“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.