Detail! Detail! Detail! Is the devil in the detail?
One thing is certain in virtually any contract management (CM) situation -- whether it is about contract administration or contract management (and there is a difference) -- massive detail will emerge. We must control and archive it carefully. Imagine the implications if we subsequently need contract data as evidence due to disputes or misunderstandings but we are simply unable to retrieve it!
Clearly, managing documentation from the start is essential, yet it is surprising how often things get messed up simply because our data retrieval system has been inefficient, and we missed seeing it. For that reason, a good filing system is vital, together with the ability to securely archive documents -- meaning they can be quickly accessed in the future.
Which documents typically need to be controlled?
- contract amendments
- service level agreements
- insurance documents
What else might we need to know?
Plainly, the financial aspects that raise practical questions like:
- which payments are to be made (or received) and when?
- what are the key dates for delivery?
- when is ‘completion’ due?
- when do latent defects provisions expire?
- when do intellectual property rights (IPR) or copyright provisions expire?
- when does the contract expire and what notice period are we required to give?
This final point in the list involves the vexed question of automatic renewals – or “evergreen contracts”. Some organizations love them. Most hate them. Does your company have a consistent policy on this? If your organization is small (a small to medium enterprise, or “SME”) and you have relatively few contracts, then a good filing and diary (calendar) system will probably suffice.
Today most SME organizations still manage this via spreadsheet technology, tracking detail under various headings relevant to their situation, possibly backed up by diary entries via e.g. Microsoft Outlook. The key objective for SMEs is to know accurately when tasks have to be carried out and that money is both being received (“coming in”) and being paid out in a timely and efficient manner.
Figure 1 reflects this idea. Cash-flow forecasting, and management is the name of the game. We track money in, the detail of associated contract(s), and money out. In addition, start and end dates etc. are reflected in the spreadsheet.
A key problem for SMEs is that organizational ‘delegated authorities’ and controls to enter contracts can be lax. Potentially (and very often in practice) non-specialist (or even non-authorized!) managers enter into contracts, but information about contract ownership and obligations is rarely maintained in a common accessible or consistent format. When the non-specialist manger leaves, often a lot of information is lost. Result? Contracts on “rollover” terms are not cancelled, and numerous agreements remain in place covering equipment and services that are no longer required.
Tracking and monitoring issues are multiplied, however, for larger organizations, such as blue-chip companies or public sector organizations. These are likely to have hundreds, if not thousands, of contractual relationships ongoing simultaneously, and they may vary between sales and purchase type commitments. Control problems are considerable, and it is a blunt fact that many organizations are not coping adequately with the detail.
Figure 2 illustrates these ideas and adds three simple questions that any business must answer. When are payments due? Who pays? What does the contract demand?
Complex businesses typically have multiple divisions – or subunits with multiple budgets. Depending on the type of organization, these make take quite different approaches to forecasting cash flow and working capital control.
Such considerations bring us inevitably to the requirement for properly designed IT-based contract management systems. The two basic types of systems currently available are based on:
- ERP (enterprise resource planning) and
- free-standing dedicated contract management software.
ERP systems are complex and often based around the needs of finance departments They are in fact extended budgetary control systems. The contract management functionality of these systems tends to be bolted-on as an afterthought and designed by finance people thinking in finance terms! They are not contract managers who are thinking in practical, contract management terms!
ERP systems can also be quite counter-intuitive in operation or downright awkward to use for non-specialist business users – and often these are the very people who actually manage contracts on a day-to-day basis! Too often, it is principally finance personnel who have access to the relevant IT system, and yet their people are rarely responsible for the practical daily administration of a contract.
To follow the thought within Figure 2, we might add this: not only do complex businesses typically have multiple divisions and multiple budgets but, depending upon the type of business, they may take different approaches to cash flow forecasting.
Figure 3 may be a slight over-simplification, but it is probably true to say that public sector organizations and those that depend heavily on public expenditures (such as defense and utilities) are mission-focused, and their budgets are set in advance – sometimes a long way in advance. They are perhaps somewhat less focused on the liquidity question and are more focused on mission-critical contract outcomes.
By contrast, trading organizations that depend highly upon interim or progress payments for working capital control, and simultaneously manage supply subcontracts alongside their main sales contracts – focus more on cash flow forecasting. These ideas are simplified in Figure 3. For these organizations, ERP controls loom larger in their daily activity.
Any company should consider the advantages of a dedicated contract management IT system. It is beyond the scope of this article to specify what an organization should look for in such a system. Suffice it to say, we can highlight the main attributes of such systems and recommend readers to undertake their own further research. Today, the five overlapping functions of an IT-based contract management system are the ability to:
- store electronic versions of signed documents, tagged with various attributes of the documents to identify and classify them
- trigger reviews against contractual milestones, log status and associated narrative;
- search against various attributes, and in full text, to retrieve the contracts saved in the system;
- send an automatic date-triggered email to the relevant business contact reminding them of an upcoming right or obligation; and
- track ‘next actions’, such as interim deliveries, or progress meetings, or renewals, including allowing sufficient time for renewal via the sourcing (procurement) process.
A typical list of basic functional requirements is suggested below. Users should be able to:
- manage legal risk using a searchable register (database) of all material contractual obligations that a business is required to comply with or needs to remain aware of and/or should be enforcing against third parties;
- be able to input a full scanned copy of a final document or agreement for electronic storage;
- ensure scanned copy entered is full-text searchable from the system (not just within pdf reader);
- ensure that -- when searching for a word in a document – the search output highlights where the word is found in the document pdf, rather than just bringing up the whole pdf;
- retain a straightforward record of obligations and provide a structure to ensure all such obligations are recorded;
- drag and drop emails from Microsoft Outlook (or equivalent email system);
- connect ‘attachments’e. all documents held or tagged together for one amended contract;
- automatically flag deadlines or time-specific obligations (The software automatically sends email to business owner and ideally has ability to input/output multiple dates – 60 days prior, 30 days prior, deadline date, 30 days after etc.;
- send reminder email if initial email doesn’t get a response. Have escalation ability if no reply is received. Also, out of office function is desirable;
- Implement simple search and report functions (search by date or agreement, date of obligation, type of agreement, type of obligation, etc.);
- be able to merge Excel data into system;
- be able to set different levels of access – e.g. read only, edit, administrator;
- be able to configure functions to behave differently for different user groupsg. Contracts added by one business unit may have different attributes from those inputted by another business unit;
- be able to report on recent changes – audit trail of what has happened to a contract document or who has looked at it or who has amended the terms.
The basic data requirements, then, for such a dedicated system include:
- contract number
- business owner
- contract reference (linked to soft copy which will be stored in register software)
- key contractual obligations
- parties to agreement
- type of agreement
- effective date
- term of agreement
- business contact
- searchable free text box to include overview of contract and possibly key words.
The good news these days is that excellent and flexible systems are available and are relatively inexpensive.
At one time, ERP type systems involved major license fees and were very labor intensive, requiring significant business-change projects to implement them, but today a dedicated system can be licensed based on a relatively low headcount.
License fees can be based on a fee per employee with direct access to the system. These can be as low as a few hundred dollars equivalent per employee. Modern systems also tend to be much easier to use than the old ERP systems. Whether these systems could or should be Cloud-based is a matter of fundamental corporate (IT) policy -- but again this is beyond the scope of this article.
Questions to consider
Reader – are you satisfied your organization adequately manages the detail under contracts?
Executive Mangers – if there was a significant dispute with a contracting counterparty, could you “get to the detail” quickly and effectively?
Executive Mangers – to what extent are you aware of your legal responsibility to secure and control key information?
ABOUT THE AUTHOR
Peter Sammons is a director at Buy Research Limited, a Cambridge UK-based procurement consultancy. He is a regular trainer with Procurement Central, a London based specialist in strategic and tactical purchasing skills transfer. The author of many books available online, Peter published Contact Management, Core Business Competence in 2017. The preview of this work may be found here.