Contract Lifecycle Management – Why Is It So difficult?

Contract Lifecycle Management (CLM) refers to the process of systematically managing the creation, execution, performance, and renewal or termination of contracts between parties. It encompasses all stages of a contract’s existence. The primary goal of CLM is to streamline and optimise the contract management process, ensuring that contracts are effectively administered, risks are minimised, and value is maximised throughout the contract’s lifecycle.

Organsations often struggle to establish an efficient Contract Lifecycle Management (CLM) function, despite its crucial importance and significant expenditures with third-party suppliers. One major challenge is the complexity of organisational structures and various stakeholders involved. Initiatives for acquiring new solutions or services typically start in specific business units like IT, finance, or customer service. These units develop a business case, conduct cost-benefit analysis, and engage in a market evaluation process to select suppliers, whether directly or through the procurement function.

Post contract signature issues arise when determining ownership and accountability for managing third-party relationships, ensuring service delivery and tracking the anticipated benefits. The business unit requesting the product or service often plays a significant role in developing requirements, the selection process, evaluating options, and establishing relationships with external parties. As a result, they feel they should retain ownership of the relationship and contract. However, accountability for managing the contracts often resides with the procurement or vendor management teams who are are presumed to possess the requisite expertise in this area. This divergence in perspectives and responsibilities leads to inefficiencies and misalignments within the CLM function. While business units prioritise relationship management and benefit realisation, procurement or vendor management focuses on contractual compliance and risk mitigation. Bridging this gap requires clear delineation of roles and responsibilities, effective communication, and collaborative efforts across business functions to manage both the relationship

Who is responsible for overseeing and monitoring the contractual benefits outlined in the initial business case?

Typically, this responsibility falls upon the individual or team who initiated and developed the original business case. However, in practice, this is often neglected, especially in cases where contracts span multiple years, the personnel involved in the process change roles or leave the organisation, and the business undergoes natural change, making it challenging to attribute the original benefits back to the third party supplier.

Who holds the business case owner accountable?

In many instances, there’s a lack of clarity regarding this accountability, if it exists at all. Often, the original business rationale is filed away and forgotten. Executives tasked with oversight are preoccupied with their daily responsibilities and don’t allocate the necessary time or resources to assess whether the contract owner is tracking the overall costs and benefits. This perpetuates an ongoing cycle: as business requirements evolve, new products or services are deemed necessary, and the justification process to engage the market for a new solution repeats itself. Rarely do organisations assess the enterprise supplier portfolio to evaluate the ongoing value-add each supplier brings.

How often are the contractual benefits reviewed and corrective action taken?

The frequency of reviewing contractual benefits and implementing corrective actions varies significantly across organisations. In some cases, contractual benefits may be reviewed periodically, such as annually or biannually, during scheduled performance evaluations or strategic planning sessions. In many instances however, the review process is at best ad-hoc, with benefits only being revisited when significant issues arise or when there is a need for renegotiation or renewal of contracts.

Ideally, contractual costs and benefits should be reviewed at set regular intervals to ensure that they align with the organisation’s evolving goals and objectives. If the review reveals that anticipated contractual benefits are no longer realised, corrective actions should be taken. These actions may include renegotiating terms with the supplier, implementing process improvements or seeking alternative solutions.

In practice, the frequency of reviews and the implementation of corrective actions may be limited by various factors, such as resource constraints, not having the information to undertake constructive reviews, competing priorities, and lack of accountability. As a result, there will be instances where contractual benefits and supplier relationships are not adequately monitored or addressed, leading to missed improvement opportunities.

Who Manages Supplier Risk?

The management of risks within the Contract Lifecycle Management (CLM) function is complicated by the involvement of various stakeholders with overlapping or unclear accountabilities. This complexity is exacerbated by the diverse types of risks that can arise throughout the contract lifecycle.

Take for example regulatory risk compliance, which is vital for organisations to uphold. Oversight of regulatory compliance often falls under the jurisdiction of the Risk Management function who are responsible for assessing and managing enterprise-wide risks. However, depending on the specifics of the contract, the responsibility for monitoring regulatory compliance may also lie with the contract owner (which as outlined above is also often unclear).

Another critical risk is the risk associated directly with the suppliers themselves, which can lead to operational disruptions, reputational impacts or regulatory breaches. These risks stem from various scenarios, including suppliers subcontracting work to other suppliers (referred to as 4th party suppliers), undergoing acquisitions or divestments, engaging with banned countries or companies, or violating legal obligations such as those outlined in the modern slavery act.

Whilst it might be a requirement for the supplier to inform its client of any sub-contracting or engagement of 4^th party providers, without the required details and tools to manage and track this information, it ends up in the too hard basket and gets lost in other priorities.

The most topical risk organisations continually face is cybersecurity risk, including the threat of data breaches and hacking. There are many recent high-profile cases that have occurred in the Australian market. Cybersecurity is an enterprise wide issue and is typically managed by the IT department, which houses the security function. The question becomes what are the supplier practices in relation management of cyber risk, and is it sufficient to mitigate risks to their clients? From a client perspective, this is where the accountability becomes grey. Is this the responsibility of the contract owner, the cybersecurity team, the risk management team or even the internal audit team to monitor the suppliers’ security policies, controls, and compliance? Often there will be overlapping interests and levels of detail required so this needs to be addressed in a coordinated manner and is another example of ensuring CLM roles and responsibilities are clearly defined.

Regardless of where accountability for risk management resides, effective management of supplier risk involves conducting thorough supplier assessments, monitoring supplier performance and compliance, establishing contingency plans, and fostering transparent communication and collaboration between the organisation and its suppliers. By proactively identifying and addressing supplier-related risks, organisations can mitigate potential disruptions and safeguard their operations and reputation.

Summary

The examples above illustrate some of the challenges associated with the supplier contract management. To overcome these challenges, a robust CLM function must be established, encompassing an end-to-end operating model covering processes, organisational structure, roles & responsibilities, and the service delivery model. This framework must be supported by a smart CLM technology solution which forms the backbone of the CLM function.

For a confidential discussion on how EvolveCLM can help your organisation please email us on: inquiry@evolveclm.com.au or visit our website on www.evolveclm.com.au.