Why it’s time to focus on Post-Signature Contract & Commercial Management has been saved
Why it’s time to focus on Post-Signature Contract & Commercial Management
The place where legal and business meet and find value
Contract Lifecycle Management technology and the professionals involved have had a banner year. For something that used to be considered minutia, the past year has seen unprecedented investment in the tools and use cases for proper contract management, be it a new appreciation for force majeure clauses in pandemics, cascading effects from Brexit, or changes in IBOR. Whilst these changes affect the whole contract lifecycle, it feels like there is more attention given to contracting as opposed to activities that occur after signature.
For framing purposes, the post-signature activities fall into two buckets:
- The hygiene to ensure compliance with contractual and regulatory obligations, change order and dispute processes, and reporting (contract management); and
- The more financially focused activities such as performance, pricing adjustments, invoicing and discounts (commercial management).
Why the disparity in focus? The most obvious reason is that companies HAVE TO keep contracting. Anything that can make this process faster, better, and/or simpler is appealing. But that only explains half of it. Maybe an analogy will help here. Let’s talk about how this is like having a child. Having a child is an amazing and wonderful investment of time and effort that takes nine months (give or take) to come to fruition. Sacrifices are made--financial, physical and time investments are given—and, at the end (hopefully), there is an amazing and invaluable gift. But is that the end? Of course not! More effort, sacrifice and investment are provided to develop this child with the payoffs along the way being, again, invaluable. So why, then, do companies invest time, effort, technology, money, and sometimes endless bureaucracy to get a “contract over the line” just to file it away (if that) and do nothing with it? Or, worse yet, they hand it to part of the business that has no idea of how the contract was created, what the risks and opportunities are contained within it, and then just hope for the best? Passing over contract management responsibilities to the “business” is not a bad idea, but you would think that there should be some training, support or tooling to help them. Sadly, this is not often the case and, whilst you might know where the contract is it only benefits from some basic document retention.
Why do smart organisations exhibit this seemingly counter-intuitive behaviour? Here are some common answers:
It is an investment
Most organisations do not have historic functions, processes or personnel for these types of activities. To be fair, most companies really didn’t get a focus on even basic document retention until the last ten years – and many still don’t. It’s hard to proactively manage your contractual relationships if you don’t know where the underlying contracts are or what is in them. Furthermore, the main functions that typically deal with contracts – legal, procurement and sales –-have a bias toward getting the contract signed. Meanwhile, the organisations that have a vested interested in managing contractual portfolios – the COO, finance, business units, IT – are more focused on the “doing” of business. They are not adequately equipped with the resources that have the skills to really dig into a contract and parse out how some legalese clause effects pricing, responsibility for action or obligations. “Best reasonable efforts” doesn’t strike an intuitive and universal recognition of what that means in practice. As such, it costs money, time and change management to develop or outsource these activities.
It requires cross-function cooperation
As I alluded to above, many functions and different perspectives are needed to perform contract and commercial management activities. A team that can properly do all this work needs a bit of legal to understand the terms, a touch of procurement or sales savvy to understand the underlying relationships, some financial acumen to keep a focus on the numbers, with a healthy dash of technology and data experts to understand the data flows as well as pinpoint the issues and automation opportunities. In all my (former) travels, I have yet to meet one individual who has all those skills sufficiently, let alone a team of them. As such, to properly do this, you need a team of mixed skills united on common platforms and processes. Most companies are great at creating siloes and land battles for whose “turf” this or that is, but collaborative team building is a challenge.
It’s a change
Investment in post-signature contract management is a change—a change that requires time and energy. It is precisely because of these needs why it gets pushed to page two of the “to-do list”. But that seems wrong, doesn’t it? We tell children to put the time in, study hard and it will pay off in the end. We preach and idolise hard work and perseverance in pop culture and pretty much all of our teachings in school. “Don’t take shortcuts”, “do it the right way; this will pay off in the end” are common mantras we extol in our personal and professional lives. But many organisations shy away from this change and stay with the status quo. Maybe this is because it is easier or because the benefits aren’t clear enough. In the next section I’ll try and lay that out.
Given that contract and commercial management require effort and change, it is natural to think “does this really payoff?” or “why put in the effort?” Here now are some of the reasons why it pays off and why it is worth the investment.
Business case is stronger
Studies from World Commerce and Contracting suggest that companies, on average, lose 9.2% of annual contract value through poor management across the whole contract lifecycle. Most of that is in the post-signature area. The business case for better pre-signature generally revolves around doing it faster, quicker or at less cost. Depending on the type of contracting there can be an argument for faster cash in the door, but that doesn’t really work for procurement contracting. Conversely, post-award support focuses on things like revenue leakage through bad invoicing or change order management which equates to paying for the same thing twice or not holding your partners accountable for what they promised to deliver. It also captures things like preventing catastrophic loss through actively avoiding regulatory pitfalls. Going back to the child analogy, there are so many things that can go wrong or right after the contract is signed. It is definitely worth it to invest a little time there.
Don’t take my word for it-- just listen to every consultant, business analyst or internal report that shows that siloed activity creates inefficiency, duplication of effort, lack of clarity, multiple points of failure, slippage and a myriad of other words to reflect ineffectiveness of this strategy. Proper contract and commercial management is way to fight that. The whole organisation should care how the business is doing and how this is inextricably linked to the way underlying contracts and the relationships they represent are entered into and managed. This is a great place for legal to enter the fray and go from “trusted advisor” to doer that helps guard and enhance the bottom-line by working with other functions to sort these problems. Legal touches all the other functions, so it’s a natural enabler and necessary component of the overall contract and commercial management ecosystem.
Largest area of risk/reward
Unless you are a start-up less than a year old, it is a near absolute certainty that your company has more contracts already signed and in play than you will sign this year. And for mature companies this is probably ten times or more. Given this number of contracts and their importance, it only stands to reason that you would focus more effort on this sheer volume, right? Post-signature contract management is where money is being won and lost at greater volumes than anywhere else.
Contract and commercial management is the logical place to invest time and energy; companies that put in the time do see the payoff. But this is not the easiest activity an organisation will ever undertake. There are ways to get started and I will write about that next time. But for now, let’s drop the excuses and get to work. There’s money in those contracts. Let’s get it.