they are, the bigger the advantages of contract management.
1.2.1. Improved realization of contract objectives
The contract objectives describe what the organization wants to realize with the contract, and this applies to both purchaser and seller. Contract management following the CATS CM methodology is primarily focused on contract objectives and so it contributes substantially to achieving them. Sometimes, this contribution can be directly demonstrated in monetary terms, but there may also be a qualitative contribution.
A unique category of contract objectives are those related to compliance, meaning that the organization complies with laws and regulations. This is something every organization has to deal with. Even though there are many different areas in which laws and regulations are applied, there are some elements that apply to a broad range of laws and regulations to which good contract management contributes:
■ Adequate documentation is very important.
■ An organization is held responsible for structuring and implementing a quality system that guarantees compliance with laws and regulations.
■ The compliance control measures carried out by the organization must be defined and their execution and conclusions must be visibly documented.
■ Non-compliance has severe consequences (financial, reputation, continuity).
Considering these elements in advance, while the contract is being drafted, ensures that there is adequate focus on the completeness of the documentation, the control measures that must be implemented, and the assessment of these measures as soon as the contract comes into effect. This is even more applicable when some of the documentation or control measures have been outsourced as part of the contract.
Due to the abovementioned reasons, compliance officers and internal audit department staff are increasingly promoting contract management implementation.
1.2.2. Relationship between performance and contract value
The contract value is the sum of the client’s budgeted expenditure based on the contract with the supplier. 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. This might lead to the assumption that a supplier focuses exclusively on achieving the highest possible contract value and the client the lowest. However, things are not that simple. For suppliers who invoice their budgeted sales to the penny and achieve exactly the expected return, contract management does not seem to have gained them anything on paper. However, without proactive contract management, they might not have achieved the expected return. For the supplier, contract management can have a substantial impact in terms of client satisfaction, more efficient use of internal resources, or the opportunity to try new innovations.
A client who pays the agreed amount to the supplier while, at the same time receiving a modified service that still meets the changing user needs, does not save on expenses but will have a more satisfied organization. If this same level of satisfaction would have been achieved without contract management, the client might have had to pay for additional work. In that case, we are not talking about cost savings but about cost avoidance.
1.2.3. The organization’s contract costs
The contract will cost the supplier more than just the cost price of the products and services provided. Other costs that may have to be included are costs for making the proposal, contract management, quality control on delivery, and storage. 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. Suppliers understand this concept very well. We now see that clients are also becoming increasingly aware of this. The costs incurred by a client for entering into and performing a contract include more than just the amounts payable to the supplier. Such costs can include activities related to the procurement department, legal advisers, contract management, quality controls on receipt, and the financial department.
The contract value plus the operational costs incurred by the party’s organization to ‘own’ the contract is called the Total Cost of Contract Ownership (TCCO). In addition to the contract value, TCCO also covers the costs of entering into the contract as well as contract execution and termination costs. The supplier has to include the sum of all these costs in the cost price of what is to be delivered. The client needs to include the TCCO in the make-or-buy decision: the business case based on which the decision for buying goods or services is made.
To understand the concept of TCCO, the organization must know which and how many employees are involved with the contract, in addition to the direct costs incurred in paying the supplier or spent by the supplier on the delivery to the client. These may include the employee responsible for the contract, the co-workers who have to be consulted regarding the contract, and colleagues who spend time ensuring the optimal execution of the contract. To this, costs for legal advice, financial administration, and the organization’s own project and service management must be added. Furthermore, the TCCO may also include costs for materials storage, workplaces for the supplier’s staff, and costs related to providing access to the organization’s locations. As the contract value grows, and with the increased variability of the environment, correspondingly larger budgets must be set aside to cover the costs of contract governance, contract extensions, continuing modified contracts, or terminating them. The termination of a contract also means that the supplier’s involvement with the client must be terminated organizationally. This contract phase-out also involves costs that are part of the Total Cost of Contract Ownership.
1.2.4. Quantifying the effectiveness of contract management
Only limited research has been done into the quantitative aspects of what contract management yields. Without exception, these studies look at the correspondence between performance and compensation and leave all other aspects aside. However, the results of these studies are consistent and indicate cost savings and cost avoidance between 5 and 10 percent of the contract value. Our experiences with businesses using CATS CM show that the implementation of CATS CM during the onboarding of already existing contracts can instantly achieve significant advantages.
■ 1.3 EFFICIENT CONTRACT MANAGEMENT
Efficiency means reaching a goal by using as few resources as possible. These resources may be related to the time spent on the contract, raw materials, or available systems. They can be translated into money and, thus, into costs. 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.
These costs for the entire organization depend on various factors:
■ the number of contracts;
■ the complexity of the contracts;
■ the structure of the contract management scenarios;
■ the extent to which the contracts are critical to business operations.
Once a contract manager has made a contract management plan for an individual
