The Greatest Challenge in Contract Management
In a previous article, we reviewed the top three pitfalls in contract management, which were all related to how processes are run. However, all of those pitfalls can only be addressed when the right culture is in place.
“Only a baby with a wet diaper likes change,” joked J.C. Penny chairman Mike Ullman when addressing the 13th Fortune Global Forum. While funny, it doesn’t disprove the fact that among the many challenges that are present in the field of contract management, creating the right culture for change is the greatest one.
In this article, we will review five strategies to create the right culture in your enterprise to optimize your contract management processes.
1. Increase Involvement of Internal Teams
With limited budgets and “fast and furious” deadlines, contract management teams often feel that involving internal teams can delay the contract lifecycle. However, research from the International Association of Contract Management (IACCM) has shown that it does quite the opposite.
For example, early involvement from your commercial staff members could reduce the time to get to a signed contract by around 20% and result in an estimated 25% less claims or disputes, according to data from the IACCM. By including members of internal teams early in the contract lifecycle, you enterprise could gain insights on how to optimize proccesses and avoid potential bottlenecks.
2. Engage External Stakeholders
In contract management, the involvement of external stakeholders is just as important as the involvement of internal ones. A mismatch of what is promised to the client and what is delivered may be the cause for the dramatic increase in the number of contracts that require significant revisions during the execution phase.
The IACCM estimates that the need for significant revision of contracts during execution has increased by 40%. Additionally, the IACCM states that less 10% of surveyed organizations have consolidated their data on performance. Key insights, including the most frequent sources of claims or disputes, aren’t readily available to contract managers.
One way to overcome this lack of key data or to supplement available data is to engage external stakeholders. Engaging your external stakeholders is one of many ways to improve client management and minimize the amount of contract claims and disputes.
3. Prevent Risk Allocation Becoming Only Focus During Negotiations
Too much of a good thing always have bad consequences. While risk management is necessary to maintain a sustainable operation, letting it become the main focus of all of your negotiations will be detrimental to your client relationships.
Using an appropriate multi-domain team, including internal and external stakeholders, early in the contract lifecycle allows your team to identify contractual risk issues. By being aware of these issues before the negotiation stage, the contract management team has extra time to brainstorm creative ways to address risk allocation. Focus on adding value to your customer relationship and avoid behaviors that may be interpreted as over-defensive.
4. Be Flexible in Contractual Relationships
More than 80% of trading relationships keep a traditional structure and set of terms, according to data from the IACCM. Failing to adopt updated best practices can unnecessarily expose your enterprise to contractual risk that could be prevented.
An example is the use of templates of best efforts clauses. While courts in the State of Delaware set a higher standard for “best” than for “reasonable” standards, courts in the State of New York deem “best efforts” and “reasonable efforts” as interchangeable terms (see Soroof Trading Dev. Co., Ltd. v. GE Fuel Cell Sys., LLC in 2012). For more information on “best efforts” and “commercially reasonable efforts” clauses, here is an overview of best effort clauses practices.
To keep abreast the latest developments in contract management, invest in training for your employees. For example, the IACCM provides a wide variety of training and certification options, including on-site and online courses in contract and commercial management.
5. Improve Handover of Contracts
If project managers could choose only one thing to improve in contract management, they would probably choose to improve handover processes. According to data from the IACCM, more than 60% of project managers complain about the issues caused by subpar handovers from the bid team to the post-award execution team.
Customize your contract lifecycle within your contract management system to include processes that do a post-mortem analysis of contract executions and provide opportunities for bid and execution teams to strategize. By giving teams an opportunity to meet, they can develop a shared understanding about processes and resolve issues.
By increasing involvement of internal teams, engaging external stakeholders, preventing risk allocation become the sole focus of negotiations, avoiding being flexible in contractual relationships, and improving handover of contracts, you’re setting the foundation for a company culture that is more open to make changes towards the improvement of contract management practices.