“We are losing roughly 17% to 40% of the value on our typical contract – from the time of execution to the close-out date. The main sources of value leaks are 1. disagreements over contract scope; 2. failures due to over-commitment; 3. weaknesses in contract change management; and 4. performance issues due to disagreement over what was committed.
Every business transaction creates a strategic partnership, whether this is a contract with a supplier or a customer. A strategic partnership is a recognized union of two parties that establishes rights and obligations between them.
I often compare business partnerships to marriage. Consider entering into a marriage without the knowledge and understanding of the promises you have made to your partner and the promises your partner has made to you.
If lawyers and consultants are akin to vow writing service providers; you may consider seeking their help to articulate your thoughts into words, but is it conceivable that you enter into a marriage based on mutual intentions and promises determined entirely by a third party, and unbeknown to you?
Did not think so.
Yet, you do just that in your business relationships when you turn over the formation and implementation of business contracts entirely to lawyers and managers.
Food for thought
We are all struggling to maintain stakeholder returns and profitability in current economic times.
Yet we are losing roughly 17% to 40% of the value on our typical contract – from the time of execution to the close-out date. The main sources of value leaks are 1. disagreements over contract scope; 2. failures due to over-commitment; 3. weaknesses in contract change management; and 4. performance issues due to disagreement over what was committed.
In this blog, we share solutions that can help increase revenue from contracts.
A massive boost to bottom-line figures can well be achieved by focusing on an often neglected discipline: Contract Management.
Good contract development and management could improve your business profitability by the equivalent of a massive 9% of annual revenue.
FIRST, Understand the Contract because you don’t
Contract language expresses the intent of the parties, but many times one party or both parties don’t even know what the contract says. The contract lays out a framework, but people actually assure that it comes to fruition. Relationships, not contracts, produce meaningful results.
THEN, Create Contract Playbooks
You will need a separate playbook for each contract type: think of key vendors, customers, partners, contractors, and employees.
- Standard clause language
- Meaning and purpose of the language
- common objections from anticipated from the other party.
- alternative language for the clause that is otherwise acceptable to the company.
For example, your standard governing law preference is Dubai, United Arab Emirates, but your clients may object to that option, particularly those outside the UAE.
So, for fall back, you might add that you will accept DIFC law in the UAE, and the laws of England or Singapore outside the UAE.
You might alert the playbook user that if the client responds to fall back options, the company must go to the legal department or a contract approval committee.
Just because the contract is signed, it does not mean that the work is done and the negotiation has ended. The organization must ensure those contract responsibilities, benchmarks, and expectations are fulfilled. All of this needs consistency and a high degree of commitment to settle all claims and conflicts, and comply with terms and conditions.
Without a well-functioning system, it’s easy to miss a crucial contractual responsibility essential to both parties. The agreement’s post-award period is just as important. You have a signed contract and commitments at this stage and must comply and behave on contract terms.
Begin with a post-award presentation to take note of the rights and obligations of each party. Consider adding flowcharts and graphs – visuals are always helpful for creating understanding.
Contract administration is necessary to successful management of:
- compliance of terms and conditions
- expiration and renewals
- disputes and claims
- contract restructuring needs
- contract milestones including payments
- service delivery requirements
Go a step ahead and leverage technology
- A playbook is a dynamic document that requires continuous updates.
- Leverage technology to maintain deviation trackers to monitor the change of policies/regulations/business strategies, and publish updated versions to all ‘concerned.
- Contract repository – the single source of truth.
- If you cannot retrieve it, why retain it? Contracts must be stored in one place, have master templates, and allow for quick retrieval and limited-time retention after project closure
The purpose here is to raise awareness and provide food for thought to all corporate leaders to do something about these issues and increase bottom-line performance.