Supply chain 22 August 2016

Ten tips for successful contract management

Getting good at contract management

Good contract management is something that begins once a contract is agreed. Business owners are much better placed to manage suppliers to ensure they deliver what we agreed if we have been involved in developing the detail and definition within the contractual mechanism. There are five things to consider here:

(1) Right structure and format – Consider the most appropriate structure, format and content of the contracting mechanism to use. Good contract planning formalises relations between parties within a robust legal framework, but is much more besides. It is an opportunity to define arrangements that encompass every aspect of what outcomes we want from a supplier and how we want the relationship to work.

(2) Include key performance indicators – Determine the handful of performance indicators that will best show supplier performance and convert them into contractual obligations, perhaps listing them within a service level agreement.

If this is done with the supplier, the process can often reveal how truly committed a supplier is to delivering against KPIs. Such an approach may even cause discussions to be reopened once a supplier realises they will be more accountable through a contractual provision.

(3) Provide for the relationship – In some cultures it is the strength of relationships alone that form binding agreements and create firm obligations of parties to each other. This might be at odds with how Western culture works, but it is possible to have both a contract and a relationship – a relationship where parties have a sense of commitment to each other and want to work in the best interests of the other, with the contract reflecting and defining how this works in practice.

If the starting point is the contract and the supplier is engaged to meet the contract they will do just that and only that. However, if the starting point is the relationship and the contract is developed to reflect the relationship both parties have agreed, then it is this that will drive how things work. This might mean making specific arrangements to define how parties agree the relationship shall work in practice.

(4) Consider contract durationWhether we need a short or long term contract depends upon a variety of factors including market conditions, how many suppliers could do what we need, how easy it is to switch, how much leverage we have, what sort of relationship we want and so on.

(5) Plan the exit before you beginIt sounds odd, but one of the important parts of contract planning is to consider how you will exit before the contract is signed. Things can change and even the best of relationships can go sour, so the smart contract is one where parties know how each can exit if they need to.

A good contract can enable good contract management

With a good contract agreed, good contract management can begin. There are five key considerations here:

(6) Ongoing monitoring, review and checks – Don’t file away the contract and leave it to chance that the supplier will perform. Monitor and check performance and compliance along the way to ensure you are getting what was agreed.

(7) Good issue management – Despite best efforts, things can go wrong and performance can be less than that required. It is how we handle this that is important. Any issues should be dealt with and managed through to resolution with the supplier, ensuring the appropriate corrective and preventative action is put in place – or ultimately exiting the contract.

(8) Review with the supplier – Regular supplier reviews keep the focus on the relationship and ensure we have the supplier’s full attention. These should be more than a nice chat – a review of performance and compliance and action planning to agree where things need to change or improve.

(9) Manage this and other contracts – This might not be the only contract with a given supplier. Where the supplier holds more than one contract, we can gain advantage and leverage by deploying a unified approach to managing our relationship with them.

(10) Manage for expiry – Don’t be taken by surprise by contract expiry. Being up against a tight timeframe can dilute leverage and limit your options if you are trying to renegotiate a new contract. Instigate a system to flag expiry in good time so that arrangements can be put in place.

Jonathan O’Brien is CEO at Positive Purchasing Ltd and author of three books about strategic procurement and negotiation.

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