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Contract Management
Contract management involves developing ways to detect, control, and
minimize the risk of failures in contracted service delivery. Issues to consider
include:
- Failure to achieve business outputs.
- Financial failure or loss of resources.
- Regulatory risks.
- Business interruption.
- Client and stakeholder interests.
- Business exposure to legal or administrative risks.
Contract management seeks to ensure that goods or services are delivered
according to the established time, cost and standards, and that the organization
has sufficient information to evaluate the contract performance when its term is
completed and/or a new contract is to be put in place.
Contract management includes the whole contract lifecycle, although activity
management comes into effect after the contract has been signed. It is
important to consider all phases, however, because management of the activity
is inherently tied to successful needs assessment, vendor selection, terms of
service and, most importantly, the SLA.
For the organization, contract management requires a repeatable process
that may be extended to each service vendor contracting situation. This
requires structure, which may be provided by creation of a separate Vendor
Management Office (VMO) in which contract management can be centralized.
Contract centralization is becoming increasingly important as companies move
toward multi-vendor business process outsourcing.
The Contracting Process
Developing the contract needs to be viewed as a complete process, beginning
with a review of business processes, followed by a Request for Proposal (RFP),
contract development, and ongoing contract maintenance and review. There
are two separate stages that must be considered: Selection & Contracting,
during which the vendor is selected and the contract is agreed upon and signed;
and Contract Provision & Management, in which the details are put in place,
activity commences, and must be managed until the contract is terminated or
re-signed.
Selection & Contracting
The process is as follows:
1. Determining needs. The initial phase of contract development does
not lie in the laying out of provisions, but rather in a general review
of organizational needs. It is important to know why service is being
purchased, how much and what components will be sufficient, and what
levels of service will be needed.
A project brief may be used to initiate the search and contracting
process. It is generally a brief two to three page statement of the project,
technology required, and the business needs that it serves.
2. Determining acquisition requirements. The required service may be
available in a number of different forms, including outsourcing, through an
ASP, or by adding to existing capabilities. A service contract is generally
only one of several possible solutions to a problem. If the object is cost
savings or process improvement, for example, competition for handling
processes and tasks also includes the following strategies:
- Retain the status quo (do nothing).
- Eliminate wasteful projects.
- Eliminate jobs and do more with existing staff.
- Reallocate resources by shuffling personnel to more effective tasks.
- Strategic initiatives, such as setting up competition between
departments.
If a service contract approach is selected, then it's important to gain an
understanding of the dynamics of this market before going to the RFP. The
outsourcing area contains a vast number of different players, with the top
end and some specialty areas dominated by a few major firms. It is also
important to determine whether the required service can be sourced from
an existing supplier. Key issues are:
- Price.
- Quality.
- Vendor commitment.
- Vendor expertise.
3. Develop the RFP. Once the service requirements have been developed,
and a clear idea of necessary services established, a RFP can be
developed and presented to possible vendors. Some initial screening is
often necessary to avoid time wastage in weeding out vendors that lack
experience, stability, or a compatible business culture. The RFP should be
as specific as possible to ensure that vendors can determine what will be
required and the level of service likely to be needed.
4. Vendor selection and negotiation. Once proposals have been received,
they must be evaluated. It is not always the least expensive proposal
that will be most acceptable. Factors of importance can include the
company's track record, experience in this service area, additional
complementary services that might be available, existing relationships in
other service areas, compatibility of equipment, compatibility of business
culture, standard contract details available from a particular vendor,
flexibility, or any of a host of other factors.
When the proposal is accepted, and before the actual contract is drawn
up, negotiations must be established to set down the details of the
agreement, filling in services provided, SLAs, penalties and remedies, and
requirements.
It is often best to create a standardized contract rather than accepting
the vendor's standard agreement, since this ensures that the terms are
compatible with existing contracts and do not include items that weigh
the balance too far toward the vendor.
Contract Provision & Management
5. Contract initiation. With the agreement in place, a transition to the service
must be established. This may include termination of a previous service,
handling of personnel issues if a service previously handled in house is
outsourced, and management of any required infrastructure changes.
At this stage it is necessary to develop a transition strategy, defining roles
and responsibilities for transitioning from any previous service and prepare
a resource plan, detailing the specifics of resources in personnel and
equipment required from the contract partners.
6. Management. Contract management requires assurance that both
internal and external risks clearly identified are managed to ensure
effective service delivery. The chief tool for service contracts is the SLA,
which should be established as a central component of most service
contracts. It provides clearly defined metrics against which performance
can be evaluated, and is discussed in more detail later in this report. SLAs
can range from a simple one-page list of standards to a comprehensive schedule encompassing a number of agreements. Key provisions are:
- Definitions of work in measurable terms.
- Standards against which judgment is to be made in quality, quantity,
and timeliness.
- Description of how providers' performance will be assessed.
Management also requires handling day-to-day communications with the
supplier, and dealing with failure to meet contracted service levels.
Communications with vendors must be maintained, and regular meetings
established. Negotiations and adjustments to contract provisions will
need to be addressed. Regular meetings should be scheduled to keep
abreast of new developments in the service environment, processes, or
technologies so that beneficial new features can be added if they meet
corporate requirements and enhance the service.
7. Evaluation. After or near the contract termination date, contract
performance needs to be evaluated to determine how successful it was,
what changes might be required, and how the operation will be handled
next. This phase, also called "succession planning," should ensure a
smooth transition after the contract is completed. It should include review
of the successes and failures, and their causes, with a breakdown as to
source, particularly differentiation between those arising from the initial
contract terms and those which resulted from later developments. The
information gained at this stage can be used to establish a basis for the
next contract.
As the contract approaches its termination date, the VMO needs to
carefully evaluate vendor services and determine whether the contract
should be renewed, extended under new conditions, or terminated.
Next: Contracting Basics
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