There are plenty of definitions on the internet when it comes to contract management. That’s why we’re providing this practical guideline in which you can read what contract management is really about. As the developer of the proven CATS CM® contract management method, we have a clear view of professional practice. Due to the high adoption rate among governments, companies, organisations and colleagues, one can legitimately call this method the standard for contract management in the Netherlands. What is the best way to define the profession from this wealth of experience?
Definition of contract management
If any profession needs to start with a definition, it’s contract management. Ask five different people what they think it is and you’ll receive five different answers. The most complete definition, which we use in the CATS CM® method, is as follows:
Contract management: the management, during the execution and termination phase of the contract, of all the stipulated responsibilities, obligations, procedures, agreements, conditions and tariffs recorded in the contract, plus the management of all ambiguities, gaps and desired changes to the contract with the goal of achieving the contract objectives.
Why contract management
The contribution of contracts in business operations of both clients and contracts is still increasing. Clients and suppliers are increasingly convinced that contracts have to be managed. Let’s take the example of a parliamentary committee that is looking for errors in the large-scale budget transfer of IT contracts. Or waste processing companies that after a while notice that they are offered less waste from municipalities than contractually agreed upon and therefore end up in a conflict. In both cases, the contracts between the parties involved were insufficiently managed. If the contractual agreements had been properly managed, it would have saved a lot of money, frustration and goodwill.
Professional practice has demonstrated that contract management is useful. Various benchmark studies were carried out on the savings achieved with contract management. And these are substantial. Professional contract management can deliver savings of between 5% and 10% of the contract value. Additionally, it yields a number of other things. These are harder to measure, but perhaps just as important!
- Grip on the contracts, personally directing the results of the contractual agreements.
- Understanding and being able to manage the risks
- Better client-supplier relationship, because less issues occur or because issues are raised at an early stage
- Fewer discussions/disagreements
- Added value due to a better service or product
- And, last but not least, contract objectives are achieved!
Relationship between contract and supplier management
Supplier management is about choosing the right suppliers: which suppliers can contribute to the strategic objectives of the organisation. Subsequently, it is important to enter into the right type of partnership and to manage the relationship with the suppliers. This is about determining, structuring, setting up, maintaining and monitoring the (correct) supplier relations. Contracts follow from these relationships. As such, the supplier management process runs parallel to the entire track of purchasing to the termination of contracts.
The goal of contract management is managing all the aspects of contracts in order to achieve the contract objectives. In terms of information provision, supplier management is therefore very important for managing contracts. Contract management is an important process within the contract lifecycle. This process starts with the signing of a contract. However, ideally, the prospective contract manager will already deliver input during the purchasing phase. We’ll return to this later in the article.
The difference with contract administration
Contract management and administration are often confused or used interchangeably. Contract administration is purely administrative. Contract management means directing the content and monitoring progress. In short, we can describe contract administration as setting up, filling in, and keeping the contract file up-to-date and accessible. This file contains all recorded information about a contract or a connected set of contracts.
A contract administrator supports the contract manager in the administration of all contract data. This officer then makes (management) information about contracts available. As such, contract management and contract administration are closely linked but distinctly separate fields.
The basis: the contract management lifecycle
Managing contracts is more than just contract clauses. There is a distinction between so-called hard and soft aspects, which all have to be managed. The hard matters are for instance the formulated agreements in the contract. But the things which aren’t agreed upon are also important. The things between the lines that have to ensure that the contract objectives are achieved. The soft side is about people: managing the relationship with the other party. The contract lifecycle is meant to make clear what has to take place at what time.
Each contract has a lifecycle which consists of multiple phases:
- Determination of needs
- Quotation request (tender, request for information and request for proposal)
- Contracting
- Contract implementation
- Contract termination and evaluation.
We see the same phases on the supplier side, but with ‘opposite’ names at the beginning of the lifecycle.
The fact that contract management is mainly about the implementation and termination phase seems obvious. You can of course only manage a contract if it exists. But this doesn’t mean that the involvement of a contract manager in earlier phases is unnecessary. The contract manager can contribute his knowledge and experience to make sure that there aren’t any pitfalls or errors in the contracts. This ensures that a contract will be concluded and that it can be managed.
Managing contracts using a structured method
We have developed a structured method for carrying out contract management, the CATS CM® contract management method. This method gives structure and direction to the contract manager’s activities. It also offers a clear method for implementation across the organisation. The implementation of one approach to the contract management process ensures that everyone is speaking the same language.
Which contract management roles
Managing contracts proactively is related to a collection of roles. The most important of these are:
- Contract owner: the person who is (was) responsible for concluding the contract, has the need and the budget.
- Contract manager: the person managing the contract on behalf of the contract owner.
- Project/service manager: the person responsible for the substantive execution of the contract.
- Contract administrator: the person responsible for the administration of the documents related to the contract.
- Process owner contract management: the person responsible for setting up the contract management process.
- Contract Board: the ‘steering group’ of all important stakeholders who are involved in the contract.
The contract management process
Each execution phase begins with a contract implementation. A proper implementation is an important condition for good contract execution. In the CATS CM® method, we call this the ‘Initiate’ step of the contract management process. We furthermore recognise the following steps: Plan, Do, Check, Act and Close .
In the Plan-Do-Check-Act cycle, the contract manager works on a number of recurring activities; the so-called ‘Contract Management Essentials’.
The influence of relationship management
Working relationships have a big influence on the partnership. Communication is also a key condition for success between contract managers and other stakeholders. Without proper coordination with the other party, the contract objectives will in any case not be achieved, so proper relationship management is a key aspect of the contract management process.
Categorising contracts
Not every contract requires the same degree of management. It is therefore important to include the categorisation of contracts in the contract management policy. This must also stipulate which contract management ‘regime’ applies to which type of contract. The CATS CM® Contract Differentiation Matrix is an excellent instrument for this.
The implementation of the contract management process
We previously described a comprehensive roadmap for the implementation of contract management. The short version for contract management implementation is as follows:
- Select the standard method which will be the basis for the setup of the contract management process.
- Appoint a process owner.
- Develop a contract management policy.
- Make an inventory of and categorise all contracts and for each contract determine the officers who (will) carry out the roles as identified in the policy.
- Select and appoint the contract managers on the basis of the defined profiles.
- Train the contract managers in carrying out contract management as determined in the contract management policy.
- Inform and train all other roles in what is expected from the role.
- The contract manager will draft a contract management plan (CMP) for each contract, which is coordinated and approved by the contract owner.
- The contract manager carries out the contract management plans.
Success factors and pitfalls
A proper implementation of contract management which actually adds value requires time and attention. A number of success factors are:
- Management commitment
- Clear (change) objectives/motivation
- Insight into the contract portfolio
- Clear division of tasks
- Time available for implementation
- Trained employees
- Paying attention to the relationship with the contract party
Unfortunately, there are also a number of factors that can throw a spanner in the works. The most common pitfalls are:
- Thinking that the organisation can ‘do it on the side’
- No process owner
- No link with the purchasing process and purchasing
- Not choosing a clear positioning
- Not appointing the contract owners
- Getting stuck in discussions about roles/functions
- Not measuring the process
- Only ‘settling’ direct savings
- Not applying differentiation
This was an introduction to contract management. A handy description of what contract management entails, why it’s valuable and what to pay attention to during implementation. CM Partners in the contract management expertise centre in the Netherlands. We’d be happy to help your organisation. View our trainings, consultancy services and mediation in temporary and permanent positions.