Contract Management

Suboptimal contract terms and conditions combined with lack of effective contract management can lead to erosion of multi-million dollars every year. This is the money which could be reinvested back into the business to fuel growth or else banked to help improve efficiency or expense ratio.

1

Collect and centralize all historical contracts in a contract repository

  • The first step that is vital in any contract management process is establishing a centralized location for storing all historical vendor contracts and ensuring that they are easily accessibles. This will reduce the time and effort needed to locate, review, and monitor contracts throughout their lifecycle. This is particularly important in monitoring supplier compliance, service levels and performance. It is not uncommon in some organizations for contracts to be stored in multiple different locations (SharePoint, filing cabinets, employees laptops) and the business is not sure which is the latest SOW that is in use with a particular supplier. This can often result in the “call of shame” where the company would have to call the vendor and ask them to send the latest version of the contract.
2

Establish a clause library for key contract terms and a standardized contracting workflow

  • The second step is to develop a clause library of key contract terms that should be used for all vendor contracts. This should be a collaborative effort between Procurement and Legal and should cover key terms such as: Data Ownership, Automatic Price Increases, Implementation and Configuration, Data Reporting, Insurance / Indemnification Amount, Training, Termination for Convenience, Termination Assistance, SLA Penalties etc. This clause library reduces the costs and time associated with the contracting process. All stakeholders involved in the process should have a defined workflow of the contract execution process that can be easily tracked through approval notifications.

COMMON CONTRACT ISSUES AND BEST-IN-CLASS TERMS

Illustrative Example, Above Contract Terms Not Exhaustive
3

Proactively manage contracts throughout the term

  • Vendor management is not a one-off or an ad-hoc process. Companies must commit to regular monitoring of contract performance against clearly defined targets. Focus should be on measuring total costs as well as supplier performance. If a supplier is underperforming, the customer must enforce a penalty. Regular monitoring, communication, and corrective action are vital to ensuring contract performance, accordingly, companies must also commit the resources from the procurement organization to regularly complete supplier performance review process. This setup also enables the client to continually optimize the relationship. It is important that the business and Procurement are frequently monitoring supplier invoices, SLA’s and KPI’s against the contract to ensure thatthe business is receiving the full value resulting from negotiations. Price non-compliance that goes undetected undoubtedly affects expense ratio. It is not uncommon for Procurement or the Business to negotiate volume-based discounts or tiered pricing into contracts but there is no one who actively monitors these contracts to ensure that they are actually receiving the full benefit of the volume rebates and tiered pricing.
4

Set up alerts for well in advance of when contracts are due to expire

  • Once the contracts are stored in a centralized contract repository, companies should set up alerts so that Procurement, Legal and Business receive notifications well in advance of when a contract is due to expire. This can range from one month for a simple agreement that needs to be renewed to up to nine months for a complex contract which may touch multiple parts of the business (IT, Claims, Underwriting etc.). This ensures that there is ample time to decide what the strategy should be for the upcoming renewal. At times, it may make sense to run a full RFP to understand what is going on in the marketplace, there may be new entrants or some tech solution which may have disrupted the market.
  • Valorant has helped many organizations improve their contracting process and negotiated best-in-class contracts with all of their suppliers. This has helped reduce their overall spend while also better protecting them from risk. This also has the added bonus of achieving better performance for their suppliers as KPI’s and SLA’s are continually tracked to ensure the suppliers are meeting the required service levels.

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