Transcription
Welcome to the podcast on the SIPS contract management cycle. I'm Danielle Goodrich, Knowledge Product Manager at SIPS, and joining me today, we have Colin Linton.
Hi Colin.
Hi Danielle, great to have you here today and join us. Contract management is such an important topic for our members, so great to have you here with your wealth of experience. Just to give some context to Colin, he's SIPS qualified for 25 years and a fellow of the institute for 10 years, and he's been involved with SIPS qualifications for many years now, and involved with a number of other universities and awarding bodies. And for the last three years, he's been involved in research into a number of different areas, including negotiation and contract management. So we're in safe hands today.
In today's podcast, we'll focus on what contract management is, why it's important, and a more in-depth look at the SIPS contract management cycle phases and their application. So Colin will now take you through some slides for about 10 minutes or so, and then we'll have a little chat at the end, and I can ask Colin some questions. So Colin, over to you.
Okay, great. Thank you, Danielle. As you know, contract management is a significant area of interest to me. During my career, I've been involved in the management of numerous contracts myself, and over the last 12 years or so, I've delivered a lot of training workshops on contract management related topics. And as you mentioned, it's been a specific research interest of mine over the last five years, and some of the results, the data that I've gathered, have been really insightful.
So, what is it? Well, conceptually, of course, contract management isn't actually complex. It is, after all, about making sure that what is in the contract gets delivered to the right standards. So that sounds simple, but there's a lot more to it than that. It is about maximizing value throughout the term of the contract, and it does have a very strong focus on managing risks over the entirety of the contract's duration, and sometimes maybe even beyond.
Contract management is especially important today because so many organizations are critically dependent on suppliers. If we stop and think for a moment and consider what would happen to our organization if we had no suppliers, the answer for many people is that our businesses would not be able to function. So much is now outsourced to third-party suppliers, and so much so that I believe that contract management really should be regarded by most organizations as a core competency. And of course, inherent within that, they should be looking at ensuring that their contract management staff have the required skills, which we talk about later.
Here's the SIPS contract management cycle. Where many organizations go wrong is that the process of contract management begins far too late, and in some cases, is actually almost an afterthought. Contract management is really where value from the contract can be maximized, and if we don't take advantage of that, and if we don't manage the contract, often what happens is that we simply allow value to walk away because we're not managing the contract to ensure that value is delivered.
So at the very, very start of the process, at the time when there is a need identified within the organization, we really should be starting to think about what we need to have in place for the contract management phase. We need to think about the contract, think about the mechanisms and the levers and the terms that need to be included within the contract right at the very beginning of the process.
The SIPS cycle outlines a dozen separate activities. These are all really, really important, but they're not all directly relevant to every single type of contract. We talk more about this in a moment. To simplify things, we can see that within the cycle, these 12 activities are broken down into four broad, distinct phases. For the purposes of this short presentation, I'll be referring to these as pre-award, award, management and or development, and then the final phase is the end of contract life cycle phase.
So, phase one. Don't underestimate the importance of this phase. It should start, and often does start, many, many months before the contract award itself, and sometimes could be even a year or more in the planning. This is the point, pre-contract award, at which our value-add potential is the greatest. This is when we need to make all of the key decisions to make sure that the contract is set up correctly, we have maximum flexibility, and the most leverage at this point. But this is when we need to be undertaking our planning. Think about engaging with stakeholders, find out what their expectations and requirements are from the contract over its entire term. We need to think about creating the required documentation, things like the specification, performance metrics, the terms and conditions. Remember that contracts are legally binding, so they come with responsibilities and liabilities and rights for both parties. So be careful what you wish for. The general principle is that what is within the contract and the entirety of the contractual documentation is what will be delivered. So it's our responsibility to ensure that this documentation is correct and valid and clearly articulated. So all of this will require very, very careful planning. And remember that we must adopt the right approach because not all contracts carry the same level of importance.
So we're still on phase one. We need to think about the right approach. On the left, you will see this supply positioning matrix. This is based on Krajic's work, and for those of you who have studied SIPS, you will be very, very familiar with this. So this needs very little introduction. So the concept that Krajic applied is that we have these variables on contracts relating to value and risk. This will tell us the level of importance based on those two characteristics. On the right, we have a newer matrix, the contract leadership matrix, which is based on my own research, and therefore reflects more current best practice. I'm not suggesting in any way that it's far superior or even equivalent to Krajic's great work, but nevertheless, the two can sit very comfortably together. Contract leadership is based on different variables that looks at the level of formalization and the level of proactive engagement in a contract, and it's a hierarchy. So all contracts need to have an appropriate level of administration as a minimum. So, for example, all contracts need to be recorded on the organization's contract database. Others, in addition to this administration, will also require some kind of more frequent maintenance, for example, maybe checking with stakeholders that the supplier is performing to an acceptable standard, and maybe checking that the supplier has renewed annual insurances. For more important contracts, we have to have administration and maintenance, but we also need a greater level of formalization. Maybe we're into the realms of having documented performance reviews on a regular basis, and we will also require more proactive engagement with key stakeholders. This is what we would traditionally regard as contract management. However, this is where it often ends. But there will be some contracts that require a lot more than this. It's really interesting that in procurement, we use the term management a lot. We talk about contract management, category management, supplier management, supply chain management. But really, on these most important contracts, we need to go beyond management and we need to be able to demonstrate leadership of the contract. High levels of formalization and the highest levels of proactive engagement with stakeholders are necessary on these really important contracts. And of course, it follows that the staff who are involved in managing and leading on these contracts, they need to have a high level of both technical and soft skills as well, so that they're fully effective.
So this is all about setting the groundwork. We've thought about how important the contract is, and the more important the contract is, the greater the levels of formalization and the engagements with stakeholders. So now, in phase two, this is when the formalities that we've already set in place during phase one begin to crystallize. The contract commences. But be careful, because there may be some legally binding commitments made before we get to this point. At phase two, it's all about thinking, do we need to include transition mobilization, which we would do on more important contracts? We need to activate the contractual levers and mechanisms that we incorporated into all of the paperwork and that we thought about in phase one. If necessary, we need to activate and schedule our program of review meetings, and similarly, we need to make sure that our risk management processes have commenced, indeed, if they hadn't commenced already.
So, for phase three, it's important to say here that not all contracts will require proactive management, and certainly not all will require supplier development and supplier relationship management. This goes back to our two matrices that we looked at as part of phase one. Okay, so in our more important contracts, then, certainly we'd be thinking about supplier relationship management, and in the most important, looking to work with suppliers in order to develop them. Decisions about all of these things do need to be made at the beginning and in consultation with stakeholders. It's also worth remembering that circumstances will often change. And the fact at the beginning of a contract, the risk profile was relatively low, and the perceived importance of the contract could be low. There could be events that happen, both internally and externally, that could have a significant impact on that risk profile. So throughout the term, there is likely to be a need for us to undertake a review to make sure that we're adopting the right approach. And of course, in many contracts, there will be a need for that contract to change. So we need to have a process for managing change and contract variations. And of course, in many situations or many contracts, there will be a need to deal with and resolve conflict, which generally, when it arises, we can resolve using negotiation.
Phase four. This will happen at the very end, and all contracts will come to an end. We hope that they will come to a satisfactory conclusion, and they will reach their natural conclusion point on achieving the deliveries, the outcomes required within the contract. Remember, though, that if there is an ongoing requirement for the goods and services that are being delivered by the supplier within the contract, and therefore we have an ongoing or continuing need for these services or goods, then we must make sure that within the life cycle, we allow enough time for us to retender, if that's our chosen route, or to allow enough time to renegotiate terms for contract extension with the existing supplier.
There are other things that we need to think about, and some of this may already have been considered within phase one and would have been built into the contract to make the end of contract life easier. So, for instance, we need to consider whether we need to make arrangements if the supplier has possession of some of our assets, for example, our equipment or data. Importantly, we also need to consider whether the supplier will continue to have any responsibilities or liabilities beyond the end of the contract. This is a common misconception that because the contract ended at the end of, say, last month, that that's the end of the need for that contract, the end of the need for contract management. Well, we need to think about whether the supplier may have continuing ongoing liabilities relating to work that they have carried out. So, for example, they may have concluded their work a month ago, but they may very well have an ongoing liability for any issues that arise, any faults that arise as a consequence of that work, maybe for a number of years after. So, in which case, even though the contract has ended, we still need to conduct some contract administration and maintenance, and maybe even some management with that supplier, and treat the contract as if it were still live until the supplier's liability has ended.
Not all contracts end so positively, of course. Some will involve termination. This might be through mutual agreement of all of the contracted parties, maybe because the contract is no longer required, or all parties have agreed that their contract has fulfilled the requirements and has just ended earlier than was expected. Often, termination is due to contract failure, for example, due to underperformance. This would, of course, be a last resort. We would attempt to resolve these issues with the supplier through other means, usually through negotiation. But often, where that cannot be resolved, then termination is what we would turn to. Now, we need to bear in mind that there are, of course, legal implications once we start talking about contract termination. So you need to be sure that you've referred to the terms and conditions and that you understand what the process was that was agreed within the terms and conditions to handle terminations, what the process would be for contract termination. For most people, this will involve working very closely with colleagues in the legal team because, of course, termination is a legal process. So you do need to take care, and you will need to engage with other stakeholders, particularly, as I say, colleagues from legal.
This has been a very quick run-through of the highlights. I would just like to conclude by giving and reinforcing a few really, really important messages. Probably first and foremost, that there is a misconception that there is a direct correlation between the level of risk on a contract and the financial value of that contract. This is a very dangerous misconception because the risks to the procurement organization could be really, really significant, even though the value of the contract is relatively low. So we do need to take care, and we do need to think very carefully about the characteristics of the contract and things that might happen that cause our organization an exposure. As I say, it could be disproportionately high relative to the value of the contract itself. And don't underestimate the importance, the value-add from this phase one, pre-contract award work. It's really important that we set up contracts correctly, and it's really important that we have all of the right documentation in place because whilst it's never easy dealing with conflict situations with a supplier, it's certainly a much easier discussion with them if we can present all of the documentation to which they agreed and on which the contract is based. You do need to undertake this initial analysis so that you can make a correct, valid decision about the correct contract management and relationship management approach. It would be great to think that organizations have enough resources to proactively manage every single contract, but in reality, organizations don't have that luxury. So it's really important to think about the importance of the contract, to think about the value and the risk, and then think about what levels of formalization and the amount of proactive stakeholder engagement should be deployed in managing that contract. And finally, if you are involved in contract management, which many people are now in organizations, many people have some kind of involvement within this life cycle, whether it be inputting to define requirements, or whether it be in managing at least elements of the supplier relationship, you do require a wide range of skills. This is one of the challenges that organizations have encountered in terms of contract management, and certainly people involved in the contract management cycle need to have a wide range of both harder technical skills and maybe an even wider range of soft skills. It's also a mistake to think that your experience, maybe you've done some training in the past or maybe hold qualifications already, and therefore you already hold all of the necessary characteristics and attributes required. But times do change, things do move on, so all of us do need a refresh from time to time, and particularly given the importance of contract management. And that is a very quick run-through, Danielle, and I'm conscious, as ever, of time. This is a subject that I know a lot about, and as you know, it's very close to my heart. So I can kind of let passion get in the way, and I can speak for hours and hours. But I do know that you have some questions. So I'm proposing that I'll draw a stop there to the formalities of the presentation, if you like, and I'll hand over to you.
Great, thank you, Colin. And your passion's great in this area, and I think that shines through, and you've brought it to life and given some examples. So I've just, my first question is, obviously, contract management's been around for quite a while now. So why do you think so many problems still arise with contracts?
Yeah, it's a great question, Danielle. And it has been around a long time. I can go back many years to when I was first involved. We didn't really call it contract management then, but the concept was exactly the same. And many organizations are still struggling to get to grips with it, really. It's been interesting looking at my own research, and a number of experienced contract managers that I've engaged with have made some interesting observations in recent years about how they feel that their organization has maybe moved too far into category management at the expense of contract management. And it's thought-provoking because category management is really, really important, and I think there's definitely a place for both. But we shouldn't lose sight of the fact that some contracts are so important. It's not only about the bigger picture, it is about drilling down and looking at the specifics of individual cases. I do think there is a case for us perhaps to ponder and maybe question whether we've really learned from previous contract failures. There have been numerous contract failures in recent years, very high profile, they're featured in the media, and it really is about taking lessons learned from those. Sometimes we pay lip service to that, and really, what we should do is we should really analyze, we should really understand why these sometimes very, very serious and tragic events have happened, and then make sure that we make changes to processes and we re-skill people to really learn from it. And I think sometimes some organizations just haven't grasped the fact that they are critically dependent on these suppliers. You know, their models have changed over the years where they've done less of the work in-house, they've focused more on their core, they've pushed that out to suppliers. But at the same time, they haven't upskilled people within their workplace to have the skills necessary to manage that. So it's a combination of factors.
Okay, and I'm just looking at your conclusion slide there in terms of "Do not underestimate the importance of phase one, the pre-award." And I don't know if you can just bring the contract management cycle up as we talk through this, but do you think organizations realize how important this first phase of the cycle really is? Because you put quite a lot of emphasis on this in your presentation, but do you really think that they grasp this?
Yeah, and it's an interesting observation, Danielle. And it's the same in a lot of the training that I deliver, that the majority of the legwork is in phase one. If we can get phase one dealt with correctly, then in theory, everything else that follows is straightforward. And I think to answer your specific question, certainly a lot of organizations don't fully appreciate the value that can be added by spending a bit more time, dedicating a bit more resource to these early phases of planning, scoping, dealing with stakeholders, getting the administration in place, making sure that we've got the right relationship management approach. And of course, so much of all of the other things where we're looking at performance management, thinking about payment and incentive in particular, they need to be considered, and decisions on those also need to be made at the beginning. I mentioned in the presentation that it is all about leverage. And if we put ourselves into a situation of, "I'm the procurement person, and you're the supplier," I know that you are the hungriest to win this job before I've said to you, "Great news, Danielle, you've won the contract." So therefore, the more that we can think things through, and the more that we can build these levers and all of these mechanisms into that contract before you've won it, you're much more likely to accept that versus a different scenario where we're having a discussion much earlier in the process, and I tell you that you've won the contract, and then at our first review meeting, we sit down and I say, "Okay, Danielle, it's great that you've got the contract. I've been talking to some of our stakeholders, and we need to introduce these performance metrics, we need to introduce these other mechanisms, these other levers." Now, of course, you as a supplier go and say, "Well, hang on, hang on. If we're making a change to the contract, fine. Put it in writing to me, and we'll let you know. Maybe it will cost more to deliver that." But it is about thinking about leverage, and that's why this initial phase is so important because the more that we can look at that as a really as an investment in time, you know, the better. I know it's a challenge, and people are busy at work, and you know, this is the phase that we could often maybe we have scheduled enough time, and maybe we've allocated six months, and other things come in, and we think, "Okay, well, I could do that in four months, not six, or three months, or two months." But it's very dangerous cutting corners. And we know that this is such a significant potential for value-add. So really, if we don't undertake enough depth of planning, we're really just running with chance, which is very, very high risk on a contract.
Yeah, definitely too high risk. Like you say, focus should be on the planning stage, which you've highlighted there and the importance. So we've talked about the planning stage, we've talked quite a lot about the end of the life cycle. But what you did mention was obviously ongoing maintenance throughout the contract as well. So how important is it for this ongoing maintenance of more important contracts to be carried out during their lifetime, and what's the benefit of doing that?
Yeah, and the key here, the crucial term is "on more important contracts." And now, this often is a dilemma for organizations. They've got a finite amount of resources, and for many organizations, you know, they have hundreds, thousands, maybe tens of thousands of contracts, or even more. And so we need to be frugal with our resources, we need to use it wisely. And so we need to focus on these more important contracts because, you know, these are the ones, quite frankly, that will create greater levels of exposure to us. So these will be the contracts that require this ongoing maintenance, engaging with stakeholders, trying to spot early warning signals of potential issues. Now, this is really, for want of a better term, smart contract management. Now, what does a smart contract manager do? You know, they're trying to anticipate, they're getting themselves on the front foot, they're looking for early warning signals, they're monitoring changes in the external environment and the internal environment, but especially the external environment. This is where it's so useful for organizations that do have a category management focus because the whole point of category management is to adopt this broader view and to understand what's happening within the market. And so now, when there are changes driven by external factors that we can't control, now this is really useful information to the contract manager because this maintenance is about maintaining records, keeping our records up to date, but it's also about maintaining the risk profile of our exposures to the supplier, the supply chain, and the contract. And this whole concept of maintenance, which sounds quite dull and tedious, but this maintenance of the administration is really, really important because we need to have the ability to be able to understand where we are on a contract at any given time. Contracts will evolve over time. You know, there's this misconception that we enter into a contract day one, and that's how that contract will remain over its life. There will be contract change and variation, it's a fact of life with contracts. And so we need to make sure we can document that. So in the event that there is a dispute, our legal team would want to know, "Okay, yes, they want to know where we were when the contract started, but where are we today?" And that's what maintenance is all about, to make sure that we've got all of the records kept up to date. Now, we're maintaining a watch on what's happening in the environment. So one of our most important contracts, and this was these were the key words in your question, it's absolutely vital.
Thank you. And like you say, contracts do evolve over time, and it's about kind of creating or making sure that they're real in real time, isn't it? What I came out from that, and that proactive element as well, I think is really important, trying to foresee what's coming up. I mean, no one could have foreseen what's happened in the last 12 months. So what kind of things...
Sorry to interrupt, Danielle, but but but it is interesting because of course, the signs for the pandemic were around for long before it caused all of the lockdowns around the world. So what it's taught us is that maybe we need to take some of these warning signs just a bit more seriously. And I remember from my career of managing risk and managing risk registers, you know, there would always be things that we would identify as having potentially very, very high impact, but you know, we'd dismiss the chances of it happening were so low. Well, you know, the warning signs for the pandemic were there, and it's these things do often arise. It's very, very unusual for us to be in the situation that we're in, but it has happened before, and the warning signs were there. So it's just difficult, isn't it, because we can't respond to everything.
No, no, I appreciate that. So on the back of that then, what kind of things should contract managers look out for during the life of a contract? So you've talked about various different risks and things, but what would your tips be?
Yeah, I guess on the basis that we can't be expected to do everything, it's about focusing really on two key elements. And there are other things, I would accept. One is probably more positive than the other, more negative, and but both have huge value to the organization. So the more positive thing is, on our more important contracts, is to identify opportunities where we can leverage more value. So on our more important contracts, there might be opportunities to engage with the supplier more, engage with the supply chain more, where we could extract value, maybe in the form of cost savings, maybe in the form of product enhancements that might please our customers more, that might then lead on to increased sales. And the other element, sorry, when I said it was negative, it's not really a negative thing, but this is on risk management. So for me, if I'm trying to be sensible about the amount of resources that I've got and how much I could do, I'm looking at trying to get value and I'm trying to minimize risk. And the key thing here is this, trying to spot early warning signals. And you know, what can we do? How can we do that? Well, I'm engaging with stakeholders, I'm picking up feedback from them, I'm responding to perhaps complaints that are coming in. Even if it's just one complaint, if I've never had a complaint before, you know, this is potentially an early warning signal. As soon as suppliers start to fall short against KPIs and SLAs, that's a warning signal. I'm looking at their behavior, how they behave towards me. And if their behavior has shifted, and they suddenly become more distant, they're a little bit more difficult to get hold of, they're a bit more evasive, then that's a warning signal. And of course, the big one for me would be to track their financial performance. It's easy to really be critical of financial statements and credit reports. Usually, it's people who don't understand them are critical of them because they're historic. They are, but it's the best information that we've got to go on, and you can identify trends. And in, I would say, in every situation where there's been a supplier failure due to financial performance, that if we go back in time and we look at their concluding series of financial statements, the warning signs were there that they were teetering on the brink of financial disaster and could have been foreseen. And could have been foreseen, and maybe there might have been things that we could have done to help them, but certainly things that we could do to prepare ourselves in the event of their failure by, for instance, identifying other suppliers potentially.
Okay. I could talk to you about this all day because it's so interesting. You've got so much knowledge. But just to close, then, finally, for there's quite a few members of ours who might be new to contract management. So what areas of training would you recommend to them?
Yeah, I think the first thing to say is that anybody who has the opportunity of working in this area, personally, I think they should seize it because it's one of the few, I hesitate to call it a specialism, but I guess contract management is becoming a specialism, but you need such a wide range of skills to be able to do the job effectively. And so many of the skills that are necessary to be highly effective are transferable and are really useful in other roles. If I may, I would just put this slide up. And as you know, this is a really important part of my own research, and these are top 10 skills as identified by existing contract management practitioners. And this has been refreshed over the last five years, but interestingly, the skills themselves haven't really significantly changed. The thing that is particularly interesting about this list is that they do split 50/50 between soft skills and technical skills. And that, for me, is really interesting because I turn the clock back to my practitioner days where we didn't really think that much about the soft skills, it was mostly about the technical skills. So technical skills here of understanding the contract terms and conditions, risk analysis, financial analysis, understanding fundamental principles of contract law, developing the performance metrics. So I would put all of those down as kind of harder, more technical skills. Versus being able to negotiate, the implication is around soft skills anyway, but then looking at this broader suite of soft skills of influencing, persuasion, emotional intelligence, handling conflict, resolving disputes, managing internal stakeholders, and relationship management. These are all soft skills which are really useful. And if we then apply this back to the cycle that we can see how valuable developing skills in those areas can be for all of these 12 different components. So I'd urge anybody either in a contract management role, particularly those in the more important, so in my contract leadership space in particular, you know, I think it's useful to sit down, you know, look at, if you want to take as an example, for example, these 10 skills, score yourself out of 10, self-evaluate, you know, be honest. And if you aspire to be a best-in-class, world-class contract manager, then we'd expect to see quite a high level of competence against each of these. The really great thing, of course, is that there is a lot of training available now. The key is to identify where you need training. So SIPS, for example, provides training across all of these areas of skills. And of course, SIPS qualifications, all of these skills feature somewhere in the various modules and at the various levels across SIPS suite of qualifications. So no, there is help. And I made the point during the presentation that there is a misconception that those who are already qualified, maybe have been through a program of training, and that's the end. Well, CPD is really important. Things do change, the marketplace changes, tools and techniques change less frequently, but the circumstances around us in the world do change. And so having a refresh is really important. So I do think, you know, it's worthwhile people thinking about how prepared they are, whether they need to upskill, and ask their organization for support as the first instance. And you know, if that's not forthcoming, then you know, there is access to material, particularly for SIPS members, there's no shortage of support and information.
Danielle, no, no, that's great. Thank you, Colin. And that lifelong learning is really important, and then we encourage that across the professions. Like I say, things change, skills evolve, and refreshes are needed. So SIPS offer a wealth of resources, training, and they can all be accessed via sips.org/contract-management, which is on the screen. So feel free to have a look there and browse the resources available. So thank you, Colin, and thank you to those tuning in to the podcast today. I, for one, found it really interesting, and I hope everyone did too. And I hope to see you soon again soon, Colin.
Great, thank you, Danielle. Take care. Thanks very much. Bye.