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At a conference recently, an overheard comment went like this: “Why bother to measure contract efficiency? We know what good contract management is when we see it!” 

You disagree, right? You know it’s too risky not to measure how your contracting is performing, assuming you want all your transactions to deliver the benefits you expect. You want the contract and vendor relationship to successfully drive the process. And you are asking all the right questions to avert surprises, right? What follows may help you get there faster and smarter!

My IACCM presentation titled, Ask The Expert: How will you measure your success when performing contract management?1 locks arms with this article. Together they tell how you can perform excellent contract management (CM) in a measurable way and you will be far more likely to experience continuous improvement in your CM processes.
Please note -- my recommendations for measuring contract management efficiency focus on post signing the contract management process, not the procurement process. The perspective is that of a customer in a managed services relationship (e.g. outsourcing).

We all know upsides of a well-managed contract:

  • The underlying business case remains on course because you have been able to leverage the budget protection provisions built into your contract.
  • Expected savings and transformational goals have been achieved.
  • Major disputes have been avoided.
  • Continuous improvement of services is actually happening.
  • No interruption of services occurs, except for very minor ones.
  • Changes to the services are implemented swiftly to support short time to market of your products.
  • The relationship with your supplier is good.

How will Key Performance Indicators (KPIs) benefit your organization?

First, when debating whether to invest in contract management (CM) life cycle tools or more CM resources, it is essential to know whether or not you are able to demonstrate the value of what your investments have led to over time.  You do this by using KPIs.

A KPI is a specific value that demonstrates how effectively a company is achieving key business objectives2. Organizations use KPIs to evaluate their success at reaching targets. KPIs will apply to all of your major managed services contracts.   

Second, verifiable and realistic KPIs will be essential in building the case for investing in contract management resources, training, and support tools.  Robust and sound CM practices are always relevant but never more so than when dealing with important ongoing and potentially long-term managed services contracts.

Third, you will get several additional, indirect benefits from KPIs. You will first need to consider which CM activities are actually worthwhile.  Then ask, will your chosen activities support the KPIs you believe to be the most important ones? And again, this will prompt further considerations on identifying specific goals and KPIs.  Are you able to say -- in specifically measurable terms -- why you’re conducting CM and answer what you really wish to achieve with your CM efforts?

Fourth, as with any management or leadership activity, having definitive, measurable results will not only foster accountability but also truly document the value of your successes and your CM organization. Therefore, aligning CM goals and KPIs with employee incentive programs is something you should consider as well.

And finally, while many organizations will subscribe to the mantra of “continuous improvement,” few can specifically define their progress. You can use KPIs exactly for this purpose.

Getting started with a CM charter

The first step towards setting KPIs is establishing a charter3 for the specific contract which you’re about to take into your CM portfolio.

A CM charter establishes your mandate and objectives. Its purpose is to make certain that your CM organization is fully aligned with organizations (parties to the contract) that are commercially responsible for the contract (often called the “contract owners”) or with parties that are supposed to benefit from the contract.

A CM charter should start by setting out the business objectives underpinning the contract. Why was the contract created?  What does the business expect to get out of it? A CM charter should be assessed on an individual basis for a specific contract or for specific kinds of contracts.

Based on the business objectives, you can develop the CM objectives.  These statements broadly specify what must be verified from a CM perspective if your organization expects achieve its objectives successfully. Depending on the specific contract, the objectives can mean making sure  you do the following:

  • have budget and cost control in place;
  • complete transformation in a timely manner;
  • secure availability and continuity of services;
  • remain competitive in terms of costs and quality of services;
  • identify and manage risks before risks have an operational impact;
  • reduce costs;
  • be able to monitor performance;
  • know when there is non-compliance and enforce all terms applicable;
  • manage and build the relationship to the supplier;
  • manage disputes to keep disputes from polluting the relationship; and
  • conduct effective change control.

Having chosen the CM objectives specifically relevant for the contract, you can move to setting specific and measurable KPIs that match and will support the objectives. Such KPIs will often focus upon several important things you should do:

  • Limit supplier up-sale (up-sale meaning unnecessary sale in addition to the contracted services).
  • Reduce the number of ongoing disputes.
  • Reduce the time it takes to resolve disputes.
  • Increase contract manager job satisfaction.
  • Increase the number of contracts managed per contract manager.
  • Reduce value leakage.

Value leakage is a term often used when explaining the importance of conducting proper contract management. Value leakage is likely to occur if you are doing one or more of these…

  • not achieving the business objectives that led to the contract;
  • paying twice for the same services (when dealing with changes and new services);
  • losing flexibility and agility after having outsourced the contract; and/or
  • remaining static without continuous improvement or service innovation.

What measurable goals are realistic for you?

The specific KPIs broadly fall in two categories: The following lead and lack measures are ambitious examples but they have realistic goals:

Lead measures (KPIs of a predictive nature) indirectly support your contract management objectives such as these:

  • Use the IACCM Capability Maturity Model4 to baseline your current contract management maturity and set targets as to achieving further steps and phases at particular milestones.
  • Measure your ability to foster innovation of services and to support new business initiatives (based on a set of criteria and a measurement scale).
  • Measure your ability to maintain satisfactory supplier relationships based on surveys of stakeholders within your company and the suppliers you’re managing.

Lag measures (KPIs that measure achievement of a specific end goal) are tied to a CM objective.  The following percentages are based on my experience of achievable goals by enterprises with a mature CM organization.  This means you should strive to achieve the following criteria:

  • Achieve less than 5% deviations from the projected cost baseline of the contract (subject of course to change management).
  • Achieve 90% or higher compliance with all deliverables and obligations being tracked at the end of year one and 95% in year two.
  • Ensure that 90% or more of all changes are implemented at no additional implementation and operational costs other than such costs covered by a P*Q pricing model.5
  • Obtain price reductions on an average of 5% over a three-year period below the original cost baseline and glide path of the contract.
  • Identify 90% of risks potentially affecting business continuity.
  • Mitigate risks materializing into service outages or high severity incidents in 90% or more of all risks being identified by risk management procedures conducted as part of your contract management process.
  • Decrease the number of unresolved issues/disagreements (categorized in three severity levels) by 10% per quarter based on a baseline created after 6 months’ operation.

The important point is not whether you agree with these examples or will be able to sign up to them but that you’re able to develop your own measurable goals to support continuous improvement.   I am confident you can do that!

END NOTES

  1. IACCM webinar: Ask The Expert: How will you measure your success when performing contract management?
  2. Clipfolio article: Introduction to Key Performance Indicators
  3. Definition of ‘project charter’ – article titled, 5 Differences Between Project Charter and Contract, PMBOK, March 6, 2017
  4. IACCM maturity model defined  See also CE article
  5. See generic definition or profit model definition

ABOUT THE AUTHOR

Ole Horsfeldt is a lawyer and partner in Gorrissen Federspiel, a leading Scandinavian law firm. Ole is an outsourcing attorney. He acts for global organizations procuring business critical outsourcing and managed services. He has pioneered concepts that are now industry standards such as fast track dispute resolution, proactive risk management, and the deliver-first, settle-later principle and written extensively on sourcing and outsourcing contracting.

It took him twenty years of witnessing outsourcing transactions not delivering the expected benefits to realize that the key driver in turning outsourcing contracts into successful and efficient relationships is primarily a question of contract and vendor management.

On that basis, he developed a contract and vendor management methodology based on 6 key processes, a number of specific roles, role and task descriptions, work flows, and contract management tools. The methodology has been implemented by a number of leading Nordic companies and the jury is still out whether the contract and vendor management methodology will assist Ole in achieving the mission statement of his law and consultancy practice: “To make outsourcing successful”.

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