Effective contract management ensures that the contract realizes the intended objectives, for the correct compensation, with acceptable risks, and with the efforts planned by the organization. Efficient contract management aims to achieve this effectiveness with minimum costs. As soon as an organization enters into contracts, actions will follow. This instantly creates a form of contract management. So, it is not a question of whether or not organizations need to use contract management but how they can execute existing contract management more effectively and efficiently.
Contract management: realizing contract objectives
CATS CM® defines contract management as realizing the intended contract objectives. This contribution can sometimes be directly demonstrated in monetary terms, but there may also be a qualitative objective. A unique category of contract objectives are those related to compliance, meaning that the organization complies with laws and regulations.
The right compensation
The contract value reflects the compensation for the deliverables. The supplier benefits from a higher compensation while a lower compensation is a financial advantage for the client. Even so, the contract value is not the sole focus area for contracting parties. They also consider what they get in return – the compensation. In this regard, organizations may also consider aspects such as client satisfaction, building their portfolio, user satisfaction, or compliance. When such aspects offer a better result with the same contract value, contract management achieves a degree of cost avoidance or value for the organization that can't be directly expressed in monetary terms.
The organization’s effort
The contract will cost the supplier more than just the cost price of the products and services provided. For the client, the costs related to the contract exceed the amount owed to the supplier. It goes without saying that suppliers are very much aware of the fact that the contracted delivery costs more than just the people and resources involved, and that this must be included in the cost price calculation on which the quoted price is based. Clients are also becoming increasingly aware of this.
The costs of contract management
Contract management costs are those incurred in the deployment of the required staff to deal with contract management, the costs for support systems, and the indirect costs associated with these such as office, insurance, and workplace costs. The scope of these costs for the overall organization depends on the number of contracts, their complexity, and the extent to which the organization wants to apply contract management.
The business case, balancing costs and benefits
Contract management pays off when its execution results in added value, in whatever form. The organization determines the desired efficiency and effectiveness. Some organizations find that compliance with certain laws and regulations, or a better grip on their primary processes, is reason enough. Other organizations want to see a monetary result related to contract objectives or contract value.
Applying CATS CM® results in effective contract management through optimizing the realization of the contract objectives, minimizing possible contract risks, realizing costs savings, and avoiding unnecessary costs. With its process-based and scalable approach, CATS CM® offers a better grip on the efficiency of the contract management process.
This is the first blog of the series ‘Contract Management with CATS CM® in a nutshell’, in which we guide you through an overview of our vision and methodology. Do you have any questions for Linda Tonkes and Gert-Jan Vlasveld, the authors of the book 'Contract Management with CATS CM® version 4'? Then please send an email to firstname.lastname@example.org!
© Linda Tonkes, author CATS CM® version 4 – all rights reserved