COVID-19 caused a revolution in contract management in 2020 and 2021. Never had so many questions been raised about contracts, as the pandemic severely disrupted supply chains and the ability for many contracts to be properly executed. While many organizations responded primarily by focusing on the third-party involved, the smarter firms realized that there was work to be done within their own organization to harmonize internal processes related to contract execution across multiple teams. Typically, these teams work in divisional silos, and can miss the wider organizational view that enables them to holistically address the downstream impact of contract lifecycle management activities.
COVID-19 put a new spotlight on post-signature contract management, what happens after the contract is signed, which includes how the contract terms are met and executed and the remedial actions that the organizational teams need to collectively take in the event of potential or actual contract failures. These events can involve procurement, contracting, finance, risk management, technology, and resilience/recovery teams. COVID-19 showed organizations that the post-signature phase of contract management is very important, is often overlooked, and is where the value really is in a contract.
It is essential for contracts to be seen as a strategic business asset, not just a legal document. In addition, it’s time to shift the collective mindset to look at contracts from a more positive angle, and think of the contract as an asset, with the ability to reduce costs and even generate revenue, if they can be managed effectively as a key component of an integrated Third-Party Management (TPM) approach in their organization.
To begin, it’s important to examine the overall contract process and its two distinct parts. First, pre-signature activities are those tasks involved with winning the deal, such as drafting the contract and negotiating it. These are short-term tasks that are done early in the process and get a lot of attention because they are viewed as being essential to closing the deal and “getting the win.”
Second, post-signature activities are those that occur after the contract is signed. Not nearly as exciting or interesting because they take place after a deal closes, these are contract lifecycle management activities, and take place over the long-term life of the contract. Post-signature includes two key areas:
As stated above, historically, the pre-signature phase gets all the attention and glory. Organizations may get trapped in the “nice to have” syndrome when it comes to contracts. The short-term, pre-signature activities are viewed as highly important and “a must have” in the effort to close the sale and generate revenue, while post-signature is looked at as a “nice to have” – something to worry about later after the ink has dried on the contract. This lack of emphasis and focus is why organizations may fall short in realizing the full value from their contracts over time, thereby potentially missing a key opportunity.
The number of questions about contracts went up significantly in 2020 and 2021 during COVID-19 and continue today. These questions could be about variations of terms, implications of contract changes, or how ongoing monitoring and management will be conducted by stakeholders.
Organizations needed to know what they were legally bound to, what the potential penalties might be if they could not meet the terms of a contract, and if they might be able to change a contract. On a broad scale, COVID-19 exposed the overall frailty of contract lifecycle management for many different organizations, in multiple industries, and across many geographies.
COVID-19 was the impetus that drove the shift in focus from pre- to post-signature contract management alongside a more holistic and integrated view of end-to-end third-party management processes in organizations. However, the need for this shift may have been long overdue.
There are a wide range of post-signature issues that can impact commercial value, such as price changes, late payments, discounts, auto-renewals and service levels. On average, 9.2% of a contract’s value is lost over time, and the majority of this loss takes place in the post-signature phase, as noted by The World Commerce and Contracting Association (WCC).
There may be significant potential in finding the hidden value in a contract. This includes avoiding potential penalties, such as automatic renewals, which may be costly for an enterprise because of the unnecessary cost that they can incur.
Effective post-signature management can also drive enhanced value by avoiding:
An integrated approach can help organizations to significantly improve their contract and third-party management programs. Here are five practices to help firms become more holistic and integrated.
As noted above, a more integrated approach to TPM can be a game changer, enabling the more astute organizations to create incremental value and gain additional competitive advantage.
Many of the steps above are reactive in nature and may be effective for preventing negative outcomes. But organizations can also shift their focus to proactively managing the details of individual contracts, digging into the details of where legal language and business outcomes meet to maximize the contract’s value. This may require going beyond standard KPIs and focusing on what a business truly needs and investing extra time and resources earlier in the process to get to know contracts at a more detailed level.
Along with this, businesses may monitor financials and performance in the post-signature phase in greater detail to apply the data gathered in a manner that will maximize productivity and revenue. The report When Technology Meets Humanity: The Future of Contract Management, authored by Deloitte and WCC, explains that only a little more than 20% of organizations attempted to monitor or calculate the costs and benefits associated with contract management. Once again, technologies that enable an integrated approach to TPM, combined with end-to-end visibility across various departments and across the entire third-party lifecycle, are keys to success.
While the pre-signature phase gets most of the attention, time, and resources in contract management, organizations are changing the corporate mindset and are now realizing that the vast amount of the actual time and cost in a contract are lost in the post-signature phase, and this area has significant room for improvement. Post-signature functions are shifting from a “nice to have” to a “must have,” with firms taking a long-term view of contract lifecycle management and realizing the benefits of doing the post-signature phase properly. Those organizations that invest time and money in the key disciplines involved in the post-signature phase, including analysis and assessment, re-engineering processes, developing cross-functional talent, and investing in new technology, cannot only reduce hidden costs but also unlock potential revenue opportunities. Looking at contracts holistically, rather than just as legal documents, can create benefits that positively impact multiple departments and the organization as a whole as an essential component of a holistic and integrated approach to TPM.
Deloitte’s integrated Third-Party Management solution helps organizations consolidate third-party data drawn from existing TPM systems and, when applicable, external sources. It then applies analytics to generate actionable insights and support strategic decision-making. The solution connects disparate software and platforms to provide an integrated end-to-end view and support any individual or function with a role in TPM, as well as senior executives responsible for enterprise growth and value.
To learn more about key TPM themes and trends, and for more information about how Deloitte can help you succeed with your TPM journey, please visit our website.