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Page 5 of 8
Contract Management Practices
Overall contract management can be improved by establishing standard
contracts; ensuring that all contracts are reasonable, inclusive, and enforceable;
and centralizing contract management.
Developing a "house contract" for vendors can provide a wide range of
advantages because it puts you rather than the vendor in control of the
relationship. It also makes management of multiple contracts much easier
because the terms will be similar—or at least comparable. Some areas, such as
metrics, can even be standardized across all vendors.
The major difficulty with a standardized contract is getting it accepted by
vendors. Vendors will have their own standard contract, and their reasons for
using it will be the same as yours: it standardizes business, is weighted in the
vendor's favor, and reduces the amount of work required to set up a contract.
For this reason, a standardized contract is most effective if it is offered as the only
option, or if using it provides advantages to the vendor, such as capability to sell
services in bulk across the enterprise.
In additional to specific advantages that may accrue from developing a
standard contract, this approach can reduce both legal and operational risk.
Legal risk can be mitigated by ensuring that contract termination clauses are
reasonable and properly stated. Operational risks can be mitigated by ensuring
that some form of SLA is included, and reasonable metrics are provided for
ensuring compliance.
Development of a standard contract can be a complex procedure, however,
and demands input from a variety of interested parties. Legal expertise is required
to spell out the terms of the contract and ensure that they are enforceable
under contract law. Financial advice is needed to ensure that payments and
penalties fall within tolerable ranges and are stated in such a manner that they
can be easily understood and agreed to. Functional management advice is
needed to ensure that the standard contract can be modified to work within
each contracted area without extensive modification, and that it will cover all
reasonable contingencies. Upper management input is necessary to ensure that
the terms spelled out in the contract are in harmony with organizational goals.
Standardization of contracts provides a number of key benefits, particularly
where they are used in a centralized setting. Benefits include:
- All procurements are based on the same standardized conditions, with
only minor variations.
- Concepts, definitions, and contents are clear to both sides.
- There will be little need for change.
- Negotiations can concentrate on key issues rather than getting lost in the
details.
- Time and costs savings are available for both sides.
- Preparation time is shortened.
The standard contract gives the purchaser an edge, and avoids reliance upon
the vendor's standard contract.
Contract Guidelines
To provide a picture of issues that must be considered in contract
standardization, the Information Technology Association of America (ITAA) has
released a set of SLA guidelines for the ASP industry. Although targeted toward
ASPs, these guidelines identify some of the key issues that need to be considered
when developing outsourcing contracts.
The proposed guidelines include3:
1. Service level. The SLA should define the service, define the level of service
required, define availability, and identify any exclusions.
2. Security. Physical access to the data center and components should
be provided for, security layers should be set, monitoring software and
procedures should be specified, as well as reporting and measures to
prevent breaches of security.
3. Tracking and reporting. The level of monitoring of devices such as network
components should be included, including auditing.
4. System performance. Performance benchmarks should be specified,
along with appropriate metrics. Performance monitoring and reporting
should be described. Scalability should be discussed.
5. Remedies. Performance penalties in the event the provider fails to
execute to the agreed service levels.
6. Upgrades. Upgrade expectations should be addressed, including
provisions to meet issues of critical importance to the buyer.
7. Contingency, backup and disaster recovery. Backup, redundancy, and
recovery procedures need to be described.
8. Support and help desk services. The scope of services needs to be
described, including response time, resolution time, and the escalation
process.
9. Termination. Service termination conditions need to be specified, along
with transition and recovery procedures.
10. Ownership. Ownership and interest in patents, trademarks, trade names,
and so forth needs to be specified, along with the buyer's ownership of
data. There may also be equipment ownership issues.
11. Intellectual property indemnification. Parameters of indemnification need
to be set.
12. Indemnification by customer.
13. General. Dependence of the SLA upon terms or conditions of other
agreements needs to be specified, as well as obligations in the event
of an acquisition or merger. Service level agreements need to reflect
the specific processes or tasks being outsourced, and the buyer's
expectations with respect to performance. They must represent
measurable items, and reflect any process improvements that the buyer
requires from the relationship.
Contract Centralization
Centralization of contracting and contract management can provide a number
of critical advantages to a firm, among which are:
- Leverage of buying power in procurement of goods and services.
- Assist company divisions, branches, and departments in accessing a wide
range of existing centralized contracts.
- Reduce the administrative burdens and costs in contract creation.
- Establish a central point of contract for vendors to permit access for a
wider variety of potential suppliers.
- Provide monitoring capability to ensure the company is able to benefit
from market and technological advances.
- Create opportunity to lower costs through bundling, which may include
items such as training, maintenance, and various hardware/software
items.
Contracting can be centralized in a variety of ways, including establishing a
Vendor Management Office. A simpler, and generally somewhat more expensive
strategy, is to outsource the vendor management task itself. This can be done
through outsourcing of the contract management task itself to a third-party
management/consulting service, or outsourcing to a major vendor which then
undertakes to manage all smaller contracts.
Next: Developing a Vendor Management Office
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