Cost Warriors Using Contracts for Corporate Services

  • Lesedauer:9 min Lesezeit

“A vendor that delivers services perceived to perform well will profit from that. They will have you buy more, through cross-selling or change requests, and they often do it under the radar of Procurement.”

Even I who work with contracts agree that they do not make for fun reading. But there is no denying there is great value in being on top of them and acting accordingly. Neglected contract management has major savings potential. Here is how you can get started on it.

I’ve discussed contract fatigue and contract aversion. They are not typically exciting. But there is no denying there is great value in being on top of them and acting accordingly. Neglected contract management has major savings potential. I recommend my clients to systematically go through their existing contacts in professional services, outsourcing, and IT, and I show them how to do it.

Contracts define terms, service deliverables, responsibilities, dependencies, and commercial terms. Good service contracts have effective measuring points, the expected outcome of delivery, i.e., KPIs. Those measurements tend to, and should, evolve as service businesses continue to operate over time. That evolution should be reflected in the contract and be part of ongoing commercial governance and supplier negotiation. If not, you are missing an opportunity. That is true even if the service is good.
  • Case 1: your supplier is performing well
    A vendor that delivers services perceived to perform well will profit from that. They will have you buy more, through cross-selling or change requests, and they often do it under the radar of Procurement, under the motto that so-and-so is high-performing and effective, why not award them this new piece of work that has come up? That’s easy for everyone involved, and great for the vendor. In some cases of good vendor standing, instead of selling more the vendor delivers less; when the perception of performance is high – and especially if the details of service deliverables are poorly known – it is easy to get away with sub-par delivery whilst maintaining excellent relationships and supplier branding. I often see it happen that work that should be part of services is charged as extras, and that non-delivery of services causes the cost of ownership to go up.
  • Case 2: your supplier is not performing well
    If your supplier underperforms, staying on top of the contract is crucial. Service failure is always a consideration prior to engaging vendors, and there are measurements taken against that in all contracts. In some cases, poor contract wording limits your options, but it’s still valuable to start with the contract, learn, and improve. If a contract is so poor that it offers no performance improvement, I generally recommend termination. Remember that you can always formally express dissatisfaction with services to a vendor, regardless of contract terms, and seek a solution, such as stepping out. Following through with such a declaration is a different matter, but it’s a highly underused option in contract governance.
The risk when you do not actively manage your contract, and especially service performance, is that you lose value and open yourself up to unnecessary levels of risk.
Let me share a few examples of good contract performance management:
  • A named person is explicitly responsible for the contract being serviced. He or she has the contract and knows and remembers its wording. 
  • The meaning of each KPI is known by service recipients. Each time the set of metrics may no longer effectively cover services rendered, they are revisited and updated. 
  • Contract performance metrics have a life, meaning that they are being measured, reported on and governed, on a regular basis. (Note the “and” in that sentence.)
  • Great governance is when not only is there reporting and a discussion, but the discussion is about underlying reasons and an outlook forward, joined with actions and outcomes that are jointly committed upon. 
  • Consistent great governance is when, additionally, the right set of people attend and are active in formal governance meetings, ensuring continuance and removing the need to spend time on informing each other and new people.
Obstacles to good contract management, real or perceived, come in many forms. Not having the right systems (need for automation and digitalization) is a common one. I’ve written about how software support for procurement is better now, which it is, and it is clear for all to see that Procurement is shedding its traditional, cost-centric identity and embracing a modern, strategic role. Processes and mindset shifts go hand in hand. I believe in nudging people in organizations to act right when it comes to sourcing. There is little point in having an excellent policy when it is not made really easy to follow. People are people and are under pressure to do more things than they have time for. It is our job as corporate service professionals to make that easy, always. It used to be true that systems and processes could be made only so good, but by now the limits of the possible are much higher.
A frequently overlooked benefit of effective contract management is earning vendor respect. It is safe to assume that your vendor knows your contract better than you, and when they notice that you are getting on top of it, a few things happen. Dubious requests for change requests fall away. Profiles for new people to onboard are correctly classified and somehow seem better. Discussions reach their point quicker than in the past. Of course, since vendor relationships are about partnership, learning about contract content can be hard too, when you are reminded of something agreed upon that the vendor wants. It is only fair that contract governance goes both ways. Vendors typically react with surprise and initial tension when customers become more professional in contract management, followed by increased respect and satisfaction with the relationship.
I might have been preaching to the choir, and if so, I apologize. I remain convinced that there is more to do on – and more to get from – good contract management. While I am full of respect for the teams and professionals who get it right (almost all of the time), I invite the rest of you to approach me. I think it is a missed opportunity when it is considered safer to go on than to change, and when no one has the imagination or courage to challenge the service performance of vendors.
The consulting market is evolving, offering new options. There are networks that let you get matched to independent consultants if you want to speed up the search process. At times you can benefit from just the one person who guides you effectively through change work, someone on your side who helps you get things done. Someone not constrained by the need to sell services, who listens to you and cares for your situation. Someone trained and networked who can help you scale up things in your team, or who can be your sounding board if you need to source change services from a larger consultancy. 
Do kontaktieren Sie mich if you think about this. I would like to help.
About the Author
Highly strategic and well-versed across business functions, I act as a trusted advisor and leverage experiences gained in consulting (McKinsey, Accenture) and industry (Zurich Insurance, UBS) to solve problems and build capabilities. I am fascinated about, and work towards, well-functioning systems with clear rules of engagement and respectful and interest-based collaboration and negotiation. My work includes business plans and business cases, outsourcing transactions, procurement category strategies, risk and financial frameworks and policies, and service transformation. Lately, following clients’ needs, my work has centered on achieving savings in procurement and lowering run rate cost.
My “power” is to quickly gauge and express the essence of a situation and needs, and then stay adaptive through implementation, never giving up on either work or teams. I interact with care and have a track record of achieving change. I energize from people and care about organizational performance and team health. Being independent fits my curiosity and desire to learn. I am fluent in Swedish, English, Italian, German and French. Read more about consulting areas, and check out meine Arbeit.