I was giving a speech last week to a mixed group of leaders from operations, finance and project management. Apart from everyone being incredibly enthusiastic about all things commercial and contract management (they weren’t there just for the free food), there was the occasional pushback that went a little something like this:
“We used a contract management solution on project X, and it was valuable to keep us informed and on target, but besides the professionalism, we didn’t see the immediate big financial save or win.”
For those of us who are involved in contract or commercial management, it’s not the first time we’ve heard this story. We may not like it, but we do hear it. If people don’t immediately see the value of contract management, it usually comes down to perception and expectations. Here’s why:
1. Sample Size Matters
Can I honestly tell you that every contract (whether it is buy-side or sell-side) is leaking 9% of contract value through overspend or cost-overrun? No. But on the whole a portfolio of contracts is losing money – I’ll explain more below.
2. An Ounce of Prevention is Worth a Pound of Cure
Ben Franklin was right. Put this into whatever cultural or idiomatic phrase you need, but the principle is the same. Generally if you have put in a system to avoid large losses or big risks, you will in fact stop large risks or losses. To turn the argument on its head, I could have retorted with, “Do you think your seat belt is useless just because it is working?”
My point is that people see gaudy numbers about value or return on investment in blogs like this and then get upset or disappointed if a single account pilot or two month test doesn’t yield 10M EUR. Ok, so that might be hyperbole, but hopefully my point is clear.
What I want to leave you with is that contract management, in particular the post-award version, really matters as a system. Properly done it is a sprinkler system installed in your organization as opposed to a few on-demand firefighters. Post-award contract management will manage the big areas of impact, but it also catches the little things that can quickly add up. Consider this:
- Errors Happen Everywhere
There wasn’t enough time. We are stretched too thin. Math is hard. Words are complicated. I had no idea that’s what was meant. I am sure that everyone reading this is a philosopher king and their teams and corporations are flawless in execution and fully aware of all permutations and possibilities in contractual relationships on a multitude of levels. However, humans make mistakes. We put in the wrong code. Enter the same data twice. Tell the robot to do the wrong thing. Often times, “it’s no big deal.” But that those “no big deals” can add up.
- It’s a Numbers Game
Whether you are a vendor or a buyer, there are all sorts of giveaways, mistakes or errors that occur such as: an extra FTE here, a wrong rate card there, improper invoice here, additional fee or surcharge there. Because of the complexity of contracts these types of mistakes are made at a staggering rate. Now, one overcharge of a license rate or improper rate card used could cost a customer 10K EUR on a one-time basis. But imagine if you have 300+ vendors (like most companies do now) and a third of those were making an error against you just one time in the year for about 10K EUR. Suddenly that 10K EUR that is just a rounding error becomes 1M EUR. Does anyone want to explain to their boss that 1M EUR isn’t a big deal? Please note that these are conservative numbers. If you don’t believe me, ask the IACCM.
Yes. Contract management may not save millions per deal, but in the aggregate it is more than worth it. And please…don’t get mad that your seat belt is working.