Upload
others
View
3
Download
0
Embed Size (px)
Citation preview
International In-house Counsel Journal
Vol. 8, No. 30, Winter 2015, 1
International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online
The Big White Elephant - “Contract Management state of mind and road forward”
MARTIN LONSTRUP
Senior Legal Advisor, Maersk Oil Houston Inc., USA
Background
I have worked in in-house legal departments as an in-house lawyer for almost 10 years in
various industries both on the customer side as well as the supplier side mainly within
procurement and was actively involved in kick-starting Contract Management as a
discipline in Denmark with the establishment of the Danish Contract Management
Association, closely linked to the global organization within the area of Contract and
Commercial Management, IACCM. Contract Management has developed significantly
over the last 3-5 years and is today a well-known discipline, widely referenced and used
by companies and practitioners globally but what is the state of mind for Contract
Management, how far have we come in actually implementing Contract Management in
organizations? In order to answer that question is it first of all necessary to look into the
definition of Contract Management. Various definitions of Contract Management exist
today of which the majority refer to post-award activities (downstream) as the definition
of Contract Management being the classic understanding of the word management
relating to contract administration and follow-up after the award of the contract to the
supplier. Some define Contract Management on the level of an individual contract which
seems to contradict the importance of cross-functional alignment, one of key aspects of
Contract Management, with optimization being done across departments. Others see
Contract Management as a system or tool which is implemented to manage the company
contracts in a static setup. All these definitions are a result of the journey that Contract
Management has been through the last 8-10 years. Today, best practice Contract
Management (or Contract Lifecycle Management) is defined as “the process of
systematically and efficiently managing contract creation, execution and analysis for
maximizing operational and financial performance and minimizing risk” covering both
upstream and downstream activities including all the processes prior to contract award
being sourcing, category management, negotiations etc., and a wider approach to the
downstream activities including supplier performance management (SPM), compliance,
supplier relationship management (SRM), contract development etc. In this article, I will
apply the same best practice definition of Contract Lifecycle Management. There is often
confusion between Contract Management and Supplier Relationship Management
(SRM). My view is that they are both part of the string of activities that relate to post
contract award management of contracts and suppliers. SRM is defined as actions that
apply across a whole portfolio of supplier contracts and are generally accepted to be
around the more strategic, long term activities we undertake with regards to suppliers.
However the fact is that very difficult to have effective SRM without having aspects of
classic Contract Management in place. How will it be possible to talk strategic
partnerships, innovation or joint ventures if there is no clear view of what contracts the
organization actually has with the supplier or how they are performing day to day.
Effective Contract lifecycle Management is therefore a necessary condition for successful
2 Martin Lonstrup
SRM in my view and something which is part of the Contract Management Puzzle
process model introduced later in the article.
This article proposes a three step process in which I will touch upon the very first steps
required in order begin the Contract Management journey, measuring the maturity of the
contracting organization, introduce my Contract Management Puzzle, a new process
model developed to provide a more visual roadmap in organizations about to start their
Contract Management journey, link the puzzle pieces to and analyzing the current
Contract Management state of mind. The latter analysis is based upon the latest findings
by the National Audit Office (“NAO”) in the Transforming Government’s Contract
Management Report 2014 (“Report”)1 from the audit of the UK government departments:
Ministry of Justice, Cabinet Office and Department of Work & Pensions (“Government
Departments”). This is linked to a best practice scenario (having recently lead a Contract
Management in the Danish conglomerate A.P. Moller Maersk (“Maersk”) introducing
Contract Management in the Group Procurement department for almost 4 years. This
included the transformation of the Group Procurement legal department by developing
new processes, policies, contract templates to become a more proactive and involved in
the Group Procurement projects; optimization of payment terms, development of contract
compliance team in Mumbai, establishment of an incentive/bonus collection process, a
new contract management tool or the introduction of the contract management 12 process
model and, latterly, the update of the current Group Procurement contract management
tool with a new tool available to the entire Maersk Group. This has ensured that Group
Procurement today is considered to be a frontier within the Maersk Group on managing
and controlling contracts and Maersk a frontier in the global scene. A Contract
Management tool that is available across the Maersk Group being +16 business units
globally, covering +100 locations, involving +1800 active users and a contract spend
coverage of approx. 38 billion USD). I then introduce a new approach to Contract
Management and give concrete suggestions on how to get started on Contract
Management whatever the size of the company. The NAO introduced a similar
widespread audit report back in 2008. This Report compares the findings and
recommendation from back in 2008 with the findings in 2014. This means that it is
possible to analyze the development of Contract Management within the public sector
albeit within one of the most mature public section globally. The focus will be on a
selective a number of areas within Contract Lifecycle Management but will not be a
complete analysis of all the individual processes involved in upstream and downstream
activities.
The Initial step (Maturity Assessment)
The initial steps in any Contract Management project should be to measure the Contract
Management Maturity of the organization. Measuring the maturity will create a baseline
for how contracts are currently managed in the organization and provide the organization
with the initial roadmap for optimizations. To be able to award and successfully manage
effective contracts, organizations must have disciplined, capable, and mature contract
management processes in place. But what are disciplined, capable, and mature contract
management processes? How can an organization measure the capability and maturity of
its contract management processes? The Contract Management Maturity Model
(CMMM©)2 is a tool for measuring an organization’s contract management process
capability. It recognizes the value in periodically assessing an organization’s contract
1 http://www.nao.org.uk/report/transforming-governments-contract-management-2/
2 CMMM reference: http://www.ippa.ws/IPPC3/Proceedings/Chaper%2045.pdf
Contract Management 3
management process maturity and using the results of that assessment as a road map for
continuously improving organizational contract management process capability.
CMMM describes the evolutionary roadmap an organization would pursue in improving
its contract management process capability from an ad hoc (immature) process to a
continuously improved, or, optimized (mature) process. Mature contract management
processes describe organizational capabilities that can consistently produce successful
business results for buyers of products, services, and integrated solutions. The CMMM
provides its users with a framework or guide for improving their level of performance. It
provides a visual tool to help an organization assess the major steps which they must
accomplish when either buying products, services, or integrated solutions, in either the
public or private business sectors. The CMMM consists of five levels of maturity ranging
from an ad-hoc level (Level 1), a basic, disciplined process capability (Level 2), a fully
established and institutionalized processes capability (Level 3), a level characterized by
processes integrated with other corporate processes resulting in synergistic corporate
benefits (Level 4), and finally, to a level in which processes focused on continuous
improvement and adoption of lessons learned and best practices (Level 5).
If your organization is about to start the journey of Contract Management, or is
considering doing so, the first step every time should be to do an internal and simple
maturity assessment based CMMM. Create a maturity assessment questionnaire and
request that the organization responds. It is important to include everyone here, not only
procurement and legal but also finance, accounting, HR, operations or any technical
departments, and different locations if the organization is global, in order to capture
cultural aspects and even get feedback from employees not based at headquarters.
Basically, every department in the organization should respond in order to receive the
most accurate assessment of the company’s maturity. Remember that each department
plays some kind of role in the contract, big or small and in order to create the roadmap
for the initial step on the coming Contract Management journey it is important to know
how the entire organization rates the maturity. I have used CMMM several times in
various organizations with maturity scoring 1-2 in the initial assessment almost every
time with a few exceptions. Important to highlight that the initial maturity score sets the
baseline and creates the roadmap for future optimizations, so it is important to highlight
that a score of 1 or 2 should not be seen as an organizational failure but as a state of mind
of the organization’s Contract Management maturity enabling the organization to further
optimize and improve. Once the organization is aware of its contracting maturity it is
possible to plan, prioritize and create the roadmap for becoming a 3 or 4 on the CMMM.
Please note that it’s not required to become 5 out of 1-5 today or in the first try because
then it will probably never happen. Too often organizations skip the step of doing even a
simple maturity assessment and instead focus more on creating a simple “believe”
business case based on risk management arguments (which I acknowledge are important
but not everything). Alternatively they may focus on theoretical cost reduction
percentages which hardly ever see the books, or on implementing a new contract
management tool to begin with without actually knowing the organization and its needs, I
will come back to the tool later in the article. Keep it simple and based on current
maturity, set up some realistic targets in order for the organization to improve and make it
exciting for all departments to be part of the initiative. First thing could be to map the
parties involved in a contract, is there a category manager, sourcing manager who is
responsible for the contract? How are legal and finance involved as stakeholders?
Knowing the ownership and who is involved, how and when makes it possible to look at
processes between departments. What do legal require in order to assist? Are there any
pre-contracting conditions the contract owner needs to make Legal aware of? Like
contract ID, contract title, information about what is being purchased? Do legal require
4 Martin Lonstrup
for the contract owner to provide any basic information prior to assistance? Or more
importantly when legal should be involved? Same goes for finance, when is finance being
involved in the TCO’s, savings, payment terms etc.? Does the organization have a policy
for standard payment terms? So there are many processes, policies and ways of working
that will come into question once the maturity assessment is done and the roadmap is
created. The above also reflects the importance of cross alignment on Contract
Management initiatives as Contract lifecycle Management involves all departments in an
organization big or small. The following sections will introduce the aspects of the
Contract Management Puzzle and, based on the puzzle pieces, drill further down into
selective findings and key messages from the NAO audit report, 2014.
The Contract Management Puzzle – setting the baseline3
The Contract Management Puzzle (“The Puzzle”) was developed based on my experience
having worked with the implementation of Contract Management projects in several
medium and large size companies globally. It is a new and improved way to think about
Contract Management, allowing any organization to work with Contract Management
without having to prepare an extensive business case to begin with. This process model
gets Contract Management out of the shade of theory and ensures that it’s tangible to
everyone, step by step enabling the organization to visualize the process for management
in a concise and clear way. The puzzle pieces and their size determine the business
priorities and provide an opportunity to focus on one area at a time without having to be
top-down. Each piece of the
puzzle further defines a second
layer of puzzles for further
mapping of the underlying
processes and actions, making it
simple but most importantly
keeping you on track and
providing management with
concise, to the point progress
reporting at the same time. In the
following section, I have
highlighted a few potential
second layer processes. The
Puzzle consists of 12 pieces
covering all upstream and
downstream activities under
Contract lifecycle Management and should be considered to be Fundamental Building
Blocks in Contract Management. Creating and presenting a business case in an
organization is time consuming and organizations new to Contract Management find it
hard to justify the investment, convey the scope, role and value of a contracting
management function to stakeholders throughout your organization based on highflying
future optimization potential and cost reduction percentages. The puzzle enables the
organization to identify the overall scope within the organization and use it to
communicate the contracting model to other stakeholders within the organization. As a
result, it is easier to clarify the contracting role and scope to cross-functional colleagues
as well as make the business case to obtain resources for strategic growth opportunities.
3 See more about the Contract Puzzle at http://thecontractpuzzle.com/
Contract Management 5
So with the initial maturity assessment done, it is time to define the activities behind the
pieces to the Puzzle and set the baseline for the up-coming Contract Management project
which, together with initial findings, can be shown as proof to management.
Alternatively, if it is possible to dedicate the time for it, or agree some individual
objectives on activities relevant for a future Contract Management project, that could be
the way to go. The Contract Management project in Group Procurement was initiated
after having presented Contract Management to all the Maersk Group lawyers on an
annual lawyers day, and a few months later shared the presentation with the CPO and
CFO,. That resulted in initial kicked off with an initial maturity assessment, initial clean-
up of current contracts creating the baseline for the potential benefits. Bit and pieces from
the project in Maersk will be used as practical best practice examples through-out the
article. The Puzzle consists of the following pieces: Demand Planning and Sourcing
Strategy, Administration, Performance Management, Contract Development, Contract
Creation, Deployment, Compliance, Renewal Management, Pre-contracting and
contracting, call off, Supplier Relationship Management (SRM) and Risk Management.
Underneath each Puzzle piece is yet another layer of processes and activities related to
consider. So why should the organization create this Puzzle roadmap and what good will
it bring? Well, that is a fair question.
The UK Government did a similar exercise back in 2008 with their NAO 2008 Good
Practice Framework with the attempt to set the baseline for Contract Management in the
UK Government. It was followed up by a report on how to improve Contract
Management in 2009. The Office for Government Commerce accepted the
recommendations but failed to influence the individual departments and focus drifted
away over the years. This is not much different from other organizations, the road to
Contract Management excellence is long and hard and you rarely get more than one
chance. Having used simple tools or the Puzzle would have eased the implementation,
enabling each department to create their own Puzzle which would have built ownership
and commitment from the start. Receiving a large report suggesting how to do Contract
Management from the top rarely works and the latest Report clearly highlight that the
failure with implementing Contract Management goes beyond poor administration or
lapsed awareness. It is clear that the overall value of Contract Management hasn’t been
recognized by the Government and too often Contract Management has been seen as
delivering the deal that was agreed when the contract was signed which means that
Contract Management has been seen as a way to avoid things going wrong, rather than
unlocking value throughout the life of the contract. The departments haven’t taken up the
challenge and the department systems and governance models have focused on approving
new projects as if the responsibility ends when the contract is signed. On top of that
departments haven’t recognized that they are responsible and that they carry the risk for
the services they have contracted. This result in departments rarely having visibility over
their contracts, leaving them unable to monitor and challenge the operational contracts.
The above observations highlighted in the Report are unfortunately not coincidences but
the result of the approach taken back in 2008 and 2009 with the Good Practice
Framework. The Government departments didn’t feel responsible, couldn’t see the
“what’s in it for me” aspects and the baseline was set by one part of the organization. I
would like to believe that using the Puzzle to design individual roadmaps for each
department, linked to the overall UK Government Puzzle, would have enabled the
individual departments to provide feedback, contribute to setting their targets and
objectives creating a sense of ownership. Instead the Report now concludes that poor
Contract Management is a long-standing issue and highlights a large number of critical
findings what you wouldn’t expect from an organization that has been focussing on
Contract Management for the last decades.
6 Martin Lonstrup
The NAO Audit Report
The NAO audit is the first audit exercise comparing the Contract Management
performance and development of UK Government Departments six years after setting the
baseline in 2008 and probably the most realistic to date measuring the performance of
Contract Management implementation. The audit tested 60 contracts for overbilling and
73 contracts against eight areas of the NAO 2008 Good Practice Framework4 (“Good
Practice Framework”). It concluded that Contract Management processes were weak in
343 out of 584 areas (of this, 73 areas considered to create a material risk). It is surprising
to see that the UK Government Departments are faced with that many issues as the UK
has been considered a frontier within Contract Management globally for many years now.
Unfortunately, it clearly show that even the most aware, skilled and educated
Government institutes find it difficult to catch “the big white elephant” that contract
management has become. So how does this term fit here? Well, similar to the definition
of the big white elephant, Contract Management has become an obvious problem and risk
so clear to everyone, yet something only very few organizations dare to address or
manage to capture as also seen here.
If you dive into the detailed observations of the reports done in the UK, it clearly
highlights all the classic textbook issues, from people management (HR), Capabilities,
Legal, Commercial, Finance, Administration and unfortunately displays that departments
are still mainly focusing on their own tasks, KPI’s and deliverables in silos despite the
guidelines for best practice Contract Management set out in the NAO 2008 Good Practice
Framework. The message is clear; the UK Government will not get value for money from
its contracts until it improves Contract Management so how can that happen?
The Report highlighted widespread problems with how the UK Government manages its
contracts, problems that most organizations today struggle with in one way or the other.
The following sections will look further into the Puzzle pieces describing some of the
critical areas raised in the NAO Report.
Administration
Second layer activities could be: Process for contract signing, a tool for storage,
contract summary and/or an operational contract guide, reporting on contract status to
management, legal policy and contract management policy.
Senior Management Visibility and a Contract Management Tool
(Data is King)
The Report highlighted that the departments lack visibility of
Contract Management at board level or are lacking senior-level
engagement with the reason that senior engagement has not
generally been maintained during the operational phase of the
contracts. One reason for that lack of involvement during the operational phase is lack of
data and visual statistics allowing for senior management to familiarize themselves in a
short and easy way with the status of contracts. Contract data needs to be communicated
to senior management in a meaningful way, long excel documents will not do the job.
According to the Report, the UK Government departments are lacking basic contract
information, departments don’t have systems in place that combine procurement, finance,
compliance or contract management. A few larger departments are still working on
4 http://www.nao.org.uk/report/good-practice-contract-management-framework-2-2/
Contract Management 7
putting basic excel overviews in place, and an overall combined system showing all
current contracts, changes and communication is planned but yet to be seen. Moving
from using shared drives, excel sheets or simple hard copy versions of contracts, to
making use of more and more online repositories, contract management tools etc.,
enables closer engagement with senior management feeding them with concise, relevant
information which eventually as management matures and data becomes better and better
will change the picture. Recently, in connecting with the implementation of a new
contract management tool in Maersk, it was a firm requirement that the tool would be
able to provide a one page easily readable dashboard to senior management enabling
them to follow with live data the status of contracts in their individual departments and
transversally but also to provide an easy accessible tool for the everyday users. The
vision was to implement a tool that would support senior management and the users in
having live date at any time they needed it, whether on their laptop, mobile or tablet.
Having all contracts in one tool makes it possible to track various elements like number
of valid contracts, number of expired contracts per location/supplier, payment terms,
delivery terms, or even across contracts: what is the average negotiated payment term
versus the policy? Do we have any incentives schemes and have they been collected if
applicable? What is the spend under the Contract? And more importantly in a
conglomerate the optimization opportunities when being able to look across business
units on generic materials/supplies, consolidating spend that provide enormous potential
on future price negotiations, or more simply limiting the number of services being
contracted for twice or even more, reduction man hours, admin cost etc. This is only a
few areas which become interesting to look at once all contracts are in the same tool and
shown in dashboards, surely something that will catch the attention of senior
management and something which ties together performance management data and
contract administration, and enables best practice negotiations, supplier relationship
management etc. Today, the Maersk Contract Management tool consists of 11.000
Contracts with approx. 7.000 more to be migrated, covering a contract spend of 40 billion
USD across 16 business units in more than 100 locations globally and approx. 1.800
active5 users of the Contract Management tool. It is expected that the number of contracts
in the tool will be much higher in a few years. A relatively unique result6, rarely seen
because the Contract Management tool was implemented together with the Business
Units by creating a project structure consisting of a steering committee and a project
team. The project was led by me as business lead together with a project lead. 21
different tool providers were invited to tender and after the first two evaluation rounds it
was down to five different Contract Management tools, all with the capability to provide
full and secure Contract lifecycle Management and enterprise functionalities and not just
simple SharePoint reporting. In order to reduce from five suppliers, we decided to do a
sandbox session asking all the suppliers to set up a test environment allowing us to test
their tool functionalities in a closed session. That meant that none of the suppliers were
allowed to be in the session, they could provide phone service availability if they wanted
to but this was not a requirement. 15 people with various backgrounds (sourcing,
purchasing, accounting, other business units etc.) were invited to test the tools in sessions
of 20 minutes with a hard stop and 10 minutes evaluation for each tool. The manuscript
was for each participant to access the tool, register a contract, upload the contract and
search for it and create a report on its status within the 20 minutes. The sandbox session
showed that ease of use varies a lot depending on the tools and user backgrounds and that
5 Current data 6 The complexity and size of tool have shown to be best of benchmark for Contract Management tool
implementations.
8 Martin Lonstrup
it is important to do these tests before spending a lot of time and money on a new or first
Contract Management tool. The results of the test varied a lot, from 1 contract being
stored and search for in one tool to 10 contracts being stored, search for and reports
created for in another tool in 20 min so an interesting excise to do. It is important to have
all the everyday users in on it from the very beginning and avoid implementing a tool to
satisfy senior management, because that will likely result in a tool not being used by the
organization, leaving senior management with same risks and no valid data. The sandbox
session clearly highlighted the easiest to use tool for the users in Maersk and made it very
easy to get buy-in in the end for implementing the most user friendly tool based on the
sandbox session plus other evaluation criteria.
Deployment
Second layer activities could be: handover packages, communication through
newsletters, briefings, intro meetings, implementation processes, upload
of contract data into ERP systems, deployment charter and policy.
The Report highlighted that Contract Management is not operating as a
multi-disciplinary function which results in limited interaction between
finance, commercial and operational contract management functions.
One of the reasons for the failure here is that the processes describing
the interaction and split in responsibility and reporting lines required
were either not completely clear, not developed between the involved
parties or even not developed in the first place. In order to get cross-functional
interactions to work, it is important to map out all the reporting lines and develop an
agreed process specifically between the two parties. An example could be on controlling
incentives or bonus collections set out in the contracts. In this case, a process for
collecting and following up on incentives/bonuses needs to be developed, probably
involving finance or accounting, the contract owner, a compliance team and legal.
Creating a process between parties promotes a sense of ownership: accounting will make
sure to follow up with the supplier, the contract owner can be used as an escalation point
as can legal in case of any doubt or questions on the interpretations of the contract, and
all involved parties will make the effort to chase down every dollar.
A second element to this piece is often the question of who should be responsible for
Contract Management? Contract Management is often considered to be something
administrative, or commercial. Sometimes it even ends up in a power battle between
departments, who should be responsible for Contract Management once cost reductions
are shown. That Contract Management should be cross-functional in order to succeed
needs to be seen in a wider sense. Best Practice indicates that Contract Management
should be located in a separate Contract Management function but there are many
examples of Contract Management being managed by the legal department, category
management department or finance which could work perfectly as long as cross
functional involvement is still applied and ownership is clearly known throughout the
organization. In the latest project in Maersk, I was faced with the same question. I was
sitting in the legal department but would that be the right place for Contract
Management? I decided to recommend that Contract Management be kept separately
from legal in a separate compliance team created for the purpose of managing the future
contract management tool recently implemented across Maersk. It made sense to have
Contract Management placed in the same department that would have the future contract
management tool ownership. Other organizations separate the Contract Management
function completely and in other places it is under commercial or even operational
Contract Management 9
departments so depends on the Contract Management approach taken by the organization
and the maturity of the organization.
Compliance
Second layer activities could be: SOP for compliance checks, Anti-corruption
measurements, Clear roles and responsibility, Operational compliance measurements
(Price models, operational use of contracts), Organization awareness
of contracts with reference to deployment, Contract audit checks
(invoice, performance, delivery, quality, and bonuses).
Contract compliance and monitoring is probably the area with the
lowest hanging fruit if argumentation or benefits needs to be
demonstrated in order to initiate a Contract Management project. 8 out
of 10 contract management business cases are based on cost recovery and provide senior
management with a dollar value on top of all the optimization potentials provided under
the other Puzzle pieces. These should definitely be a priority when looking for
optimization potentials. So what are we talking about, cost recovery? Well, the UK
Government tested 60 contracts for overbilling out of which 34 contracts had non-
compliance issues and five contracts were handled over to the Police for further
investigations. The UK Government ended up recovering 179.4 million GBP from two
suppliers in the form of negotiated settlements on rebates, investigation costs and interest
from consistent overbilling. The Report concluded that the audit of the 60 contracts
included both under and overbilling and that given the lack of controls across the
Government, that other instances of overbilling were most likely have occurred across the
wider contract portfolio. This is a clear consequence of not having an overall overview of
contracts, of lack of coordination, communication (processes) between involved
departments. This was a result of just handing over the contract to the next department
without any interaction or formal hand-over policies and tie-backs to the observations
made by the NAO on lack of visibility on contracts, overall ownership and tools. I have
conducted similar exercises before and rarely discovered overbilling close to the amounts
discovered by the NAO even with a much higher consolidated spend. Having said that, I
would still say that some form of under or overbilling has been the case pretty much
every time, however not to the extent that it has been considered to reflect fraud-like
behaviors needing further investigations. I have in previous companies seen evergreen
consultancy contracts lying around for years linked to small consultancy companies or
license agreements that just renew themselves every year which added up considerable
sums. Other optimization aspects of checking supplier invoices against contract could be:
Are items missing from the pricelists? Is there any lack of contract or pricelist
extensions? Are online purchases done without valid pricelists? Are invoices missing the
article/part number references and description? Checking if suppliers are invoicing the
organization the right amounts is an exercise that is possible to do in any organization,
simply by locating 5-10 contracts and requesting the invoices from the same suppliers
from finance. Simply compare the amounts of the contract with the invoices, does it
match? What about the payment terms? Does the payment term match between the
contract and the invoice? Does it match between the contract and the financial system and
when is the actual invoice paid into the system? Now payment terms has been a debate
for year now, as global organizations are squeezing their suppliers by requiring +45 days
or current month + 60 days payment terms but in reality it is more beneficial to have a
look at the actual payment term used in the financial systems and by finance or
accounting before settling the policy of payment terms in general. The exercise could
reflect that the invoices are actually paid too early or provide the proof those 30 days
10 Martin Lonstrup
minimum is required in order to pay in time. This would be valuable information to have
during negotiations and with the financial status globally, many a dollar saved!!
Call-off - Payment and Incentives excise
Second layer activities could be: Roles and responsibility are clear (SLA structure
supporting the business), Process for collecting bonus, Process for
operational use of contracts, Incentive structures (financial or non-
financial and governed with appropriate checks and approval
mechanisms, process for payment terms, and payment flow
One exercise I have done previously reviewing the payment terms in
approximately 300 contracts compared with the financial system showed that invoices in
average were paid 18 days too early. The reason was that the financial systems hadn’t
been updated alongside renewal of contracts resulting in contracts and systems being out
of sync. Now, paying too early doesn’t imply interest, penalties or suspension of
deliveries, typically expected from financial systems but actually not uncommon.
Updating the financial system to match the actual agreed payment terms meant 2-digit
million USD amount improvement of Net Working Capital, the optimization being
simply based on the already agreed payment terms. Another part of the exercise on
payment terms showed that out of 1000 contracts stored in a centralized contract
repository, only approx. 300 made use of the standard payment terms from the fixed
drop-down menu, whereas approximately 700 contracts entered had used the option
“Other” which generated a free text field. Out of the approximately 700 contracts having
used the “Other” option for payment terms, around 126 had typed in “Not applicable”,
whereas the remaining part of the contracts under “Other” had payment terms typed in
that in 90% of the times reflected the drop-down menu options with small nuances. This
again shows quickly non-compliance on simple things arises, leaving the door open for
lost benefits.
Incentive programs and bonuses are again mechanisms agreed during negotiations similar
to payment terms and handed over to a contract manager, or carried through to the end by
one contract owner, depending on the procurement model used. Commercial incentives
and potential benefits which could become applicable in the future, in one year from now
or even later are difficult to manage for any organization. Employee turnover alone
makes it very difficult to control unless a firm process is set up. Secondly, unclear
processes about supplier incentive and bonuses could become a serious risk with the
increasing focus on anti-bribery and the latest FCPA and UK Bribery Acts on anti-
bribery. Another exercise I previously have done was to look into the bonus schemes
with suppliers. This ended up being a relatively manual exercise flipping through all the
contracts in the centralized contract repository looking for bonus clauses etc. The bonus
exercise resulted in a USD amount being recovered in unclaimed bonuses and a two-digit
million USD amount in bonuses received was documented as received. This was
followed up by a new policy on bonus collection being developed between the
commercial departments, finance and legal. The Report does not deal with payment term
optimization or bonus schemes however it is very likely that payments and collection of
bonuses are out of sync in the UK government contracts given they today experience lack
of visibility and transparency of contracts. This is definitely an exercise worth
considering whether the organization has a centralized repository in place already or
contracts/invoices need to be collected manually.
Contract Management State of Mind
So, what is the actual state of mind of Contract Management? Well, whether looking at
the selected areas covered in this article or browsing through the full NAO Report in
Contract Management 11
detail, clear signs exist of the Big White Elephant still being in the room. Looking at
some of the observations done by NAO highlighting issues with visibility, overbilling,
limited interaction or hand-over between departments, payments and contract
development not to mention SPM or SRM, which is considered to be even less mature,
and taking into account that the UK Government for decades have been considered to be
a frontier within public Contract Management, the conclusion must be that Contract
Management has become an obvious problem and a risk that is clear to everyone, yet
something only very few organizations dare to address or manage to capture. The UK
Government would probably be rated between 1-2 in maturity on the CMMM and that is
after having developed the Good Practice Framework seven years ago. It is therefore
obvious that even with all the right intentions and management buy-in it becomes
difficult if the ambitions are set too high, out of sync with the organization. It is important
to avoid making it too theoretical and difficult, because it isn’t! Keep it’s simple, start
tomorrow with the maturity assessment and initial roadmap to create your Contract
Management strategy. Don’t struggle with heavy business cases unless absolutely
necessary, investigate your organization in order to understand how and where a potential
Contract Management project is best initiated. Remember that Contract Management is
all upstream and downstream activities whether SRM, SPM, strategic sourcing models,
purchasing systems, compliance or the legal department etc. so relevant to involve all
departments eventually. Transition of a legal department in order to make it aligned with
contract management principles is a separate chapter and an article in itself. Few truly
global, best practice examples exist having successfully implemented Contract
Management and a Contract Management across +100 locations in a conglomerate
consisting of multiple and individual business units but the Maersk – Group Procurement
project certainly stands as a best case example for future reference in implementing
Contract Management in a simple way.
***
Martin Lonstrup is a Danish Lawyer, having worked with contract management and
legal for the last 8 years, founded the Danish Contract Management Association
(DCMA), former Chairman of DCMA. Worked in various related roles from Head of
Legal, to Legal Counsel and Contract Manager to now Senior Legal Advisor and
experienced in contracting from various aspects with focus on procurement.
Martin worked with operational contract lifecycle management in different companies
and industries, implemented legal department governance models, policies, CM
processes, CM tools, compliance, legal processes ensuring better use of contracts,
financial optimization, and clear overview of contracts. Most recently in the role as
Senior Legal Counsel and Business Lead on implementing a new contract management
tool in the Maersk Group globally before moving to a new position within the Maersk
Group in Maersk Oil.
He has developed the new Contract Management process model, the Contract Puzzle – a
new and improved way to think Contract Management, allowing any organization to
work with Contract Management without having to prepare an extensive business case to
begin with. This process model gets Contract Management out of the shade of theory and
ensures that it’s tangible to everyone, step by step enabling the organization to visualize
the process for management in a concise and clear way.
The Maersk Group
Maersk Group is a worldwide conglomerate. We operate in more than 130 countries and
employ roughly 88,900. In addition to owning one of the world’s largest shipping
12 Martin Lonstrup
companies, we’re involved in a wide range of activities in the transport, energy, logistics,
retail and manufacturing industries. Read more about Maersk and our business units on
www.Maersk.com
The Maersk Group Values
As members of the Maersk family, all Business Units and employees are encouraged to
live by the values of the Group:
Constant Care: Take care of today, actively prepare for tomorrow
Humbleness: Listen, learn, share, and give space to others
Uprightness: Our word is our bond
Our Employees: The right environment for the right people
Our Name: The sum of our values, passionately striving higher
These values symbolize Maersk’s heritage and act as the founding element of the
company.