Long-term and complex contracts – the importance and challenge of effective management
May 13, 2015
Contracting is at the core of many business relationships and there is an increasing prevalence of large, long-term contractual agreements. Many businesses are entering into contracts for facilities management, IT services, HR services, software licenses – the list is extensive. There is often a great deal of focus on the value of these contracts during the procurement phase, but this drops once the customer has awarded the contract and it becomes operational.
Divergence of focus
However, this is not the case for the suppliers who, quite understandably, seek to maximise their margin in accordance with the contract terms. Unchecked, this potential divergence of focus can cause problems ranging from customers’ perception that the services being delivered are expensive to disputes relating to overcharging. At the extremes these diverging interests can create serious issues, ranging from suppliers forced to deliver loss-making contracts to contractual disputes and even fraud investigations.
How can you address this?
There are two answers to that question:
- Companies procuring contracts should set up dedicated contract management teams who hold suppliers to account for delivering on their contractual obligations. Companies should also enforce their right to audit suppliers on a periodic basis. This will ensure that the suppliers are adhering to best practice in maintaining an audit trail of the services being delivered and the charges levied.
- Suppliers should ensure they are being sufficiently transparent in their invoicing and performance reporting. When we find issues at suppliers during contract audits, these are usually due to a lack of rigour over the charging and performance reporting mechanisms or differing interpretations of what the contract means. An open dialogue with customers can avoid these issues, reduce the likelihood of disputes and manage any issues before they escalate.
What’s in it for you?
The benefits of effective contract management are that customers can ensure they are getting what they are paying for and suppliers can build long-standing relationships with their customers that are built on trust; this can reduce the likelihood of disputes, of contracts being re-tendered and, if they are, increase the likelihood of being reappointed.
How did the last dispute you were involved in play out? How was it resolved? What would you have done differently at each stage of the process? Share your thoughts below or schedule a meeting to discuss your situation in confidence.