This presentation, by Richard Austin and Eric Notkin, looks at: (i) the context of Contract Management - why it is becoming more important; (ii) the reasons for expectations' and performance gaps in contracts; and (iii) ideas and initiatives to improve Contract Management.
2. “After all, how hard can it really be?”
“My job is to get the signed contract. Your job is to deliver it.”
“It has to be signed today if we’re to get it into this quarter.”
______________________________
“If I’d know the contract said that, I never would have agreed
to do that change order for that price.”
“Who’s the idiot who agreed to that?”
“There’s no way I can deliver what you have committed us to
in the time we have to do it/for the price you have
negotiated.”
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3. Agenda
I. The Context of Contract Management
II. Expectations and Performance Gaps
II. Ideas, Initiatives and Improvements
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4. I. The Context of Contract Management
More rigorous contract management regimes - beyond standard invoicing
and service-level performance inquiries – emerging because:
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Outsourcing industry is
maturing
• Customers are getting smarter
• Outsourcing transactions (including
BPO) are more complicated
• Large full service providers and small
niche players
• Superior contract performance
becoming a key differentiator
5. I. The Contract Management Context cont’d
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Increased regulatory
pressure for proper
contract
management
“7.3.2 Monitoring the Outsourcing Arrangement
The FRE should monitor all material outsourcing
arrangements to ensure that the service is being
delivered in the manner expected and in accordance
with the terms of the contract or outsourcing
agreement. Monitoring may take the form of regular,
formal meetings with the service provider and/or
periodic reviews of the outsourcing arrangement’s
performance measures. …”
OSFI Guideline B-10, Outsourcing of Business
Activities, Functions and Processes
Rigorous audit
requirements
CSAE 3416 Audits require Management Assertion
that controls are fairly presented, suitably designed
and operating effectively and that management have
a reasonable basis for its assertions.
6. I. The Contract Management Context cont’d
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Privacy and security
breaches
• Winners/TJX
• Heartland Payment Systems
• Target
• Home Depot
Customer reputational
risk from
subcontractor
performance issues
• Collapse of OSI Group’s China business
• April 24, 2013 Rana Plaza garment factory collapse
in Dhaka, Bangladesh
• “Target Hackers Broke in Via HVAC Company”
Better contract
management software
Increased focus by
outside counsel
7. II. Gap Risk: Negotiations <> Post-Negotiations
Discussion: How to bridge the gap?
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8. Dissecting the Expectations Gap (*)
• Conflicting/badly defined objectives
• Badly managed due diligence and
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negotiating processes
• Not involving all stakeholders as well as
Delivery, Security, Finance & Audit
• Lack of proper resources
• Inadequate issue tracking (for resolved
and unresolved issues)
• Poorly defined governance
(*) Not dealing with bad contracting/negotiations process
9. Dissecting the Expectations Gap cont’d
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• Deadlines (for completion of due
diligence, contract negotiations, signing,
etc.)
• Poor and poorly-timed approval
processes
• Inappropriate Service Levels (not
measuring the right things or no input
from the right teams)
• Poorly defined SOWs
• Ongoing business and technology
change
10. Dissecting the Performance Gap
READING THE CONTRACTS…
• Contracts reflect high level of complexity
• What desk drawers were made for …[insert
contract here]
• Someone else wrote it and contracts are
“legal stuff”
• Negotiation specialists needed (we all have
day jobs)
• “That’s not my understanding of what we
agreed.”
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11. Dissecting the Performance Gap cont’d
• “That’s not how we do it here (and why
would I change?).”
• Age/attention gap (tools only seem to work
for those who use them regularly)
• Key personnel continuity (promotions,
terminations and resignations happen/no
knowledge transfer)
• “Out of Sync” subcontractors
• Lack of proper Change Control processes or
poor implementation
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12. III. Ideas, Initiatives and Improvements
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BUILD
RELATIONSHIPS
(along with contract
obligations)
Align the parties’ interests
Establish rules for the negotiations
Put some “relationship” into “relationship management”,
e.g. utilizing Advisory Boards and social functions
INTRODUCE the right
resources early and
for the duration
More than the Sales:
o Subject Matter Experts (SMEs) including Legal
o Delivery leads
o Finance and HR support
o Executive approvers/strategists
Use separate teams to negotiate different types of issues
Focus internal-approvers on mitigations & options
Be adaptive; accommodate for skills gaps at the “table”
(not everyone is comfortable in the negotiations arena)
MAINTAIN continuity
of key personnel
throughout
negotiations and into
operations
Applies to both Customer and Service Provider
Involve the Customer personnel who will manage delivery
and the Service Provider personnel who will deliver at an
early stage of the negotiations
Avoids “bait and switch”
Implement knowledge transfer processes
13. Ideas, Initiatives and Improvements cont’d
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MANAGE the issues
Discuss the issues before negotiating them
Track open and resolved issues using defined processes
and shared technology tools
Consider using a facilitator, “single text” or other
negotiating tools and techniques
“It ain’t over till it’s over.”
Document key discussions and side conversations during
contract negotiation that might lead to additional
unwritten expectations in future
Use an issues log aligned with Governance Committees
in the post-signing period
RE-VISIT the solution
or cost-model
Customer and Service Provider should develop a solution
or cost model at an early stage
Use the models during and after negotiations and in the
approval processes
Incorporate appropriate Customer and Service Provider
Contract Management resources and their costs in the
solution and cost models
14. Ideas, Initiatives and Improvements cont’d
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ROBUST internal
approval processes
that approve the
contract to be signed
Initial and final approvals against defined metrics,
mitigations and risk measures
Involve internal stakeholders wherever practical or circle-back
to get buy-in from Team participants (including flow-down
commitments from subcontractors)
Consider a separate contract review pre-signing: the
“second set of eyes”
Avoid artificial signing deadlines
CONTRACT
TRANSPARENCY
Make accessible and distribute all collateral including
lessons learned, negotiations issue tracking and
conditional approval documentation
Consider a Transition memo from Legal Counsel:
o Identifies participants in the negotiating process
o Highlights gaps and deltas
o Overrides deferred to other contract parts/layers;
mandated or prudent flow-downs for Subcontracts
o Identifies all one-time and periodic contract
deliverables and their timing
o Summarizes Change Control Processes and
issues to be considered for each Change Order
15. Ideas, Initiatives and Improvements cont’d
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MANAGE the post-signing
period
Implement the Governance Process that was agreed to
Identify the Customer and Service Provider Personnel
who are responsible for success and meeting obligations
Hand-off and train the Customer Contract Management
and Service Provider Delivery organizations
Consider joint (Customer and Service Provider) walk-throughs
of contract terms
Collect, promptly after signing, and retain the negotiations
record along with approval trails
ASSUME a living
contract
Utilize appropriate Contract Management resources or
software (the other party probably is)
Implement comprehensive Change Control procedures
Different procedures for different types of change
All changes to be documented
Honor timelines (but remain flexible for quality response)
16. Ideas, Initiatives and Improvements cont’d
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COMPENSATION /
PROMOTION
(the “Stock Options”
problem)
Based on margin (not revenue)
After successful transition and over multiple years
IDENTIFY Lessons
Learned
Conduct a post mortem for each transaction:
o What have we missed?
o How was that resolved before? Or Why doesn’t
that (old) solution work here?
o Who knows better? (other interests / stakeholders
views are important)
o What compounds that decision? (or no decision)
o Where’s your leverage (or loss thereof)
INCENTIVIZE for
Innovation
17. Ideas, Initiatives and Improvements cont’d
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CONDUCT periodic
contract and delivery
reviews
Identify early risk indicators that can be used to identify
problems in the making
Perform a comprehensive review of performance against
contract obligations on a regular basis; (including distilling
lessons learned)
Incorporate Customer satisfaction surveys into the review
process
INVOLVE counsel
18. Questions?
Richard Austin
Deeth Williams Wall LLP
raustin@dww.com
416-941-8210
Eric Notkin
CGI
eric.notkin@cgi.com
905-762-4963
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