5 Contract Relationship Management Pitfalls And Solutions
“Relationship beyond the contract” – most global outsourcers often fail to understand that this starts with understanding one’s contract.
Suppliers’ lack of self-education of their contracts, is one of the key source of relationship and value dilution over the contract term. I often find blogs of leading global outsourcers quoting “relationship beyond the contract.”
The moot question is, if the relationship is built on the strong foundation of the contract or is it a relationship that is built on the loosely defined term – “mutually agreed upon?”
In this blog post, I will focus my analysis on the multi-billion-dollar global services outsourcing market serviced by matured outsourcers. Despite investments in technology, processes, people, and service offerings, they often lack the ability to manage their own contracts. Here is an analysis of some of the key gaps that, if bridged, may help outsourcers build relationships with rich dividends.
Understanding Contract Relationship Management
Global outsourcers and their operating model often lend themselves to a complex structure. Customer relationships are supported with innumerable stakeholders due to involvement of federated global practices. They stitch together multiple teams scattered across delivery locations, an N-tier service delivery models, and disparate pricing models to support commitments under the umbrella of a complex relationship agreement.
In their unending thrust to build the relationship P&L, they end up with the following common pitfalls in the process:
1. Poor hand-over from pre-signature deal teams to post-signature account governance teams
This is “the” pitfall that is core to the problem. This often haunts the supplier organization through the course of the deal. Often, there is limited continuity of members involved in due diligence and deal signatures to the team that manages the deals.
Lack of basic and inadequate transition framework, processes, training sessions, etc., lead to gaps in understanding the intricate legal terms and conditions, contractual commitments, and the interpretive guidelines for understanding the performance and service delivery led terms often non-existent.
As an example, I find leading global suppliers supporting same customer, offering identical services, measured by the same performance metric, using the same tool for measuring raw data, and yet interpreting the service level measurements differently. Or, the members across the teams use varying interpretations while applying the dead-bands and volume bands while calculating the ARC/RRC charges.
2. Weak post-award contract governance knowledge
With global outsourcers having practice-level P&Ls, end up with multiple PMO functions, multiple finance functions, and multiple commercial and contract managers touching the same contract during the term. In absence of structured interpretive guidance and technology to help understand the contractual commitments, the service performance clauses, price books, etc., the governance framework starts developing cracks and leaks.
An illustration of the above may become evident when supplier teams change, and the teams struggle with service level measurements methodology resulting from different interpretations despite using the contract language to calculate service performance. Unfortunately, strategic deal management is no stranger to the attrition puzzle that haunts suppliers. It may take several training sessions of coaching and mentoring of the account teams, delivery organization, PMO, and finance to re-establish the common denominator of contract understanding.
3. Focus on the wrong terms
A deeper analysis points to the problem having started much early in the lifecycle, right at the deal negotiation stage.
It starts early in the bid phase with business counsel and legal teams spending innumerable hours of high cost lawyers negotiating terms that are most often the terms that assist risk containment than relationship growth and win-win scenarios. Not that these terms are any less important but one of the common areas of dispute being interpretations of what is in scope or otherwise. I have found that deep into the terms of the agreement, supplier teams not agreeing to interpretation of service performance and associated credits. The root-cause may lie in the obsession with maintaining gross margins, rather than relationship reviews based on facts and data.
4. Benchmarks for well-informed negotiations
In the endeavour to close deals, suppliers may end up taking unfavourable positions on service performance led clauses and associated credit frameworks, agreeing to stringent credits led milestones against deliverables.
Often this may be a result of the supplier’s inability to track and benchmark own operations with empirical data from like-to-like service engagements, an essential ingredient in deal negotiations to ensure well assessed positions. Hence the need is to consolidate performance data across the deals on common parameters and build internal benchmarks on service performance has never been more important.
5. Zero-technology usage to limiting use of incorrect technology
Using traditional Sourcing Lifecycle Management (SLM) and Contract Lifecycle Management (CLM) solutions to help manage complex strategic account governance and hoping for relationship dividends is like blindly following peer groups without asking if such solutions helped them.
Unfortunately, most CLM solutions fall well short of strategic deal governance ability. Most CLM products have built contract repository solutions and several claim to offer workflow led obligations management. A handful of them help manage contractual performance management and even fewer have solved the puzzle of complex services-led contract price book validation.
These solutions do not have the capabilities to consolidate transaction data across customers into standardized and normalized views and play back organizational benchmarks.
Several customers are also waking up to the fact that such traditional enterprise finance solutions do not help manage the ever-growing pie of services relationships. Neither do these solutions help manage the complex need for supplier performance visibility.
Fortunately, advisory and research organizations are waking up to this category and there is growing research to assist in forming opinions.
Putting It Into Practice
All the above factors lead to an ever-widening gap in trust between the customers and suppliers and instead of earning relationship dividend, suppliers stare into a strained relationship trying to repair it through band-aids. Customers start asking the question of value realization against the business case.
Empirical data at Sirion shows over 9% of value leakage results from such inadequate strategic deal management functions. Invoicing errors range from consumption errors, unmanaged contract errors, computation-led errors, and unmanaged credits and rebates are core to such leakages. The impact of longer cycle times and its impact on DSO often only adds to the woes of the suppliers.
Global outsourcers have achieved scale where internal business services (read GBS) led organization restructuring may include strategic account management functions. Along with finance, HR, and other horizontal functions, strategic deal and contract management functions will bring dividends through the use of common technology, processes, and skills.
So as much is the need for building skills on newer technologies, creating new-age value propositions, to solve customer problems, so is the need for respecting your own contract. As outsourcers crave to build “relationships beyond the contract” – it would not harm to start with first understanding your contract.
A good place to start. Trust me
Arannyak Ghosh is Vice President, Centers of Excellence at Sirion, and a Contract and Commercial Management Advanced Practitioner (CCMAP) with IACCM. His other certifications include Six Sigma Green Belt, and COBIT 5.