increasingly often identified as a risk. In a society specialized to a large degree, outsourcing has become fundamental. The result of this specialization leads to contracts covering a much larger part of the process, while organizations no longer have the in-house expertise to adjust for any possible discrepancies. Suppliers almost always use contracts to structure their relationships with clients. Most of all, the rise of the customer-success function, which has an even more intense focus on delivery, indicates the increasing importance of the contract management function. The same applies to timely and adequate risk management. With the increased demand for transparency and responsibility, as well as the fact that timely and adequate contract risk management is quickly becoming more relevant, the importance of proactive contract management only grows, and is being added to the organizations’ agendas on a strategic level.
In version 4 of the CATS CM methodology, which is significantly extended and offers many practical tools, we respond to the changes and issues in the market, for which we can draw upon our experiences with the many organizations that have allowed us to share our expertise on contract management in recent years.
■ INTRODUCTION
Companies are entering into a rapidly increasing number of contracts, driven in part by specializations and niche players in the market, as well as acceleration caused by technological developments. For quite some time now, the make-or-buy decision clients have to make is not being made based on an individual need that must be fulfilled. Ever more frequently, companies are choosing to make a strategic choice to ‘buy’. Sometimes, this is even necessary because organizations no longer have in-house expertise in a broad range of areas.
It is not just the number of contracts that is increasing, but the form of collaboration is changing as well. Consequently, this increasingly results in the ecosystem described in the introduction to this book. That means that the relationship between client and supplier must be structured in a different way. As a result, this changed relationship requires contracts that are more flexible and more focused on value creation and the adjustment of contracts that do not yet offer that flexibility. Furthermore, contracts are increasingly contributing to the full implementation of processes. The effects of a possible discrepancy in the contract agreements increase and the response time to deal with them gets shorter. This is why contract management must become more proactive. Proactive contract management means: focused on activities linked to the execution and modification of a contract while concentrating on anticipating specific situations where possible or necessary.
Entrepreneurship is inextricably linked to having contracts. Contracting parties are increasingly aware that entering into contracts with due care is not sufficient to control the realization of the desired results, and it offers insufficient direction to the above-mentioned collaboration dynamics. This makes effective and efficient contract management crucial. The first chapter of this book explains what effective and efficient contract management entails and how CATS CM helps to achieve this. CATS stands for Contract Administration and Tracking Scenarios.
Our vision on proactive contract management is based on the idea of having effective and efficient contract management. Chapter 2 lists the most important definitions and explanations. Chapter 3 is a description of the determining factors for successful contract management and its implementation at a strategic, tactical and operational level. Last but not least, Chapter 4 describes the CATS contract life cycle, the role of contract management during those stages, and it delves deeper into the other processes that sustain this contract life cycle at an operational level.
As soon as an organization enters into contracts, each one of those specific contracts requires specific actions. This is 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 the already existing contract management more effectively and efficiently. Applying CATS CM results in effective and efficient contract management through optimizing realizing of the contract objectives, minimizing possible contract risks, achieving costs savings and avoiding unnecessary costs. This chapter explains the correlation between organizational goals and contract objectives, and the elements of effective and efficient contract management.
■ 1.1 ORGANIZATIONAL GOALS AND CONTRACTS
Every organization has a mission and vision that determine its organizational goals. To realize those goals, the organization establishes a strategy that also takes laws and other regulations into account. Based on this strategy, the organization describes its goals for the short, medium and long term. When the organization enters into a contract with another party to realize its own organizational goals, these goals will also determine the contract objectives. The contract will describe how the objectives, for which the contract has been set up, are to be translated into performance. This performance can involve the delivery of both products and services. Figure 1.1 diagrams the relationship between organizational goals, contract objectives, and contract performance.
Every client uses suppliers, and therefore contracts, to carry out its activities to a lesser or greater extent, in order to realize its goals. Suppliers make choices when it comes to the products and services they offer and the markets in which they want to operate. Since the 1990s, the percentage of ‘contributions from suppliers’ relative to overall operations has been increasing significantly. Studies indicating that more than 70 percent of the total costs incurred by organizations can be attributed to the purchase or procurement of goods and services only confirm this. One of the main indicators that procurement has become even more important is the fact that Management Boards of both large and small organizations are choosing to appoint a Chief Procurement Officer (CPO), so that a solid embedding in the financial column is becoming the norm rather than the exception.
Figure 1.1 The relationship between organizational goals, contract objectives and contract performance
■ 1.2 EFFECTIVENESS OF CONTRACT MANAGEMENT WITH CATS CM
As described above, contract objectives are derived from the organizational goals. Such a relationship can still be a perfect match at the time the contract is finalized, but this balance may shift over time. The organizational goals may change and, partly influenced by the rapidly changing environment, the way contracts are executed is also in constant flux. Relationships between contractual parties can change, the required technical solution may already have been outstripped by the market, and contracted volumes may no longer meet the need.
Effective contract management ensures that the contract realizes the intention, for the correct compensation, with acceptable risks, and with the efforts planned by the organization. Whenever an organization’s needs change, effective contract management ensures that these changed needs lead to changes in the contract. The effects of good contract management contribute to achieving the contract objectives, the best possible relationship between contractual performance and contract value, as well as to savings and avoiding costs incurred by the organization in executing the contracts. The
