Supply chain management: managing contracts
Column written by Kaveh Taghizadeh, VP Middle East at BrainNet Supply Management Consultants.
This column touches upon a field within Supply Chain Management (SCM), which, especially in the Middle East, has so far received comparatively little attention: Contracts Management. In this column, I will elaborate on this topic with a recent case from a Middle East (oil & gas company) at the core of it.
So, why is Contracts Management important?
For the sake of brevity, let’s focus on two points.
1) Firstly, the fact is that Middle East companies work primarily with “Western” companies, which are highly sophisticated in contracts management (e.g. terms & conditions). It is obvious that Middle East companies must endeavour to increase their capabilities in Contracts Management in order to secure their interests (and keep abreast of change).
2) Secondly, the time it takes to finalise and sign a contract is the time a company has to wait while critical work is not being accomplished (often this involves core operations). In one case that we looked at, our analysis revealed that it took 270 days to complete a contract. Now, it is up to every manager to decide whether this is an acceptable lapse of time for their business (in this case, it was not).
What are the root causes for deficiencies in Contracts Management?
Again, let’s focus on just a few points.
I) “Paper pushing”: If you are engaged in heavy “paper pushing”, you’ll bear a significant risk of outright errors in your contracts (terms & conditions!) with potentially serious adverse effects.
Paper-based errors in Contract Management processes unfortunately are rather too commonplace
II) “Delegation of Authorities” (DoA): if DoA is excessively designed for higher management and committees to review and control even small volume ($) contracts, don’t look much further for why the contracting process takes a significant amount of time. This will be one of your major root causes. Changing DoA requires a lot of thought and effort or it will fail.
III) Tools: if a contract manager’s only tools are paper or Microsoft Word at best, expect many mistakes, endless loops of reviews and changes— ultimately a slow process.
Now, let’s have a look at a few parts of a solution package.
1) The processes, especially Delegation of Authorities, will need revamping (in most cases it is the result of historical growth and is almost certainly ready for refreshing). Here, e.g. segmenting contracts by volume ($), then designing appropriate DoA is a wise method of choice. As a “formulae” for change you could apply: high volume = high risk = extensive controls; low volume = fewer controls and dedicated, simple and lean processes.
2) A professional Contract Lifecycle Management (CLM) tool will reduce paper – or even eliminate paper work, if customised to suit your needs properly. With the help of contract terms libraries, an error-proof contract can be assembled within minutes as opposed to to weeks! Also, it will create one central repository for all contracts, i.e. central access to contracts, and no more searching for paper contracts.
There are two more important benefits. One, the right CLM solution can create smart “alerts”, so that the contract manager will be informed ahead of contract expiration, and he can start action to renew the contract in time or find a new contractor. Two, CLM can deliver management reports, which the management team can access quickly and easily. There is quite an array of CLM software solutions available – the appropriate one for each company needs to be evaluated and selected with due care.
3) Also, creating an effective contract management organisation, and building the right skills are key elements of an effective solution package. In our case, our skill assessment measured and showed clear gaps in best practice standards and helped define specific and targeted skill-building measures to close the gaps.
In conclusion, a sophisticated Contracts Management approach can significantly reduce risks for companies and bring them on a par with their contractors. Also, the higher process speed will enable companies to receive services and materials needed for their operations in significantly shorter time. Finally, the transparency over all contracts and contractual terms will make sure contracting can be done professionally - not to neglect potentials for cost savings through proven terms and conditions.
Overall, professional Contracts Management, especially in the Middle East, will need some attention in order to retain professionalism and to secure vital interests.