Services Procurement

(CUSCM415)
Contract Management
Outline
Learning objectives
Definition of Contract Management
Objectives of Contract Management
Benefits of Contract Management
Disadvantages of Contract Management
Contract Management Process
Reasons why Contracts Fail
Contract Administration
Assessment

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Learning Objectives
Define contract management
Recite the objectives of contract management
Explain the reasons behind contract failure
Identify the role of buyers and suppliers in contract
management

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Definition of Contract Management

This is also known as post-contract performance measurement

and it is defined as the activities of a buyer during a contract
period to ensure that all parties to the contract fulfil their
contractual obligations
OR;
Is a process designed to ensure that both parties to a contract meet
their obligations and that the intended outcomes of a contract are
delivered through a good working relationship continuing
through the life of a contract.
However it is also referred to as relationship management, which
describes the management of an on-going relationship with a
supplier, beyond the performance of individual transactions.
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Objectives of Contract Management

To examine approaches to the measurement of performance

efficiency in procurement in relation to its stage of evolution
To consider the mechanisms of contract management
To relate procurement performance to the stage of
development
To consider the benefits of measuring performance
To consider the role of procurement as the intelligence
customer
To evaluate reporting systems and the information that
should be included
To consider service level agreements
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Benefits of Contract Management
The buying company incurs lower costs of identifying,
appraising and training new vendors and lower transaction
and contracting costs of multiple sourcing and competitive
bidding by developing a small core group of trusted suppliers
Quality and other problems can be ironed out progressively
and continuous improvements made over a period of
feedback, problem-solving and co-operation.
Goodwill developed with positive relationships may earn
preferential treatment or flexibility from suppliers in the
event of emergencies such as materials shortages or
underestimated demand leading to urgent orders.

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Benefits of Contract Management
Suppliers may be more motivated especially by the
promise of long-term, stable business to give their best
performance and add value through innovation,
flexibility, commitment to continuous improvement etc.
Motivated suppliers may be willing to co-invest e.g. in
research and development, systems integration or staff
training
There is less risk of supplier failure or poor performance,
if performance standards are regularly agreed,
monitored and managed.

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Disadvantages

It is very costly

It involves a lot of time
It needs a lot of commitment from the top
management and the purchasing staff
Benefits can only be obtained in the long term
It needs skills and training for those who will be
involved
It needs proper planning

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Contract Management Process
Effective contract management should start as early as
possible (ESI) before awarding the contract to supplier, i.e.
evaluating prospective suppliers so as to achieve the following;
1.Avoid misunderstandings
2.To manage the expectations e.g. compliance and commitment
by the supplier
3.To ensure process capability and minimise the risk of problems
4.To design specifications
5.To enable construction of effective negotiations
6.Added value arising from efficient contract administration and
performance

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Contract Management Process
In addition to early discussions and negotiations suppliers should not be
confined to the terms and conditions of the purchase contract or partnership
agreement but should be behind the agreed terms so that each party knows
his counterpart clearly in order achieve the intended requirements.
1.The time table of stages in the operation
2.Staff planning e.g. grades of staff, estimated number of hours, arrangements
for supervision etc
3.Rules and procedures relating to site conditions, operations and safety issues
4.Invoicing and payment procedures
5.Buyer’s responsibilities to provide designs, tools, facilities etc
6.Supplier’s responsibilities for reporting on progress
7.Procedures and time tables for review of progress

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Buyer’s Responsibilities after the Contract
Award
To maintain regular contact with the supplier
To monitor the supplier’s performance against the
agreed terms and standards
To motivate the supplier
To work with the supplier to solve any performance
and relationship problems

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Key Elements of Contract Management

1.Contract development; involves the formulation of the legally

binding contract of the terms and conditions as well as defining
clearly the required specifications
2. Contract communication; copies of contract administration
should be delivered to the necessary people involved
3.Contract administration; the implementation of procedures
between the buyer and the supplier to ensure that contract
obligations are fulfilled e.g. contract maintenance, payment
procedures management reporting
4.Managing contract performance; e.g.
risk management
continuous improvement planning

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performance management problem solving
5.relationship management; developing the working
relationship between the purchaser and the supplier
6.contract renewal and termination; the buyer and the
supplier must make a collaborative post mortem in
order to evaluate the success and failures of the
contract.

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 Reasons why Organisations fail to Manage
Contracts Successfully:

1.The role and value of contract management may be

poorly understood or underestimated
2.Contracts may be poorly crafted failing to identify
foreseeable risks and issues leaving loopholes and
areas of misunderstanding
3.Inadequate resources
4.Wrong people being assigned to the contract
management
5.Failure to develop effective performance measures or to
monitor and review performance
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Reasons why Organisations fail to Manage
Contracts Successfully:
6.Inadequate procedures for contract administration e.g.
payment procedures to the supplier
7.Inadequate co-ordination of cross-functional contract
administration responsibilities
8.Failure to evaluate the likely risks, and changes by both
parties and failure to be flexible and unreasonable
when facing challenges.

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Planning and Governance of Contract Management

Governance for contract management:

This relates to the issues of corporate governance which
simply refers to the rules, processes and organisational
structures by which organisations are operated, controlled
and regulated to ensure that they adhere to accepted ethical
standards, good practices, law and regulations.
Governance Mechanisms; refers to the following tools for
the commercial activity.
1 Responsibilities and accountabilities
2Formal communications and reporting channels
3 Policies and procedures
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Its Importance in Contract Management: is based on the fact that
individuals responsible for developing and managing commercial
contracts are involved in the following;
1. Operate in a cross-functional and cross organisational role, which
requires robust mechanism for co-ordination, communication and
control
2. Operate in a stewardship role, responsible for the custodianship of
finance and assets which are owned by the shareholders
3. They control very large sums of organisational funds
4. They are exposed to opportunities of committing financial fraud,
misuse systems or information for personal gain
5. They are responsible for the standing credibility and reputation of the
organisation in its dealings with the supply chain partners

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Contact & Communication Structures

This refers to the various ways in which the individuals involved

in contract management can be in contact between the buying
organisation and the supplier i.e. through proper allocated and
structured channels e.g. when the buyer wants to get in touch
with the supplier.
1. Single Point Of Contact (SPOC); is an appointed central point
of contact by the supplier as a single communications interface
with the buyer who will be a corresponding buyer-designated
gatekeeper responsible for all the dealings with the supplier.
2. Multiple touch points(MTP); this is a decentralised contact
system which involves many contact points for the buyer to
interact with and it has got the following advantages;

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Diverse inputs to supplier relationship for different
purposes and at different levels of expertise
Avoidance of communication bottlenecks where a
single contact is overburdened
Better relationship, knowledge and service community
if a contact leaves or is unavailable

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3.Various touch points for Contract Management;
Business reviews
Steering committees
Performance measures
Multifunctional team working
New product development

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4. Co-ordinated decentralisation; this is the best
approach as it involves multiple contact points and
communication channels which must be coherent and
consistent across the board.

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The role of Procurement Function in
Contract Management
The procurement function should be involved in developing supply
contracts, particularly by collaborating with relevant operational or user
departments and other expert stakeholders such as engineering, legal and
finance departments.
It must be noted that the procurement function need not to retain the
responsibility of the ongoing contract management because of the
following factors;
1.Governance and communication efficiency may dictate that the lead
responsibility for contract management should reside in the function which
will require most collaboration, co-ordination and information exchange
with the supplier in order to avoid delays and misunderstandings from
routing of communication through a third party gatekeeper
 

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2. There may be a need for specialised knowledge and
expertise to manage technically specialised complex
contracts e.g. specialised staff may have a better
appreciation of supply risks, quality service and cost
issues and technical terminology than procurement.

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Responsibilities of the Contract Manager:

Depending on the size of the contract, a single

individual may be sufficient out all contract
management responsibilities while for large contracts,
a contract management team may be necessary.
On the Buyer’s side;
1.To act as a single point of contact for all commercial
and legal correspondence relating to the contract
2.To maintain the specification of contract performance
measures e.g. SLA or KPIs

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3. To monitor contract performance and report on overall service levels
4. To represent the buyer’s interest to the supplier
5. To oversee operation and administration of the contract
6. To determine and take remedial actions in agreement with the
supplier, on any problems that arise
7.To negotiate remedies with the supplier in the event of breach of
contract terms
8.To escalate contract disputes to higher levels if necessary
9.To maintain revised and updated contract specifications
10.To advise and support operational managers in other functions to
whom day-to- day management and monitoring of contracts which
affect them may be devolved.

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On the Supplier’s Side

1.To monitor contract performance

2.To identify and manage exceptions
3.To represent the supplier’s interests to the buyer
4.To respond to changing customer needs
5.To determine and take remedial actions in agreement with
the buyer on any problems that may arise
6.To negotiate remedies with the buyer in the event of a
breach of contract terms
7.To escalate contract disputes to higher levels if necessary
8.To operate and administer the contract to the specification
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Contract Administration

Contract maintenance, document management and change

control i.e. identify all documentation relevant to the
contract such as contract documents, specifications, KPIs,
SLA, procedure manuals etc. Change control procedures
should be included in the contract as they have got a
serious impact on the performance of the supplier.
Payment procedures; it is the legal responsibility of the
buyer to effect payment according to agreed terms and
conditions so as not to disadvantage the supplier
Management reporting; is based on providing performance
reports and management information for progress.

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Expediting; may include such things as, ensuring delivery
deadlines, maintaining project and production schedules,
monitoring supplier progress etc
Contract renewal or termination; is based on a well prepared
full end-of- contract review report conducted by the buying
organisation.
Post-contract lessons management; the contract management
team should intentionally review the contract’s history and
outcomes and gather feedback from a range of stakeholders
on what went wrong or right, how things should have been
done and what lessons have been learnt from contract.

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Assessment
Discuss why contract management of a service is
regarded as more difficult than of physical goods and
how can this be solved?
 
Explain the importance of pre-contract and contract
administration in service Procurement?

Analyse the importance of incorporating the issues of

corporate governance in service Procurement?

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