Value added contracting: Why senior management need to place more focus on contract management beyond just closing the deal. Part 1

In today’s increasingly competitive markets, companies face growing pressure to increase revenues, cut costs, innovate, be more flexible and continue to enhance shareholder value. Likewise, in-house legal functions are required to demonstrate what value they bring to the organisation, usually in dollar terms.

Within this environment, effective management of corporate contracts is of significant importance with the contract management process facing increased demands from within companies. Increased regulation and compliance obligations, corporate governance standards and the need for senior leadership to have greater visibility of risk within organisations compound the issue. A further complicating factor is that contracting has many stakeholders such as legal, finance, operations, sales and procurement, each with their own interests making them sensitive to changes.

Acknowledging this, any organisation not responding to these contracting challenges is essentially eroding shareholder value. To understand why we say this, we need to look more closely at what contracts are and why senior management needs to place more focus on them beyond just closing the deal.

The core values of contracting

Contracting can be defined as the act of defining, recording and managing an agreement between two or more parties to undertake specific obligations, or to achieve particular outcomes, in return for specified rights or rewards. Organisations such as the International Association for Contract and Commercial Management (IACCM) believe that essentially contracts are assets and instruments of economic value. Their value lies in the outcomes they produce; legal considerations are fundamental but not their primary purpose, which is to enable business by representing an economic arrangement between two or more parties. Accordingly, they need to be designed and managed to maximise the probability of a successful outcome.

In addition to being an economic arrangement at their core, they are also a lifecycle activity, and value-creation opportunities exist in each stage of the contract lifecycle. The business needs to capture this value. If organisations are able to manage the lifecycles of their products, why do they struggle to do this with contracts?

Why should organisations care about contracting?

According to the IACCM, contracts are also critical contributors to the management of complexity within organisations. Internal and external factors contribute to this complexity, so business must become better at managing risk and relationships, both internal and external. Building long-standing relationships that are better at reducing the probability of risks occurring, and managing them to a successful conclusion so that the desired contract outcomes are achieved, is preferable to unfair or unbalanced terms which will undermine collaboration and result in adversarial or defensive relationships which ultimately undermine value.

Critical business questions reside within your business contracts and can help avoiding lost revenue opportunities, unnecessary expenses and guide your overall contract management process.

Intelligent contracting via effective collaboration with customers, suppliers and internal clients, innovation and combining resources to tackle major risks and opportunities, will generate significant value creation for all parties involved and will be the key to growth for organisations.

In order to contract intelligently, lawyers and contract managers need to look beyond understanding and managing risk in contracts; they need to create value. How can legal and contracting functions set themselves up to create value during the contract lifecycle? What do they need to do to be more proactive in creating this value? Lawyers are good at being reactive when disputes arise, but how do they side-step disputes and other threats to the business to reinforce relationships, both internal and external? How can legal and contract teams be more agile and a source of business information?

Effectively managing your corporate contracts

The answers to the questions posed above lie in planning effectively for the future to extract the maximum value out of an organisation’s contracts. Understanding and managing risk by using the 10 building blocks of value-added contracting and adopting a continuous improvement mindset, will enable companies to achieve contracting excellence thereby adding significant value to the organisation.

1. Strategy and policy

The senior leadership team of an organisation must firstly transform the prevailing business culture regarding contracts from a focus on administrative processes to an organisation and culture that recognises contracts as business assets. Greater investment needs to be placed in creating contracting competencies that work within a consistent framework. This framework needs to be compatible with, and have the capacity, agility and flexibility to support, the overall business strategy and operational objectives. It is therefore essential that the ownership and accountability for the quality and integrity of the contracting process is measured by specific outcomes vis-à-vis these business objectives.

2. Focusing on outcomes in contracts

To succeed in this, an organisation needs to understand the value of their product or service and emphasise the role of people in delivering this value. Care needs to be taken by not placing dependency on processes and activities that are technology-focused, without paying attention to the behaviours of the people required to deliver value.

3. Process and workflow

Focusing on behaviours is important, but so too are the processes and workflows people use to help deliver value. Legal functions need to develop and maximise a balanced and standardised contract management process based on established best practices. This will improve consistency, reduce risk across the organisation and continue to transform terms and procedures that cope with change.

In our next blog we will give you the remaining seven building blocks that legal and contract teams need to consider. These include cost-saving, efficiency and the value of co-creation.

eDiscovery Cat