Managing contracts and service performance

Little or nothing is spoken of Contracts management within the Supply chain management process, but it is an integral part of the SCM process and is a result of strategic sourcing or tendering processes. However, do we understand what’s involved?

What is contract management?

Contract management is the process which ensures that both parties to a contract fully meet their respective obligations as efficiently and effectively as possible, in order to deliver the business and operational objectives required from the contract and in particular to provide value for money. Typically, you will require resources for contract management that are equivalent to 2% of the contract value. It is an integral part of the ‘informed customer’ capability.

Who is involved?

Contract managers (Category Managers) representing both the customer and provider have a key role; there will also be input from the ‘informed customer’, providing the interface between customers and providers. Ideally, the people involved in contract negotiation during the procurement process will take on a contract management role.

Critical success factors

A contract is being managed successfully if the following conditions are met:

  • the arrangements for service delivery continue to be satisfactory to both customer and provider
  • expected business benefits and value for money are being realised
  • the provider is co-operative and responsive
  • the customer knows its obligations under the contract
  • absence of dispute
  • no surprises

Foundations for contract management

During the procurement process, the emphasis is likely to be on why the contract is being established and on whether the provider will be able to deliver in service and technical terms. However, you must think very carefully about how the contract will work once it has been awarded.

Management of contracts, especially where there is a partnership, usually requires some flexibility on both sides and a willingness to adapt the terms of the contract to reflect a rapidly changing world. Problems are bound to arise which could not be foreseen when the contract was awarded.

As the customer, you must have clear business objectives, coupled with a clear understanding of why the contract will contribute to them. There must also be a clear understanding of the provider’s objectives. You must be able to recognise and get agreed at senior management level the need for the service provider to achieve their objectives, including making a reasonable margin, perhaps as part of a risk/reward arrangement.

There must be people with the right interpersonal and management skills to manage these relationships on a peer-to-peer basis and at multiple levels in the organisation. Both sides need managers who can manage upwards in their organisation and persuade their boards to make decisions for the benefit of the joint relationship (even though individual decisions may not look attractive in isolation).

Other issues to consider before contract award
Other areas that need to be thought through before the contract is signed include:

  • what are the processes for managing the contract which will give you the level of control you need?
  • how will you retain sufficient expertise to understand the technical direction in which the provider is taking your organisation? You must be able to understand the answers and enter into dialogue with the provider
  • how would the provider ensure that they could always provide you with sufficient skilled resources, given the problems of national skills shortages and the risk that another customer’s account might take priority?
  • what is the real quality of the provider team? Do they have sufficient standing within their organisation to ensure that they will be able to get the resources you require? Can they influence their own board?
  • is there a likelihood of the provider team changing after award of contract, leading to a lack of continuity?
  • if the provider is a consortium, how will the members handle things and ensure that problems are resolved quickly and constructively? For example, do all members of the consortium share the same quality management system and/or escalation procedures?
  • what does the provider know about your business and how will they get up to speed? Can you ensure that enough time is allowed for the provider’s learning curve in understanding the complexity of your business?

Principles of good communication & Collaboration
You have to be aware of new demands when working together – who takes the lead; who is responsible for what; and who pays for what. Will existing management structures help cooperative working? Depending on your organisational structure (for example, centralised or federal units) you will require different reporting arrangements, but the underlying principles of good communication and mutual understanding of responsibilities remain the same.

There must be a clear understanding of what is expected and effective ways of reporting progress. You must have a formal framework defining responsibilities, reporting arrangements and policies. Without this framework there is a risk that you will lose control; your auditors will also need to be assured that formal arrangements are in place, regardless of whether you operate a ‘hands-on’ or ‘hands-off’ management style.

Performance

You will usually need performance measures to cover all aspects of a service arrangement:

  • cost and value obtained
  • performance and customer satisfaction
  • delivery improvement and added value
  • delivery capability
  • benefits realised
  • relationship strength and responsiveness.

It is important that the performance measures selected (and ideally specified in the contract) offer clear and demonstrable evidence of the success (or otherwise) of the relationship.

Once chosen, the requirements underpinning the performance measures should be the primary focus for contract management. They should provide the framework around which provider information requirements and flows, contract management teams, skills, processes and activities are developed.

You should have an existing baseline against which to track any performance measures which are related to delivery or capability improvement. Much of this baseline will typically be established in the business case for the deal.

Three likely levels of performance assessment are:

  • the bottom level is concerned with ongoing service delivery using conventional Service Level Agreement (SLA) approaches and related measures
  • the middle level comprises the desired results of individual programmes of change or improvement, implementation of projects or developments and infrastructure roll outs carried out during the period of the deal. Measures at this level are likely to be derived from investment appraisal and benefits management techniques and constructed on a case by case basis
  • at the highest level an organisation is concerned with the overall outcome or impact of the deal what do we want to have achieved by the end of the contract period? These measures will be derived from the objectives identified during project scoping and in the preliminary business analysis activity. They will be rooted in your organisation’s long term business strategy.
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