10 Jun 2020
Effective Supplier Management – Contract Management Essentials
Written by James Cowley
A ‘New Normal’ for Supplier Management?
When it comes to our daily lives and the situation that surrounds us due to the current pandemic, controls are starting to loosen, and the lockdown boundaries are beginning to look different. The promise of a ‘new normal’ and what that will eventually look like (if things will ever stand still long enough) is seemingly the hot topic of the current time. I firmly believe that our approach to many things in life will evolve and change as a result of COVID 19 and that it will be one of the biggest events of our lifetime, but I also believe that many of the key principles we hold dear will also remain.
Following on from my initial article , today I bring to you the first of my four instalments on the art of ‘effective supplier management’ and over the coming weeks I’ll be outlining my views on what good looks like in each of my ‘golden pillars’.
Will COVID 19 completely re-shape the foundations of what it takes to manage your supply base? For me, I believe that the key disciplines remain the same, however I do certainly subscribe to the view that ‘agility’ and the need to be able to respond nimbly to changing landscapes needs to be central to our future strategies. For now though I’ll be focussing on the ‘tried and tested’!
In the Beginning
In my first article, I outlined that in my view, good supplier management is based on the four critical components of:
Yes, financial management is paramount, but as I mentioned last time, I feel it has a place in all four of the above and therefore I don’t call it out as a standalone discipline. Others may argue differently, but that’s just my take on it.
To kick us off I’ll be focussing on the first of the above – Contract Management. Is there a particular reason for choosing this other than it being first on the list alphabetically? No, but when you first dive into a situation it’s always good to get your bearings early and the presence of good contract management certainly does that. Hence, I think it’s as good a place as any to start.
Back to Basics
The discipline of Contract Management can be and is interpreted in different ways. For instance, if you take a look at the CIPS (Charted Institute of Purchasing and Supply) website you’ll find a whole useful section on contract management including the presence of a nice, shiny 12-step contract management lifecycle graphic. In this context however, I actually feel that the CIPS term ‘contract management’ and my use of the term ‘supplier management’ are effectively talking about the same thing – the end to end journey of what good looks like when it comes to managing your supply chain.
I just tend to chunk things up a little, but this does not mean that the key activities within each area are being overlooked. As outlined earlier, I feel contract management sits alongside three other key pillars and each of these consists of a number of critical activities to make them effective. For the purposes of this, my own definition of contract management is probably more closely aligned with this Wax Digital article and consists of five key areas that I’ll touch upon in turn later.
Now that we’re clear on what I’m referring to when it comes to contract management, some of you may be thinking that this all sound fine, but how can I possibly be expected to be on top of all of this stuff with a boat load of suppliers? In reality, it’s very difficult to cover all bases and to manage every single contract and supplier effectively, but my advice is to take an approach that’s appropriate for your business and concentrate on where the biggest returns are. That will normally involve undertaking some form of supplier segmentation (e.g. using Kraljic), but that is a whole topic in itself and one that I won’t stray into here.
Key for me is ensuring that the essential components of good contract management are covered, that they’re undertaken by appropriately skilled people and that everyone knows where the hand-offs are (if there are any). There are of course different operating models when it comes to procurement and supplier management teams, but whether you run an end to end model or a split discipline model, its essential that you’ve got the right framework and that each person understands their role and that any integration is seamless.
Upstream and Downstream
Regardless of which operating model you’re running, it’s important to realise that contract management isn’t just a downstream activity or an ‘add-on’. In my opinion, and as similarly highlighted in this Business News Daily piece, good contract management starts upstream as part of the sourcing process and flows downstream into the post contract-let phase.
Delving into that a little more, here’s how I see good contract management and the key activities that should be undertaken within each part of the journey:
Approach to Market. The contract management process kicks off by ensuring that, wherever possible, you accompany your approach to market with your relevant contract terms. Where this is not possible e.g. as often happens with ‘off the shelf’ software products, be clear to obtain early sight of the supplier terms and conditions and incorporate the appropriateness of these as part of your supplier evaluation criteria.
Contract Negotiation & Execution. Ensuring you land in as good a place as possible during this phase is key as this will ultimately govern the service from day one. Many organisations have ‘golden rules’ or parameters that you can’t negotiate outside of so be sure to ensure you’re clear on what can and can’t negotiate on and execute accordingly. It’s also really important to remember that significant value is attached to many contract terms and that these should be negotiated in tandem with your overall commercials to ensure that you land with a quality, rounded outcome. Ensure good document tracking and version control to avoid any none agreed terms and discrepancies from slipping through the net. Finally, do your upmost to ensure that the contract signature process is as swift as possible and ensure that all who form part of your governance process are warmed up and are aware of whats coming and when.
Value Management. This is crucial part of contract management and is vital to ensure that those well negotiated terms executed in the sourcing phase aren’t watered down or lost during the lifetime of the contract. It’s vital that the key contract obligations are being met by both parties and that the service being received is in line with what was agreed at the outset. Ensure that you have a clear handle on all key obligations and value delivery and monitor adherence to these through your contract governance.
Contract Administration & Compliance. Good contract administration doesn’t mean filing the contract in a drawer and never letting it see the light of day again. It’s essential that the contract and any relevant associated documents are stored, safely and ideally electronically where they can be easily retrieved and managed. Track any key dates such as price increases, benchmarking reviews, renewals etc and make sure that the relevant prompts are in place early enough to allow you to act upon them e.g. don’t set a notification for 3 months before the renewal date if you have to give 3 months-notice to change the contract, service or even terminate. Additionally, its key that the contract is kept up to date when it comes to any changes in ownership that require a novation or similar. Periodic contract audits are also useful in determining both companies’ compliance with the terms of the agreement e.g. are you being invoiced correctly. These tend to be more relevant with larger contracts and it’s important for the relationship that a handle is kept on this aspect of things.
Change Management. Managing and documenting change is crucial particularly when it comes to major, complex and critical supply arrangements. Some contracts can run for many years and morph over time, so ensuring that the contract always reflect the current scope is key. Ensure the contract has a clear and agreed approach when it comes to documenting change and ensure that any relevant contract variations are raised and recorded to ensure that the contract paperwork and understanding of the services is always kept current. Significant changes may also provide an opportunity to re-evaluate the overall commercial picture too and these opportunities shouldn’t be missed.
Contract Development. By contract development I’m talking about how proactively the parties can improve the service, evolve the offering and drive further value. Sometimes this can be run through a separate stream such as a continuous improvement programme, but frequently reviewing the status quo and identifying how outcomes can be improved for both parties is a good habit to have. It may be that some form of gain-share is appropriate, but whatever mechanism you use, ensure you are always looking at how to improve from your current position, where possible. Some services lend themselves more naturally to this and we of course do also blur the lines here to some extent with ‘relationship management’ by ensuring you have the right basis to evolve.
Exit, Termination & Renewal. Often overlooked, this area can really catch you out if you are not on the front foot. Wherever possible, ensure you have a clear and documented approach to termination and exit or transfer of the services within the initial contract and review this periodically. Aligned with good contract administration as referred to earlier, its clear that you understand what the key dates are and the triggers that are associated with them. Ensure also that you have a clear view of the right stakeholders involved here and that they understood their responsibilities too. Failure to understand your exit path or your renewal approach will lead to significant difficulty if and when you wish to change.
Finally, and as I alluded to earlier, it’s important that you take an approach that works for you and your team. The nature of your supply landscape and the services you buy may affect how much or how little of the above you do, but hopefully it provides a helpful view of what I have found to be most useful in the last 20 years in doing this stuff day in day out.
Up next and second in my four part series is the topic of Performance Management and I look forward to sharing this with you in a couple of weeks time. In the meantime if you have any areas you do require support on, please feel free to contact me on 07834 452333 or at Marriage-Stanley Associates via this link.
Principal Associate, Marriage-Stanley & Associates
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