Contract Management in the Netherlands - WUR

Contract Management in the Netherlands

Development of a maturity model

Author: C.A.A. Kleiren Supervisors WUR: prof. dr. ir. A.F. van Wagenberg dr. W.J.J. Bijman Course code: MST 80430 Date: June 2008

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Document: Master thesis report

Student: Cornelius A.A. Kleiren

820731 441 010

[email protected]

Supervisors: prof. dr. ir. A.F. van Wagenberg

dr. W.J.J. Bijman

Company: Capgemini Nederland B.V.

Address: Papendorpseweg 100

3528 BJ Utrecht

Supervisors: mr. W. L. Lee

[email protected]

030 6892225

ing. J.G. Tersteeg (MBA)

[email protected]

030 9892225

University: Wageningen University & Research centre

Chair: Management Studies

Course code: MST 80430 – 30 ects

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Preface

Utrecht, May 2008

“After having been a student for over five years, I realized it was time to start studying”

This thesis represents the final result of my time as an academic student and also represents the start of

a new era focused on work and career. The start of this new era however wouldn’t be possible without

the help of many people who assisted me in writing the document in front of you.

Therefore I would first like to thank my Capgemini supervisors: Way Lin Lee and Jim Tersteeg. I’m not the

easiest person on the world and relations might have started as a little struggle. This relation however

managed to flourish and resulted into a productive cooperation. Way Lin and Jim, thank you for all the

feedback, coaching and given trust. Another thanks goes to all other Capgemini colleagues of the Finance

Transformation practise and the GRC cluster for their support and advice but also the lunch conversations

and the necessary fun and distraction while working on my research.

Next I would like to thank my supervisors of the Wageningen University: Dries van Wagenberg en Jos

Bijman, for their support, scientific feedback and flexibility in letting me do my internship and thesis on

the same subject at the same organization.

A thanks goes to all participants of the interviews for their enthusiasm and showed interest in my

research and often providing me with new insights on the subject.

I would also like to thank my girlfriend for continuously motivating me and helping me design a front

cover for this thesis.

A special thanks goes to my parents in trusting me on my decisions and supporting me everywhere I

decide to go.

I hope you will enjoy reading this thesis document. Read it if you’re interested and want to know more

about contract management. Read it if you’re already skilled in the profession and interested in the

newest contract management insights.

Kind regards,

Kees

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Management summary

Managing contracts is becoming a corporate priority these days. Businesses are focusing on their core

competences to reduce costs and are outsourcing more business activities to either specialized

organizations or low-wage countries. These developments lead to more and more complex contracts.

Another development is the growth of legislations such as the Sarbanes-Oxley act (SOX) and the

Tabaksblat code, or Dutch corporate governance code, which oblige boards of large companies to make

processes auditable, traceable and give account to their stockholders. As a result of these legislations

contract management processes in an organization need to be traceable and auditable as well. This again

leads to the fact that contracts need more extensive and structured management in organizations these

days.

This research originated as an initiative of Capgemini Netherlands B.V.. Capgemini is a global player in the

field of IT, consulting and outsourcing activities. The consulting department of Capgemini Netherlands

B.V. noticed an increase in activity in and attention to contract management among their Dutch clients

and other large Dutch companies. As Capgemini is a consulting company, this led to the question how

and by what instruments companies can be guided in their development path to professional contract

management.

In the literature study of this thesis a difference is identified between the American definition of contract

management and the Dutch definition of contract management. The American definition comprises sales

and procurement contracts, whereas the Dutch definition only takes procurement contracts in scope.

Another difference is the beginning and end of the contract management process. According to the

Dutch definition contract management starts with the creation of the contract, whereas, according to the

American definition, contract management starts with identifying the initial need, or pre-sales activities.

Several maturity models have been developed for the American definition and the cause for this research

is the lack of a maturity model for the Dutch definition. In the literature study a conceptual version for

the maturity model is developed that has been tested in the empirical research together with the Dutch

definition of contract management found in literature.

In the empirical research a case study approach is used and a sample of fifteen companies has been

selected. The selected companies have been interviewed with the help of a questionnaire in order to test

the findings of the literature study. In the empirical research the conceptual model is tested and the

definitions for contract management used in the participating companies are assessed. After each case

the conceptual model was reviewed and adaptations were made on the model and the questionnaire in

an iterative process after every interview. The model and the questionnaire have evolved during the case

studies and interviews and new insights on the subject of contract management have been developed.

The result and conclusion of this empirical research is the confirmation that the key elements of the

Dutch definition in literature are also in the definitions used in large Dutch companies. Next to that a

contribution is made to the Dutch definition of contract management by identifying two organizational

levels in contract management; a tactical level i.e. managing risks and relations per individual contract

and an operational level i.e. monitoring performances and providing overview in all contracts. The final

conclusion of the empirical research is that a maturity model for contract management does not apply. A

maturity model implies that a company should always try to grow and strive for the highest level of

maturity. The conclusion after the empirical research is that there is an optimum in the professional level

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of contract management and striving for the highest level is not necessarily profitable. Growing in

contract management maturity with higher transaction costs as a result doesn’t always repay itself and

therefore the conceptual model, a maturity model for contract management based on literature, has

been rejected.

In the discussion of this research the subject is continued and the information of the literature research,

the conceptual model and the interviews are used to come up with an alternative model which can be

used to identify the optimal level. This model consists out of a model for the identified tactical level in

contract management and a model for the identified operational level in contract management. These

two models can help an organization to determine their “as is” situation and, with the help of the found

factors of influence on the optimal level, their “to be” situation.

According to this research, certain factors are of influence on the optimal level in contract management.

Some of these factors have been identified in the discussion, for example amount of contracts, total

spend under contract, the threat of a possible merger or the position in the “Kraljic” matrix identifying

the business impact and the supply risk. These factors all have a relation with the opportunity costs in

contract management and influence the optimal level.

Finally in the recommendations to Capgemini and the participating companies, a list of best practices in

contract management found among the participating companies, expected future trends and suggestions

for future research are stated.

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Table of contents

PREFACE 3

MANAGEMENT SUMMARY 4

TABLE OF CONTENTS 6

ABBREVIATIONS 9

1. INTRODUCTION 10

1.1 RESEARCH BACKGROUND 10

1.1.1 INTRODUCTION TO CAPGEMINI 10

1.1.2 INTRODUCTION TO RESEARCH 10

1.1.3 PROBLEM ANALYSIS 12

1.2 CONCEPTUAL RESEARCH DESIGN 12

1.2.1 RESEARCH OBJECTIVES 12

1.2.2 RESEARCH FRAMEWORK 13

1.2.3 RESEARCH ISSUE 14

1.3 TECHNICAL RESEARCH DESIGN 14

1.3.1 RESEARCH MATERIAL 14

1.3.2 RESEARCH STRATEGY 15

1.3.3 RELIABILITY AND VALIDITY 16

1.4 STRUCTURE OF THE REPORT 16

2. THE CONTRACT 18

2.1 AGENCY THEORY 18

2.2 TRANSACTION COSTS THEORY 19

2.3 CONVENTION THEORY 19

3. CONTRACT MANAGEMENT 21

3.1 TRANSACTION MANAGEMENT 21

3.2 CONTRACT MANAGEMENT 22

4. THE CONTRACT MANAGEMENT MATURITY MODEL 26

4.1 INPUT FOR THE CONCEPTUAL MODEL 27

4.1.1 THE CAPABILITY MATURITY MODEL 27

4.1.2 THE CMMM© 29

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4.1.3 THE CONTRACTING CAPABILITY MATURITY MODEL 30

4.1.4 STEPS FOR DEVELOPMENT IN CONTRACT MANAGEMENT 31

4.1.5 THE ABERDEENGROUP 31

4.2 THE CONCEPTUAL MODEL 32

5. THE EMPIRICAL RESEARCH 34

5.1 RESEARCH METHODOLOGY 34

5.1.1 SELECTION OF CASES 34

5.1.2 THE INTERVIEW QUESTIONNAIRE 35

5.2 CASE STUDIES 35

RABOBANK 36

KPN 36

PHILIPS 37

HEINEKEN 37

ING 37

ABN AMRO 38

AKZO NOBEL 38

PRORAIL 39

ESSENT 39

FRIESLAND FOODS 39

NUON 40

CAMPINA 40

ENECO 41

5.3 CASE ANALYSES 41

5.4 VALIDATION OF RESULTS 41

6. RESULTS AND CONCLUSIONS 43

6.1 CONTRACT MANAGEMENT ACTIVITY 43

6.2 DEFINITION OF CONTRACT MANAGEMENT 44

6.2.1 A MULTI-LEVEL ACTIVITY 45

6.2.2 THE CONTRACT MANAGEMENT PROCESS 47

6.2.3 MULTIPLE STAKEHOLDERS 48

6.3 CONTRACT MANAGEMENT AND THE MATURITY MODEL 50

7. DISCUSSION 51

7.1 TRANSACTION COSTS VS. OPPORTUNITY COSTS 51

7.2 FACTORS OF INFLUENCE ON THE OPTIMAL LEVEL 52

7.2.1 AMOUNT OF CONTRACTS 53

7.2.2 TOTAL SPEND UNDER CONTRACT 53

7.2.3 A NATIONAL ORGANIZATION VS. AN INTERNATIONAL ORGANIZATION 53

7.2.4 THREAT OF A MERGER, ACQUISITION OR OTHER MAJOR REORGANIZATION 53

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7.2.5 INTERFACE WITH PRIMARY BUSINESS PROCESS 53

7.2.6 POSITION IN THE “KRALJIC MATRIX” 54

7.2.7 OTHER FACTORS OF INFLUENCE 55

7.3 THE CONTRACT MANAGEMENT DEVELOPMENT MODELS 55

7.3.1 OPERATIONAL LEVEL 56

7.3.2 TACTICAL LEVEL 58

7.4 LIMITATIONS 60

8. RECOMMENDATIONS 61

8.1 BEST PRACTICES 61

8.1.1 PROCESS 61

8.1.2 PEOPLE 62

8.1.3 SYSTEM 63

8.2 FUTURE TRENDS 64

8.3 FUTURE RESEARCH 64

REFERENCES 65

LITERATURE: 65

WEBSITES: 67

APPENDIX I: INITIAL QUESTIONNAIRE 68

APPENDIX II: FINAL QUESTIONNAIRE 70

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Abbreviations

CCMM Contracting Capability Maturity Model

CLM Contract Lifecycle Management

CMM Capability Maturity Model

CMMM Contract Management Maturity Model

ECM Enterprise Contract Management

FTE Full Time Equivalent

GRC Governance, Risk and Compliance

IACCM International Association for Commercial and Contract Management

KPI Key Performance Indicator

NCMA National Contract Management Association

NEVI Nederlandse Vereniging voor Inkoopmanagement

SEI Software Engineering Institute

SLA Service Level Agreement

SOX Sarbanes Oxley Act

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1. Introduction

This research originated as an initiative of Capgemini Netherlands B.V. and ultimately led to the writing of

this master thesis. In the following sections more will be explained of Capgemini Netherlands B.V., the

cause of this research, the objectives, issues and how the research is build up in this report.

1.1 Research background

1.1.1 Introduction to Capgemini

Capgemini S.A. is a global leader in consulting, technology, outsourcing and local professional services.

Capgemini is headquartered in Paris, France and operates in more than 30 countries. Capgemini has had

a 7.7 billion in revenues with a 293 million net income in 2006 and almost 68.000 people were employed

at Capgemini in 2006. Capgemini Netherlands B.V. together with Belgium and Luxembourg (the Benelux)

form Capgemini N.V. and are part of the strategic business unit Continental Europe & Asia-Pacific of

Capgemini S.A. 6.000 of the 68.000 people worldwide are employed at Capgemini Netherlands B.V.

Capgemini Netherlands B.V. is split in three departments: Consulting, technology and outsourcing. The

writing of this thesis was performed at the consulting department within the practise Finance

Transformation. The practise Finance Transformation is split in five clusters: Facility management, cost

and economic value management, corporate performance management, financial transaction processing

and governance risk and compliance (GRC). The contract management project is an initiative of the GRC

cluster.

1.1.2 Introduction to research

Making agreements and putting them in contracts is seen as a normal process in doing business.

Companies manage these contracts in order to monitor contract compliance, make savings on

procurement and maintain insight in their contractual agreements, rights and obligations. Nowadays

more focus in companies is put on professional outsourcing with more and more complex contracts as a

result. Therefore a bigger challenge lies in managing these contracts. To support this bigger challenge in

contract management different kinds of information technology applications are available which provide

handy tools in assisting contract management. Still it is not uncommon to find organizations with

thousands of contracts in place with little more than manual efforts, desk drawers and file cabinets to

manage their contractual agreements. Nor is it uncommon to find contracts long expired but that are still

being paid for or are not compliantly executed. In many organizations contract administration and

management is often an afterthought. Contracts are often not easily found, not well maintained and

different contracts are made with the same supplier. They are often only put attention to in case of a due

diligence investigation in a merger or acquisition situation. Contracts are living documents, this means

that mutations occur. Contract mutations require structure in contract management.

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Most businesses and industries focus on the negotiation, getting the contract and closing a profitable

deal. An often forgotten part however is actually putting the contract to good use in the operational

purchasing process. Catching the identified savings and turning them into “in the pocket” savings, linking

the contract to the operational process, which is equally vital to business success (Garrett, 2007)

Contract management is becoming a corporate priority. In a research of the AberdeenGroup (2003) a

result was that 53% of the organizations considered contract management to be a critical success factor

and 84% of the organizations considered contract management as of great importance to their business.

A growing trend is shown by Capgemini research (2006). This research conducted a survey to understand

what issues CPO’s of large corporate procurement functions are planning to address in the coming years.

This SRM study clearly reported contract management and contract management related issues are of

top priority for CPO’s.

This growing focus on contract management is a result of several trends:

• Globalization

More companies are expanding their business abroad with more international contracts as a result. Due

to a wider geographical spread of contracts and international regulations maintaining visibility in these

contracts is more of an issue. Another aspect is the growth in amount of contracts when companies go

global, more contracts need more management.

• Focus on core competences

Companies are more focusing on their core competences in order to reduce costs. More outsourcing

contracts and licensing contracts are a result of this trend. A motive behind this trend is the re-definition

of organizations of core and non-core activities. Only competitively distinguishing activities important for

the continuity of the company are seen as core activities nowadays. New non-core activities are more

and more identified and outsourced. In the past most organizations limited their outsourcing to just

catering or security (Ghijsen Cohen, 2006).

• New legislations

Another development is the growth of legislations such as the Sarbanes-Oxley act (SOX) and the

Tabaksblat code, or Dutch corporate governance code, which oblige boards of large companies to give

account to their stockholders. As a result of these legislations contract management processes in an

organization need to be traceable and auditable. This again leads to the fact that contracts need more

extensive and structured management.

As a result of this trend in more outsourcing, more and more complex contracts are made. Collins (2003)

states that the number of active contracts in a typical fortune 1,000 company reaches between 20,000

and 40,000. Conclusion; management of contracts is taking place at an ever larger scale which begs the

question of how it is done and who’s or what practise may be considered to be excellent?

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1.1.3 Problem analysis

Two divergent definitions of contract management are used in different literature, websites and

companies. The first is a definition often found in American literature and used by American research

companies. This definition entails a broad scope in managing contracts, sell-side or buy-side, starting at

the initial need or pre-sales activity to the contract termination. Stated below is a good example of an

American definition of contract management of Garrett and Rendon (2005).

“The management of the contract management process.” “With the contract management process

including sales contracts and ranging from the procurement planning or pre-sales activities to the

contract administration and close-out.” (Garrett and Rendon, 2005)

For this definition of contract management a maturity model is developed by Garrett and Rendon, the

contract management maturity model or CMMM© (Garrett and Rendon, 2005). Another maturity model

for this definition of contract management is being developed by the International Association for

Commercial and Contract Management (IACCM). This maturity model is called the Contracting Capability

Maturity Model (CCMM) and is still under development by this association.

In Dutch literature, websites and among Dutch companies however a different definition for contract

management is in use. This definition starts when the contract is created in the procurement process and

excludes sales contracts. Stated below is the definition of contract management of the Dutch professor

Harink.

“The linking pin between the tactical purchasing process and the operational purchasing process.

Managing the registration and further execution of the contract after it has been signed” (Translated

from Harink, 2004)

For this definition of contract management however no maturity model is available. No maturity model

based on scientific research for contract management for the Dutch definition has yet been developed.

1.2 Conceptual research design

This section deals with the initial aims, structure and content of this report. What are the goals and how

are they planned to be achieved?

1.2.1 Research objectives

The objective of this research is to develop and test a maturity model for Dutch companies for the Dutch

definition of contract management and by that helping and assisting Capgemini Netherlands B.V. and the

participating large Dutch companies. The complete research objective is:

Key objective:

• Development and testing of a

the consulting activities of Capgemini Netherlands B.V.

contract management development

1.2.2 Research framework

The theoretical foundation for this research has

several existing maturity models have been studied as the Capability Maturity Model (CMM) the

CMMM© and the CCMM. This literature study and multiple consultations with supervisors and experts of

Capgemini has resulted in a literature overview of used Dutch definitions of contract management and a

matching maturity model for the Dutch definition of contract management which is the conceptual

model of this research. This definition and model has been analyz

process during a series of twenty interviews with fifteen Dutch companies. This has resulted in an

adjusted and tested model and a contribution to the Dutch definition of contract management which has

again been validated by a panel consisting out of Capgemini experts and the participating companies.

Figure: 1 the research framework

Development and testing of a contract management maturity model to make a contribution to

the consulting activities of Capgemini Netherlands B.V. and contribute

contract management development of large Dutch companies.

1.2.2 Research framework

The theoretical foundation for this research has been based on the theories shown in Figure 1. Next,



i has resulted in a literature overview of used Dutch definitions of contract management and a


model of this research. This definition and model has been analyzed, tested and adjusted in an iterative



dated by a panel consisting out of Capgemini experts and the participating companies.

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model to make a contribution to

and contribute to the professional

been based on the theories shown in Figure 1. Next,



i has resulted in a literature overview of used Dutch definitions of contract management and a


ed, tested and adjusted in an iterative



dated by a panel consisting out of Capgemini experts and the participating companies.

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1.2.3 Research issue

This research consists out of three main research questions:

• What is the definition used in large Dutch companies for contract management?

• How does contract management of large Dutch companies mature?

• How can a maturity model contribute to the professional development of contract management

in large Dutch companies?

1.3 Technical research design

1.3.1 Research material

As to derive from the research framework in Figure 1 this research consists of four phases. The first phase

is the literature research, followed by an empirical and analytical phase, a validation of the business

results and finally the writing of the final results, conclusions and recommendations.

Phase (A) Literature research

In the first phase, a literature study is performed on contract related theories as: agency theory,

transactions costs theory, procurement theory and convention theory. In order to get more insight in the

foundations of contract management a parallel is drawn with transaction management and further

research is performed on the different definitions and aspects of contract management. Next to that

several existing maturity models have been looked into to form the basis of a draft version of a maturity

model for contract management, or the conceptual model, based on the Dutch definition formulated in

the literature research. Supervisors and Capgemini experts have provided input in the form of several

informal conversations for the conceptual model as well. This conceptual model has been tested in the

next empirical phase.

Phase (B) Empirical and analytical part

In this phase companies have been selected and contacted to participate in the research. People

responsible for managing contracts in these organizations have been interviewed with the assistance of a

questionnaire. Every interview is analyzed afterwards and has led to an adjustment of the conceptual

model and interview questionnaire. During every interview the maturity model has again been tested and

has become more applicable, underpinned and validated.

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Phase (C) Validation

After all twenty interviews the fifteen participating companies have been invited for a presentation.

During this presentation the research results, conclusions and recommendations have been presented.

The organizations have provided feedback and rated the model as a contribution to their professional

development of contract management.

Phase (D) Writing

This is the final phase where the report has to be finished and all the findings have to be written down.

The conclusions and recommendations for Capgemini and further research will be given.

1.3.2 Research strategy

Following the classification of Verschuren and Doorewaard (2001) the research strategy “case study” is

most suited for this research. Case studies have the following features that apply to the research

question and objectives for this research:

- A small sample of research units; fifteen companies will be interviewed for this research.

- A labor-intensive approach.

- More depth than width; Contract management is only a small part of a business’ processes.

Specifically developing a maturity model for this business process will need depth rather than

width.

- A selective or strategic research sample.

- Qualitative data and research methods; the research method used is interviewing. This is a

qualitative research method and will gain qualitative research data.

- An open observation on location. By visiting companies and performing interviews with these

companies, field observations are made.

Method: Structured interviews

This research has chosen interviews as research method primarily because this was the wish of

Capgemini. Twenty interviews are performed with fifteen companies. Further this research chose to use

structured interviews with a predetermined questionnaire. This choice is made because these types of

interviews are conducted when it is known at the outset what information is needed. Sometimes,

however, based on the exigencies of the situation, the interviewers have taken a lead from the

respondent’s answer and have asked other relevant questions not on the interview protocol. In spite of

the deviation in some of the interviews these are still considered to be a structured interviews. (Sekaran,

2003).

At the start of this research two pilot interviews are performed with Fortis and Ahold. These interviews

were performed to test the questionnaire and get better familiarized with jargon and expressions used in

this field of management.

Before the interviews desk research is performed on the companies to have better insight in the

organization’s business and as preparation for the interviews.

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Research population: Large Dutch companies

In order to draw valid conclusions the research population is limited to large Dutch companies which are

stock market listed or companies which have over a 1000 employees. This research has chosen for large

companies because of the assumption that larger companies have more contracts. The object of research

“contract management” is therefore most likely to be “more” present at large companies. This research

has chosen Dutch companies because the research is executed in the Netherlands and the research

objective clearly states assistance in contract management for Dutch companies.

1.3.3 Reliability and validity

o The interviews have not been recorded.

o Eighteen of the twenty interview were conducted together with a supervisor of Capgemini, both

making notes providing input for the interview report.

o After every interview the interview reports have been sent back to the interviewed for validation and

possible additions.

o Analyses of the interviews and adjustments to the conceptual model or questionnaire are the

interpretation of the researcher.

1.4 Structure of the report

The remainder of this report is structured as follows. Chapter two, three and four are the literature

research and further the empirical research, results, conclusions, discussion and recommendations are

described:

In chapter 2, The Contract, theories related to contracts have been described such as the agency theory,

transaction costs theory and the convention theory in order to form a theoretical foundation for this

research.

In chapter 3, Contract management, a parallel is drawn with transaction management and contract

management. Next to that an overview is given of the different definitions of contract management used

in the Dutch and American literature.

In chapter 4, The Contract Management Maturity Model, an overview of different maturity models and

other contract management related models have been stated. This has provided the input for the

maturity model used as the conceptual model for this research and is stated in Section 4.2. This

conceptual model has again been tested in the empirical research.

In chapter 5, The Empirical research, the process of selecting the cases for the research sample is

described. These selected cases, or organizations, are interviewed by the use of a questionnaire. During

the interviews this questionnaire evolved in an iterative process together with the conceptual model due

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to new insights on the subject. In Section 5.2 short summaries of the cases and the interviews are

described. Next, the results and conclusions found in this iterative process of interviewing and analyzing

are validated by Capgemini experts and the participating cases during a presentation of the researcher.

In chapter 6, Results and conclusions, the results and conclusions of the empirical research are described.

A contribution is made to the definition of contract management and two organizational levels, tactical

and operational, are identified. The final conclusion is that a maturity model does not apply in helping

organizations in developing their contract management and the conceptual model has been rejected. A

maturity model implies that one must always strive for the highest level in maturity. This is however not

the case, there is an optimum in the professional level of contract management.

In chapter 7, Discussion, based on the conclusion two new models are presented based on the

information from the literature research, the conceptual model and the empirical research. One model

for both the organizational levels in contract management. Next to that the factors of influence on the

optimal level of contract management identified in this research are described.

Finally in chapter 8, Recommendations, the recommendations to Capgemini and the participating

companies is stated. This consists out of a list of best practices in contract management found among the

participating companies, expected future trends and suggestions for future research.

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The following chapters two, three and four give an overview of the literature research performed for this

thesis divided over three chapters. Theoretical aspects related to the contract are explained with the help

of several theories in chapter two. Chapter three attempts to deliver a definition of contract

management that can be used for this research. Finally chapter four goes into the maturity model. The

final result of this literature research is a literature based contract management maturity model,

presented in section 4.2, to be used as the concept model for this research.

2. The Contract

According to the dictionary a “contract” is a written or verbal agreement between two or more parties

who make an undertaking with one another (van Dale, 2005). A legally binding exchange of promises or

agreement between parties that the law will enforce (Wikipedia, 2008). The binding exchange of

promises or agreement between parties can be verbal or written in both these definitions. The definition

of “contract” used in this research however will refer to the written agreement between two or more

parties. The reason for this is the written form that contracts are required to take to be enforceable.

In neo-classical economy perfect information is assumed and prices coordinate the market and economy.

Perfect information for both parties however is often not available. Different economics have thought

about this and came up with different theories and papers about issues related to imperfect information.

2.1 Agency theory

The agency theory describes two actors: The principal and the agent, where the principal hires the agent

to perform a certain action. The agency theory describes the issues in the relationship between actors in

the economical process. The theory is founded on two presumptions: In the relationship between

principal and agent there is a conflict of interest, wherein the agent has different interests than the

principal. The second presumption is that the principal is not able to see the agent’s actions, so there is a

lack of information. The fact is that the agent is closer on the subject and therefore has an information

advantage. The result of this incomplete and asymmetrical information is inefficiency. Both have different

interests and have different information which will lead to inefficiency. The challenge is to design a

contract on the basis of different interests and incomplete information which would give the right

incentives to the right agent to do exactly what the principal would want him to do and this way stop his

opportunistic behavior (Sources: Anderlini and Felli, 1998, www.wikipedia.org and www.economische-

begrippen.nl)

The agency theory and the information asymmetry problem is applicable in many cases: In an employer-

employee relationship, in an owner - manager relationship but also in a buyer - supplier relationship. In

the paper "The Market for Lemons: Quality Uncertainty and the Market Mechanism" (Akerlof, 1970) the

interaction between quality heterogeneity and asymmetrical information is described. This can lead to

the disappearance of a market if information about the quality is not clearly defined and available.

According to Akerlof incentives exist for the seller to deliver a low-quality good as a higher-quality due to

the asymmetry of information about the goods. The buyer, however, takes this incentive into

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consideration and assumes the quality is uncertain. To overcome this issue the buyer will consider the

quality of the good to be average, which in turn will lead to the side effect that goods that are of a high

quality will be driven out of the market. If this mechanism is repeated, a no-trade equilibrium is reached

and the market will no longer exist.

In order to overcome this problem contracts are put up to make clear agreements about the trade and

the levels of quality. Price and quality negotiations, finding information and putting up long contracts

which include all the right incentives to prevent opportunistic behavior however cost money for both

principal and agent (transaction costs). It is in the interest of both principal and agent to reduce the

transaction costs as much as possible and come to a mutual agreement quickly. However there is also the

importance of clear agreements, good prices and giving the right incentives to overcome opportunistic

behavior.

2.2 Transaction costs theory

The transaction costs theory by Williamson (1975) begins by seeing agents as boundedly rational and

opportunistic. He emphasizes that bounded rationality is particularly problematic for organizations when

they try to put up contracts or make agreements with each other. Next to bounded rationality there is

also opportunism what plays a role in contracting. Some actors behave opportunistically within the

system. They don’t play by the rules, they lie and they cheat. In a world of perfect information, you don’t

have to worry about opportunism because it is already within the bounds of rational behavior. Not being

perfectly rational, actors cannot anticipate all the circumstances that, over time, a contract may be

subject to. If actors were always truthful they could commit themselves to be fair to the signed

agreement. But, agents can be opportunistic and, with the right incentives, seek their self-interest with

fraud. This way hazards can arise from contracts. Williamson’s suggestion (1985) to help solve these

problems is integration within the supply chain. In order to gain information, get incentives aligned and

reduce negotiation costs a company can get everything in house. Negotiations, lack of information and

non-aligned incentives cause major company costs and many savings could be made in that area.

2.3 Convention theory

In the convention theory other means of coordination, non-price means, are described. Convention

theory deals with what it calls “radical uncertainty” which means that one is not able to assign a

probability distribution to future events. This means that it is impossible to write a contract because the

information needed is always incomplete. It is not possible to assign probabilities to all future

contingencies. How does the economy get coordinated in this face of such uncertainty? In the paper “The

market for lemons” of Akerlof (1970) asymmetrical information is assumed to be the reason of the failure

of the standard neo classical theory, in which perfect information is assumed. The convention theory

assumes that the neo classical theory fails because of the way people reason about their trading partner.

People tend to attribute their own original intentions and attitude to their trading partner resulting in a “I

know that you know that I know…” kind of infinite reasoning. If each does this, with no reference to an

outside standard behavior, the market fails since no one will commit. The combination of “radical

uncertainty” and self-referencing on the other actor’s actions will make action impossible. The

20

convention theory however assumes that actors are not perfectly rational but boundedly rational.

Standardized decision rules and standard operating procedures are developed and in existence. This way

the actor does not deal with all the possible results expected from a decision. Principally the validity or

efficiency of the rule allowed him to reach a decision, a justifiable or reasonable decision rather than a

rational decision (Chevassus-Loza and Valceschini, 1994.). This theory allows the existence of collective

rules that interpose themselves in bilateral contracting agreements.

3. Contract Management

Summarizing the previous chapter: Many challenges, d

purchasing. For that reason contracts are put up to make agreements clear and enforceable

challenge in managing those contracts lies in finding t

opportunistic behavior and making as less

possible things that can happen during a transaction in a contract and t

procedures are in existence to help

The following sections of this chapter describe a parallel on contract management with transaction

management and next the contract management definition issue is discussed.

3.1 Transaction management

Managing a contract can be regarded as managing one or multiple transactions.

the management of this transaction as “transaction management”. He distinguishes three dimensions in

transaction management: phase, content and effort. In

managed in a certain phase of the transaction on a certain aspect which will take a certain amount of

effort (transaction costs).

The period of a transaction is characterized by two phases

period preliminary to the transaction and a

objective of the ex ante period is to prevent any possible problems in advance, the

solve problems during or after the transaction.

The content of both the ex ante phase and ex post phase

process and the operational purchasing process in the identified phases in purchasing in the model of Van

Weele (2001) en in the procurement model of Capgemini (see Figure 3). Van Weele identifies a tactical

purchasing process wherein the needs of the company are specified, a supplier is selected and the

contract is put up. This could also be referred to as the ex ante phase in transact

because in this phase in purchasing possible problems are also prevented by putting up a contractual

agreement. Van Weele also identifies an operational purchasing process wherein the contract is put to

use, monitored and feedback is provide

as the ex post phase in transaction management wherein the transaction is executed, monitored and

possible problems are attempted to be solved in the aftercare phase. See Figure 2.

Figure 2: Phases in purchasing (Van Weele, 2001)

anagement

Summarizing the previous chapter: Many challenges, difficulties and multiple interests exist

contracts are put up to make agreements clear and enforceable

challenge in managing those contracts lies in finding the right balance between anticipating on

r and making as less transaction costs as possible. It is impossible to cover all

possible things that can happen during a transaction in a contract and therefore standardized rules and

help find this balance.

sections of this chapter describe a parallel on contract management with transaction

management and next the contract management definition issue is discussed.

3.1 Transaction management

Managing a contract can be regarded as managing one or multiple transactions. Rooks (2002) refers to


transaction management: phase, content and effort. In short this means that the transaction can be


is characterized by two phases (Macaulay, 1963; Williamson

period preliminary to the transaction and an ex post period during and after the transaction. The

objective of the ex ante period is to prevent any possible problems in advance, the

ter the transaction.

content of both the ex ante phase and ex post phase show parallels with the


urement model of Capgemini (see Figure 3). Van Weele identifies a tactical


contract is put up. This could also be referred to as the ex ante phase in transact



use, monitored and feedback is provided to the supplier in the aftercare phase. This could be referred to


possible problems are attempted to be solved in the aftercare phase. See Figure 2.

re 2: Phases in purchasing (Van Weele, 2001)

21

ifficulties and multiple interests exist in

contracts are put up to make agreements clear and enforceable. The

balance between anticipating on

It is impossible to cover all

herefore standardized rules and

sections of this chapter describe a parallel on contract management with transaction

Rooks (2002) refers to


short this means that the transaction can be


liamson 1985); an ex ante

period during and after the transaction. The

objective of the ex ante period is to prevent any possible problems in advance, the ex post period is to

show parallels with the tactical purchasing


urement model of Capgemini (see Figure 3). Van Weele identifies a tactical


contract is put up. This could also be referred to as the ex ante phase in transaction management



d to the supplier in the aftercare phase. This could be referred to


22

Two phases again are identified in the ex ante phase in transaction management. The first one is

searching, screening and selecting a possible transaction partner. This could again be referred to as the

selecting phase in tactical purchasing focusing both on possible differences between the possible

suppliers in the area of reliability and competences (Blumberg, 1997). Selection of a reliable and

competent supplier leads to less risks (Milgrom and Roberts, 1992) and less risks lead to less transaction

costs. Making a selection can be done by, among other things, previous experience with the same

supplier. One could measure its previous performances by pre-set key performance indicators or by

measuring to which level a service agreement is fulfilled. These are called key performance indicators

(KPI’s) and service level agreements (SLA’s).

The second phase in ex ante transaction management is the contractual planning of the transaction, or

making agreements for possible circumstances during the execution of the contract. This again shows

great resemblance with the “contract” phase in tactical purchasing which entails contracting the supplier

including negotiating the contract terms (Van Weele, 2001)

Ex post transaction management starts after the agreement has been closed and is focused on managing

possible problems during the execution of the transaction (Rooks, 2002). Ordering, monitoring the pre-

set KPI’s and SLA’s and aftercare could therefore be referred to as ex post transaction management.

The last dimension of transaction management is the effort of the transaction. This could again be related

to transaction costs. The relation between transaction costs and opportunity costs are discussed in the

previous chapter.

3.2 Contract management

The oldest information on contract management found in this research dates back to the founding of an

American association, the National Contract Management Association (NCMA) in 1959. Until the 1990’s

however contract management did not get much attention. After that, the attention on contract

management increased and also became an international issue and the International Association for

Contract and Commercial Management (IACCM) was founded in 1993.

Contract management is closely related to the concept “contract administration” and they are often

confused and can have very similar definitions in literature. In most literature however, the concept of

contract management refers to the processes of managing the entire contract lifecycle of contracts,

rather than the management of implementation of contracts, which is an often used definition for

contract administration. The objective of contract management is full realization of the potential of

contracts (Keskitalo, 2006)

As stated before, contract management could be referred to as the management of the contract lifecycle,

also often referred to as Contract Lifecycle Management (CLM) or Enterprise Contract Management

(ECM). The problem however is which part of the contract lifecycle? Where does the contract lifecycle

start and stop? What type of contracts are in- and excluded? American and Dutch definitions diverge and

are stated below.

23

American literature differs in scope in contract management compared to Dutch literature. American

literature includes sales and procurement contracts and start earlier in the purchasing or selling process.

Garrett describes his definition of contract management in an article:

“The management of the contract management process.” “With the contract management process

including sales contracts and ranging from the procurement planning or pre-sales activities to the

contract administration and close-out.” (Garrett and Rendon, 2005)

A definition found on the Dutch website of the virtual platform “Keten&Netwerken”, which is a platform

for creating mutual knowledge, is translated and defines contract management as:

“The process that ensures that the right information is at the right place at the right time in order to

support the entire contracting process. So it includes not only concluding the contracts but also

administering, monitoring and controlling afterwards. After conclusion of the contract these processes are

often forgotten or insufficient executed.”

The definition of “Keten&Netwerken” does not mention “including sales contracts” and starts with

“concluding the contracts.” It also shows similarities with the definition of contact administration in a

publication of NPPP (2004) of a workgroup of NEVI.

“Contract administration is the process that makes sure that the right information is at the right place at

the right time in order to support the entire contracting management process” (translated from NEVI,

2004)

Their definition of contract management in the same publication is:

“Contract management is the process whereby, on the basis of given input, signed and altered contracts

are uniformly documented, controlled and monitored, in order to fully utilize those contracts” (translated

from NEVI, 2004)

In the NEVI definition conclusion of the contract is not in scope. The “given input” can be interpreted as a

already concluded contract. The objective of fully utilizing the contracts is again in line with Keskitalo

(2006) stated before. Another approach is used by the Dutch professor Harink (2004) who defines

contract management as the linking pin between the purchase department who concludes and

administers corporate contracts (tactical purchasing) and the operational procurement process

(operational purchasing).

“The linking pin between the tactical purchasing process and the operational purchasing process.

Managing the registration and further execution of the contract after it has been signed” (translated from

Harink, 2004)

In the previous chapter parallels were described between transaction management and contract

management. So, according to Harink, contract management can also be described as “the linking pin”

between the ex ante phase in contract management and the ex post phase. It sees to the fact that the

contractual agreement made to prevent any possible problems in advance is executed compliantly.

This is also in line with the definition drawn in the procurement model of Capgemini (2006), in Figure 3.

Figure 3. Capgemini procurement model (2006)

In the Capgemini procurement model in

strategic sourcing cycle and the procurement order cycle.

execution of the contract after it has been signed, capturing the in the sky identified savings

strategic sourcing cycle in the procurement order cycle

In order to clarify all concepts and key concepts and the interrelationship with the term contract

management, the marking of concepts

describe and reflect many key concepts used in this research area. The interpretation of contract

management and the interrelationship with other concepts in this

interrelation used in this research.

Figure: 4. Marking of concepts

(source: Van Weele, 2001)

Figure 3. Capgemini procurement model (2006)

In the Capgemini procurement model in Figure 3, contract management is the linking pin between the

strategic sourcing cycle and the procurement order cycle. Managing the registration and further

execution of the contract after it has been signed, capturing the in the sky identified savings

strategic sourcing cycle in the procurement order cycle


marking of concepts of Van Weele (2001) has been presented in Figure 4,


management and the interrelationship with other concepts in this figure is the interpretation and

interrelation used in this research.

24

Figure 3, contract management is the linking pin between the

anaging the registration and further

execution of the contract after it has been signed, capturing the in the sky identified savings from the


presented in Figure 4, in order to


is the interpretation and

25

The arrow representing contract management in Figure 4 has been added by the researcher in the

marking of concepts of Van Weele. This shows the interrelationship and the beginning and end of

contract management as defined by Capgemini, 2006 and Harink, 2004.

26

4. The Contract Management Maturity Model

Garret and Rendon (2005) have defined all aspects related to the contract management maturity model.

These are stated below followed by an introduction to the capability maturity model what was the first

maturity model to be used. After that a build up will be made towards the contract management

maturity model that will be tested and validated after this internship.

Maturity

Maturity refers to a measure of effectiveness or capability in any specific process and is usually described

in terms of levels of effectiveness or capability (Garrett and Rendon, 2005).

Maturity level

A maturity level is a level of organizational capability created by one or more parts of an organization’s

processes. Maturity levels are used in an organization’s reach for improvement from ad hoc practises to a

state of continuous improvement (Garrett and Rendon, 2005).

Maturity Model

A maturity model is a structured collection of indicators that describe the maturity of an organization. A

maturity model provides: a place to start, prior experiences, a framework for prioritizing actions and a

path for improvement. Organizations use maturity models to asses, measure and improve their critical

core processes (Garrett and Rendon, 2005)

Contract Management Maturity

Contract Management Maturity is the measure of effectiveness of an organization’s contract

management processes and an indicator of the level of professionalism. These measures of contract

management process effectiveness can be described in terms of maturity levels reflecting an

organization’s contract management maturity (Garrett and Rendon, 2005)

Contract Management Maturity Model

The contract management maturity model is a maturity model as described earlier, applied to the

contract management process in an organization. It is a method for assessing and improving an

organization’s contract management process capability. It should describe an evolutionary roadmap an

organization would pursue in improving its contract management from an ad hoc (immature) process to a

continuously improved, or, optimized (mature) process (Garrett and Rendon, 2005)

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4.1 Input for the conceptual model

In the next section the different inputs for the draft version of the maturity model that will be tested in

the empirical part of this research are stated. In short the inputs are provided by: the CMM, the

CMMM©, the CCMM and preliminary research of the AberdeenGroup.

4.1.1 The capability maturity model

The Capability Maturity Model (CMM) is a framework that describes an improvement path from an ad-

hoc, immature process to a mature, disciplined process focused on continuous improvement (Humprey,

1989). In creating a maturity model for contract management the CMM can be used as input. The CMM

was developed by the Software Engineering Institute (SEI) at Carnegie Mellon University in Pittsburgh and

defines the state or level of maturity of a process. The CMM has been used to assess the maturity levels

of organization areas as project management, risk management, information technology or personnel

management. The CMM consists of a continuum of five process maturity levels, enabling process owners

to rate the state, or maturity, of a given process as: Initial, repeatable, defined, managed or optimizing.

The CMM applies to any process within an organization and, when applied effectively, improves the

ability of organizations to meet goals for cost, schedule, functionality and quality. The different stages

used in the CMM can be adapted and transformed and used to help create a contract management

maturity model. The CMM identifies the following levels of maturity:

• Level 1: Initial stage

This is an ad hoc or chaotic state wherein control is not a priority. No stable environment is provided and

success depends on individuals, not on the use of proven processes. Still organizations or processes in

maturity level 1 often work, they only exceed budget and schedule frequently.

• Level 2: Repeatable stage

In this state documented processes provide the foundation for consistent and repeatable successes.

Process discipline helps ensure that existing practises are retained during times of stress. Output

measures are tracked and monitored, creating an environment that is more stable and disciplined. The

reliance on people remains however and there is still a significant risk of exceeding costs and time

estimates.

• Level 3: Defined stage

The organization’s set of standard processes, which are the basis for level 3, are established and

improved over time. The process is well documented; policies, process and standards are defined and

institutionalized through the whole organization and tailored from the organization’s set of standard

processes to suit a particular project or organizational unit.

• Level 4: Managed stage

The managed stage is characterized by the use of precise measures, effective control and monitoring. The

process is both stable and measured, but an exceptional circumstance may occur. At maturity level 4, the

performance of processes is controlled using statistical and other quantitative techniques, and is

quantitatively predictable. At maturity level 3, processes are only qualitatively predictable.

28

• Level 5: Optimizing

Maturity level 5 focuses on continually improving process performance through both incremental and

innovative technological improvements. Both the defined processes and the organization’s set of

standard processes are targets of measurable improvement activities. As process activities are executed,

the process is continuously improved by quantitative feedback and from implementing innovative

approaches. At the optimizing Stage, there is a strong focus on continuous process improvement for

controls enterprise-wide

In Figure 5 the CMM is demonstrated. On the Y-axis the different capability maturity stages are shown

from immature (initial) up to a more mature state (optimizing). Next to that a short description is given

about the key features of theses capability maturity stages.

Figure: 5 The Capability Maturity Model

Source: www.knowledgeleader.com

(CMM information derived from: Herbsleb et al. 1997, www.wikipedia.org, www.knowledgeleader.com).

29

4.1.2 The CMMM©

One contract management maturity model (the CMMM©, see Figure: 6), also based on the CMM, is

already in use. It is created by Garrett and Rendon (2005) and identifies five different levels of maturity as

well. For this maturity model buyer and seller contracts and the different phases in their definition of

contract management are taken into account.

Figure: 6 The CMMM© of Garrett and Rendon (2005)

(Source: Garret and Rendon, 2005)

The contract management process areas in this maturity model exists of six chronological process steps in

managing contracts. It is build up out of five levels of maturity ranging from an ad-hoc level (1), a basic,

disciplined process capability (2), a fully established and institutionalized processes capability (3), a level

characterized by processes integrated with other corporate processes resulting in synergistic corporate

benefits (4) and at level 5 in which processes are focused on continuous improvement and adoption of

lessons learned and best practises.

• Ad hoc

The organization at this initial level of maturity acknowledges that contract management processes exist.

The organization’s management understands the benefit and value of using contract management

processes, some established contract management processes exist but these processes are applied only

on an ad-hoc and sporadic basis to various contracts. There is only informal documentation of contract

management processes existing within the organization.

• Basic

Organizations at this level of maturity have some basic contract management processes and standards

within the organization. These processes however only account for the “important” contracts. The

organization does not apply these contract management processes or standards through the entire

organization. Finally, at this maturity level, there is no organizational policy requiring the use of contract

management processes and standards on other than the required “most important” contracts.

• Structured

At this level of maturity, contract management processes and standards are established, institutionalized

and mandated throughout the entire organization. Formal documentation has been developed for the

contract management processes and standards and some processes may even be automated. Senior

organizational management is involved in providing guidance, direction, and even approval of key

30

contracting strategy, decisions, related contract terms and conditions and contract management

documents.

• Integrated

Organizations at this level of maturity have contract management processes that are fully integrated with

other organizational core processes. The contract’s end-user is also an integral member of the buying or

selling contracts team. The organization’s management periodically uses metrics to measure various

aspects of the contract management process and to make contracts-related decisions.

• Optimized

The final and highest level of maturity reflects an organization whose management systematically uses

performance metrics to measure the quality and evaluate the efficiency and effectiveness of the contract

management processes. At this level, continuous process improvement efforts are also implemented to

improve the contract management processes. Furthermore, the organization has established ‘lessons

learned’ and best practises programs to improve contract management processes, standards, and

documentation.

In the CMMM© all key process areas are described for the American definition of contract management

used in their model. Two of the key process areas in their model overlap the definition of contract

management used for this research: contract administration and contract closeout. Those can be used for

input for the development of the maturity model of this research. The following maturity indicators of

the CMMM© are selected to possibly provide input for the maturity model of this research:

• A team approach for monitoring the supplier’s performance to ensure the fulfillment of contractual

obligations by all parties of the contract.

• An established process for managing and controlling contract changes to cost, schedule, and

performance requirements.

• An established process for ensuring that only authorized individuals negotiate or agree to contract

changes.

• An established process for managing invoices and payments.

• An established process for conducting periodic and integrated cost, schedule, and performance

evaluations, such as earned value management, is used as part of the contract administration

process.

• Encouragement of contract disputes to be resolved using alternate disputes resolution methods.

• The contract closeout process involves checklists, templates, and forms for ensuring proper documen-

tation of closed-out contracts.

4.1.3 The contracting capability maturity model

Another maturity model for contract management, the contracting capability maturity model (CCMM), is

still under development and initiated by the IACCM mentioned at the beginning of section 3.1. Their

definition of contract management also includes sales contracts and includes the same scope as the

definition used in the CMMM©. The CCMM also defines five stages of maturity just like the CMM and the

CMMM© but has identified different key process areas. These are not the chronological process steps in

the contract management process but ten areas of engagement as: Leadership, vendor experience,

execution and delivery, information systems, risk management, strategy etc. Since the CCMM is still

31

under development and has not yet been officially released, not much focus will be put on this maturity

model as input for the maturity model for this research.

4.1.4 Steps for development in contract management

Another input for the maturity model of this research are the steps for development in contract

management issued by van der Kolk (2004). He describes five stadia for development with an increasing

potential value and an increasing effort on the other hand. These steps are of special value for input due

to the fact that van der Kolk used a similar definition for contract management than that has been used

in this research.

4.1.5 The AberdeenGroup

Research reports of the AberdeenGroup (2003, 2006-I, 2006-II and 2007) describe the results of

researches under ‘best in class’ companies in the field of contract management and present a benchmark

report on contract management, benchmarking these companies. In order to assess the maturity level of

contract management in those researches several indicators for the level of maturity in contract

management were used:

• To what level standardized contract management processes and methods are used

• The level of automation of the contact management process

• Presence of a central contract management organization, responsible for all contracts

• Presence of a central electronic repository for all contracts

• The level of access to aggregated and detailed data extracted from contracts

• The capability to generate analysis reports on portfolio of contracts

• The implementation of a contract management IT solution provider

• Ability to analyze contract performance and risks

• The amount of systems and databases that vary across the organization

• Degree of policies and executive support

• Degree of internal stakeholder compliance

• Degree of contract visibility and compliance-tracking (monitoring)

• The place of contract management responsibility

• The organization maintains a lessons-learned and best practises database for use in future

projects and contracts.

All this input from literature, together with the help and input of Capgemini consultants and supervisors,

have resulted in a conceptual model. This conceptual model, or maturity model, will be tested in the

empirical part of this research. The conceptual model that will be tested in the empirical part is explained

in the next section.

32

4.2 The conceptual model

Just like the CMM, the CMMM© and the CCMS the maturity model of this research will also contain five

levels of maturity.

In consultation with Capgemini supervisors and using the input and feedback from experienced

Capgemini experts on the subject the following conceptual model is developed. It is also build up out of

five levels in maturity which are described below and consists out of five key process areas. The five

identified key process area are: Knowledge & data, process, system, monitoring and organization &

responsibility. The maturity model is shown in Figure 7 and below the key features of the five identified

levels in maturity are described, inspired by the provided input from the previous chapters of part II.

• Aware

An organization with this type of contract management is aware of the existence of contract management

processes and contract management supporting information technologies. Although there are no organization-

wide established basic contract management processes, some processes do exist and are used within the

organization. The processes however differ per department and are not transparent to other departments. Also

there is no special reason as to which contracts these processes are applied. Mostly informal processes are in

use. Organizational managers are not held responsible for any contracts and the management of contracts

mostly relies on individual performance.

• Visible

An organization with this type of contract management has established some basic contract management

processes. These processes however are only required on selected complex, critical or high-visibility contracts

meeting a certain amount (‘big contracts’). The contract management processes are not established throughout

the entire organization for every contract. Different contract management processes are used throughout the

organization but are transparent to other departments. There is no policy requiring the consistent use of

standard contract management processes other than the ‘big contracts’. Standard templates and central

depositories however are used throughout the organization; there is insight in the contracts and different

processes used.

• Control

In this type of contract management processes are implemented throughout the entire organization. Policies to

ensure internal, external and regulatory compliance are institutionalized. Standard procedures for corrective

action are implemented and operational. At this level senior management is responsible for the contract

management process.

• Integrated

In this type of contract management processes and systems are fully integrated with other organizational

processes and systems. Also sale contracts are integrated in the contract management system. Board is directly

involved in the integration and management of all systems and processes.

• Business optimization

An organization with this type of contract management is continuously improving all its processes which are

fully integrated. Also an organization with this type of contract management is always searching for

opportunities in the market. It can easily adapt and shift its contract in order to react to market opportunities.

33

Figure: 7 Conceptual model

1. Ad hoc

2. Visible

3. Control

4. Compliant

5. Business optimization

A. Knowledge & data

• Little or no standard

templates for contracts

• No central repository

• Little or no visibility or

overview

• Standard contract

templates

• A central repository

• Access and insight in

contract information

• Uniform contracts

• A digital central repository

• Ability to cross-report

through a portfolio of

contracts

• Digital repository

integrated with sales

contracts

• An up to date repository

• Easily and quickly to access

and alter contracts in order

to react to evolving market

conditions

B. Process

• Processes exist

• Ad hoc appliance

• Individual performance,

no integrated process

• Processes limited to

visibility

• Standard processes for

monitoring for “big”

contracts only

• Implementing standards

• Standard processes for

corrective action

• Process fully operational

and meeting or exceeding

expectations

• Quick alterations easily

made in process in order to

react to new market

conditions

C. System

• No or little form of

automation

• Some manual systems in

use.

• Little automation

• manual systems

• Automated system in use

• Integrated with other

business systems

• Integration with sales

contracts

• A non-stop up to date

system

D. Monitoring

• No internal compliancy

policies

• Monitoring is not a

priority

• Much ‘maverick buying’

• Monitoring “big” contracts

only

• Internal and external

compliancy policies

• Corrective action

• Intensive monitoring

• Compliant with all policies,

agreements and

regulations in purchase

and sales contracts

• Market conditions and

business are being

monitored for contract

management opportunities

E. Organization &

responsibility

• No one responsible

• De-central organization

• Unstable situation relies

on ‘heroes’

• Operational management

responsible

• Clustered organization

• Senior management

responsible

• Centrally organized

• Board level responsibility

• Board level responsibility

34

5. The Empirical Research

This chapter describes the empirical research performed in order to test the definition of contract

management and the conceptual model, developed on the basis of the literature in chapter two, three

and four.

5.1 Research methodology

As stated in the introduction in chapter one, the strategy of this research is “case studies” by making use

of the research method “structured interviews”. Because of the fact that a case study strategy is most

suited for this research a sample of fifteen “cases” is selected. The qualitative research method of

structured interviewing is chosen in order to get more depth rather than width.

5.1.1 Selection of cases

For a case study approach, first the cases will have to be determined. As stated in the research strategy in

chapter one the research population is stock market listed or companies which have over a 1000

employees. In order to further specify this research population, the top 50 of largest Dutch companies

stated in the top 500 list on the www.FEMbusiness.nl (September, 2007) website are taken into account.

An ideal research population would be the entire top 50 list of large Dutch companies. Because of limited

time and the dependency of the willingness to participate of companies not all these fifty companies can

be interviewed. For that reason the list of the top 50 Dutch companies is compared with a list of

Capgemini clients. Since this research is conducted at Capgemini it is assumed that companies would be

more and more easily willing to cooperate with the support and help of Capgemini. Twenty clients of

Capgemini overlapped on the list of the top fifty potential companies to approach. With the help of

Capgemini account managers these companies are approached and fourteen indicated to be willing to

participate in the research. An exception however is made for ProRail which is number 84 on the

FEMbusiness list and was still included to the research population.

From the research sample four companies are in the utility sector (Eneco, Essent, KPN, Nuon) four in the

financial services (ABN Amro, Fortis, ING, Rabobank) and six in the product sector (Ahold, Akzo Nobel,

Campina, Friesland Foods, Heineken, Philips) and one in the travelling sector (ProRail). In this research

sample are three cooperative organizations, four semi-public companies and eight stock market listed

companies.

Assumed is that the list of participating companies is a representative sample of “large Dutch companies”

due to the diversity in company sectors and organizational structures.

35

5.1.2 The interview questionnaire

The selected cases are researched on the subject contract management by using structured interviews. A

questionnaire is developed in order to provide structure to the interviews and to test the conceptual

model. The conceptual model provided much of the input needed for the first initial questionnaire and

resulted in the list of questions stated in Appendix I.

In this first questionnaire the five identified areas in contract management in the conceptual model:

Knowledge & data, process, system, monitoring and organization & responsibility are clustered in:

System, process and people. Further all necessary questions are asked per category to fill in or determine

the position of the company in the conceptual model. Finally two general questions are stated to provide

some extra input and leave room for discussion. This was the questionnaire for the first pilot interview at

Ahold. The interviews and questions however have evolved and are different over time due to new

insights, an increasing understanding of the matter and an increase in the clarity of the aim of the

research. The questionnaire has matured together with the research. In appendix II the questionnaire

used for the last interview is showed and one can see the maturation process. If these two are compared

one can easily notice the shift from an attempt to fill in the maturity model for a company to a more

general interview with more focus on different visions on contract management, the definition and the

model as a concept rather than an attempt to fill it in. After more and more interviews the research came

to the perception that in an one hour interview it is not possible to get a good picture of the total

maturity in contract management of a company. There are too many factors of influence and what is

mature for one company, could be considered immature for another. Therefore the questionnaire

evolved to a list of questions with increasing focus on the vision of the interviewed on the subject and

definition of contract management and how a professional development model should look like.

The difference in the participators of the interviews have contributed to deviation in the interview

reports as well. Some interviewed stated a clear personal vision on the subject in an enthusiastic manner

and provided the research with many new insights. On the other hand there was often not enough time

to answer all the questions due to this enthusiasm of the participant. Other participants answered the

questions and did not share a personal vision on the subject.

5.2 Case studies

In the next sections the companies, or cases, will be shortly illustrated in chronological order of

interviewing. In the sections a description of the person(s) interviewed, general company information

and, if applicable, striking or contributing quotes out of the interview will be given. The interview reports

cannot be found in the appendices since these are confidential. The interview reports are submitted to

the scientific supervisors of this thesis. The two pilot interviews with Fortis and Ahold will not be dealt

with in this chapter since these interviews were merely used to test the questionnaire and did not

provide added value to the research results and conclusions. These reports are still submitted to the

supervisors and have contributed to the recommendations.

36

Rabobank

Interviewed:

• Manager Dienstketenmanagement

• Rabobank Nederland Shared Services & Facilities

• Category Manager Facilities

• Central procurement department (Rabo Concern Inkoop, RCI)

• Consultant

The Rabobank is a cooperative bank based on autonomous local banks in the Netherlands. Procurement

contracts over 50K€ are closed by the central procurement department RCI, this department is

responsible for about 1900 contracts. Due to the focus on core competences the Rabobank is increasingly

outsourcing and at the Shared Services & Facilities department more focus is put on contract

management. At the RCI however contract management is not a priority.

No clear definition for contract management is companywide implemented, but it roughly links the

tactical purchasing process to the operational purchasing process. According to interviewed nr. 1

procurement and contract management is not of much importance for a bank. “Contract management

needs to be optimized, not maximized”. According to interviewed nr. 3 on the other hand contract

management can always do better. One should always strive for the maximum in everything.

KPN

Interviewed:

• Senior controller

• Corporate Procurement Office Finance

KPN is a former public organization and is now a stock market listed company in the telephone, internet

and television services and products business. Recently procurement has been centralized in the

Corporate Procurement Office (CPO) and is set up with its own finance department. CPO is responsible

for contract management and has a total spend of € 2.6 billion divided over eight categories. In the

definition of the interviewed for contract management strategic purchasing is excluded, vendor rating

and ordering are included in the contract management scope. According to the interviewed contract

management is mature when all contracts are fully utilized. The level of maturity and what needs

monitoring is however dependent of the business a company is in. In some businesses availability is

important, in other businesses quality or price.

37

Philips

Interviewed:

• Contract Filer Manager

• Corporate Legal Department

Royal Philips Electronics is a stock market listed organization in the electronic products business. Philips

has approximately 123.800 employees in over more than 60 countries and a generated turnover of € 27

billion in 2007. The corporate legal department is responsible for about 50.000 contracts. The

interviewed states that it is important that contracts are prioritized. Some contracts need more attention

than, for example, the routine contracts. Contract management improvement is always possible but

should not be the only objective. For mature contract management it is important to find a balance

between costs, revenues and risks.

Heineken

Interviewed:

• Manager contract management

• Heineken Nederland Supply

Heineken is a stock market listed company in the product sector and the largest brewery of the

Netherlands. In the past no one was responsible for managing contracts but since the beginning of 2007

Heineken has been reorganizing the buying and supplying activities. Heineken Nederland Supply now has

its own contract management department responsible for managing the contracts. According to the

interviewed focus is on three main pillars at Heineken Nederland Supply: Availability, supplier

performance and cost savings. In total six people, together with the interviewed are fulltime equipped

with managing all procurement contracts for packing material.

ING

Interviewed:

• Head of contract services

• Operations & IT banking – Vendor management office

ING is a global stock market listed organization in the financial service sector. At ING Operations & IT

banking about 1000 contracts with a 1.8 billion spend are in scope of contract management. Until two or

three years ago contracts were not monitored or managed at ING, contracts were considered to be of

minor importance. The interviewed states that contract management is performed on two organizational

levels. A tactical level in contract management and an operational level. Contract management on a

tactical level would e.g. imply managing contract risks and relations. Operational contract management

would imply the implementation or transition in the business. The interviewed also states that companies

in the product sector should be leaders in purchasing, banks are followers since it is not part of their core

business.

38

ABN Amro

Interviewed:

• Regional Head of Procurement Operations

• Global procurement – Amsterdam London

ABN AMRO is a Dutch international bank with total assets of euro 1,025.2 billion (as at 31 December

2007). ABN AMRO was acquired by the Consortium of RBS, Fortis and Santander in October 2007 and its

various businesses are being divided among the three banks in line with their strategic priorities.

Procurement is geographical divided in four regions and these procurement regions are again divided in

department. One of these departments under procurement is operations and procurement which is

responsible for managing the contracts. Contracts are administered, implemented and monitored in

centrally, monitoring performance however is performed in the business. According to the interviewed,

in a business as usual situation “good” contract management is sufficient. In a merger or acquisition

situation a higher state of maturity is necessary.

Akzo Nobel

Interviewed:

• Director Global ICT Sourcing

• Global Information management group

Akzo Nobel is a stock market listed company in the products sector producing and supplying a wide range

of paints, coatings and specialty chemicals. Akzo Nobel has approximately 60.000 employees in eighty

countries and generated a € 14,4 billion revenue in 2007. The interviewed clearly states that contract

management is a multi level activity, contracts are not managed on one central level. On a strategic or

tactical level mostly master agreements are managed focusing on supplier relationship management and

new internal or external developments. Monitoring SLA’s however is done in the business on an

operational level. All these layers in contract management are in scope of contract management. “There

certainly is an optimum in contract management” according to the interviewed. This optimum should be

determined for every contract type. Contracts with a high business risk should be managed differently

than contracts for commodities. Contracts with high risk or business impact need more attention than

other contracts.

39

ProRail

Interviewed:

• Contract manager

• ICT Services

• Contracting Process leader

• Outsourcing, cost management & procurement (AKI)

ProRail is a former public organization responsible for the capacity, reliability and safety of all rail tracks

in the Netherlands. The interviewed nr. 1 is a contract manager for the ICT services and is responsible for

about 40 to 50 contracts. The interviewed nr. 2 is a process leader at AKI and AKI is responsible for all

contracts of the NS and ProRail which are about 300 contracts with a yearly spend of € 900 million. All

contracts are physically stored at AKI in hard-copy, no digital copies are made. All projects over € 50K

need to be tendered nationally and all projects over € 422K need to be tendered out on a European base

at ProRail.

Essent

Interviewed:

• Contract manager

• Corporate Legal Department

Essent is a Dutch semi-public organization in the utility sector. Since the interviewed is with the legal

department, his role in the contract management process is keeping insight in all contractual rights and

obligations. The corporate legal department is responsible for about 4.000 contracts. Multiple contract

repositories exist at Essent and all have different systems, processes and procedures. Essent is occupied

with implementing a new document management tool to support the contract management process. The

implementation stagnated before because of a threat of a merger with Nuon at the time. Now the

merger is off, the implementation of the tool continues.

Friesland Foods

Interviewed:

• Manager Corporate Supply Chain

• Corporate staff

Friesland Foods is a cooperative organization in the product sector and in possible merger process with

Campina. Friesland Foods processes approximately 6.9 billion kilograms of milk annually. In the

Netherlands, Friesland Foods purchased 5.3 billion kilograms of milk from 9,417 dairy farms owned by

members of Dairy cooperation Friesland Foods in 2007. The interviewed is the manager corporate supply

chain and is responsible for the full global procurement of Friesland Foods which is fully centralized. The

total spend under contract is € 3.3 billion. According to the interviewed the future for contract

40

management is a total cost of ownership approach integrating procurement and sales in the supply chain.

Also according to the interviewed, in contract management there is an optimum in the level of

management per product category.

Nuon

Interviewed:

• General Council – Legal

• Energy Sourcing

Nuon is a Dutch semi-public organization in the utility sector providing energy to over 2.5 million people

in the Netherlands, Belgium and Germany with a turnover of € 5.6 billion. Nuon energy sourcing is

responsible for about 1000 contracts and has 50 people to manage those contracts. A new document

management tool is now being implemented. The interviewed believes that there is an optimum in

contract management but in the future he foresees a total integration of the entire supply chain and

integration of procurement and sales contracts.

Campina

Interviewed:

• Secretary

• Legal department

Campina is a cooperative dairy organization in the product sector and is now in a possible merger process

with Friesland Foods. The definition of contract management at Campina is managing the contract

management process, starting at signing the contracts and it stops when the contract ends. In the in the

legal department approximately 1000 contracts are stored and managed, this are all contract with

exception of the milk contracts with the farmers and members of the Campina cooperation. According to

the interviewed it is important, from a legal department point of view, that contracts are traceable, can

be retrieved and are put in a well organized system.

41

Eneco

Interviewed:

• Lean six sigma Black Belt – Project manager

• Management

Eneco is a semi-public Dutch organization in the utility sector providing energy to 2 million customers.

Eneco is currently implementing a new contract management tool application of SAP in order to manage

the 600 or 700 procurement contracts at Eneco. Eneco uses a narrow scope in what it calls contract

management and excludes contract creation and monitoring of the contracts. This results in the fact that

three fte are sufficient to manage and register all contracts. According to the interviewed mature

contract management however starts at the initial need in the company. Mature contract management

will always repay itself, the only problem is that you’ll never be able to quantify the opportunity costs

since you will never know what savings are made by mature contract management and really

demonstrate this. Contract mismanagement can however result in major costs.

5.3 Case analyses

After every interview, every case and every expert consultation this research came to new insights. This is

an iterative analytical process in the researcher’s head, not possible to draw up in a formal schedule or

framework. Much is dependent on the researcher’s interpretation of all new information. All new insights

have however again been consulted with other experts every time and many adjustments and small steps

are made. This analytical iterative process finally resulted in the results, conclusions and

recommendations stated in next chapters. These results, conclusions and recommendations have again

been validated by the participants of the interviews, or research sample, in a presentation of the results

by the researcher, see next section.

5.4 Validation of results

After all the interviews a business lunch was organized where all participants of the interviews and all

consulted Capgemini experts were invited to reflect on the findings of this research. During this lunch the

researcher presented the results and conclusions of the research. During and after the presentation the

participants could reflect and comment on the presented research results. The feedback during and after

the presentation is briefly stated below and taken into account in the next chapters.

• There is indeed an optimum in the level of maturity in contract management and one should

make a business case to make the investment decision. You cannot rely on figures in reports, you

need to quantify the possible costs and cost savings.

• The total transaction costs go up as the maturity of contract management go up, but this is not a

linear relation. The slope decreases in the last phases.

• Next to a good system, discipline is crucial. A system does not work without discipline.

42

• It’s good to have a central database. But the management of the contracts should be as closely

to the business as possible. Sometimes however it pays to have local databases for contracts,e.g.

in case of a divestment of a business unit.

• Contracts should be lifted to their individual optimal level of management

• One can easily improve its contract management without having to implement a new system.

Optimizing people and process can also help improve one’s level of maturity in contract

management

• It is better to have one system for all your contracts

• The environment expects that the maturity of contract management at large corporate

companies is taken good care off. Good contract management contributes to the agility and

fitness of a company with quick decision making, efficiency and more profit as result.

Besides these remarks all participants were enthusiastic about the results and they all agreed upon and

recognized the research findings and conclusion.

After the presentation also two propositions were stated:

1. Contract management should be on corporate level.

2. An optimal level in contract management results directly in higher profits.

These propositions did not result in long discussions. All participants quickly agreed.

1. Contract management is a multi level activity and not a corporate activity. Every contract should

be managed on the appropriate level and as closely to the business as possible.

2. An optimal level does result in higher profits and less risks. But a good quantitative business case

is necessary to decide what the optimal level is, what steps need to be taken and calculate

possible profits.

43

6. Results and Conclusions

In this chapter the results and conclusions in relationship to the definition of contract management, the

maturity model and the contribution of the maturity model will be drawn. Next to that other findings of

this research will we stated in this chapter that are of importance to the cause of this research.

Results and conclusions are put into one chapter because of the iterative process of interviewing and

analyzing used in this research. No clear line can be distinguished in what are exactly results and what are

conclusions. Organizations have been interviewed and after these interviews the results have

immediately been analyzed. After ever analyses after every interview the questionnaire and the

conceptual model have again been slightly modified. So results were analyzed, conclusions were drawn

and again tested in the next interview in an iterative process. This is a process of many steps which

contributes to the final result but makes it impossible to describe every step.

This chapter attempts to answer the following questions which were stated in section 1.2.3.

• What is the definition used in large Dutch companies for contract management?




The chapter will start with the found activity in contract management. A high level of activity in contract

management was predicted in preliminary research and was one of the main causes for this research.

6.1 Contract management activity

“Contract management is on top of the CPO’s wish list for 2007”, this was the conclusion of a research

performed by Capgemini in 2006. This is in line with preceding research of the AberdeenGroup (2003)

who stated that 53% of the organizations consider contract management as a critical success factor to

the success of the organization and 84% of the companies find contract management very important or

critical to the success of their organization.

Those reports are again in line with the findings of this research. More than half of the companies

interviewed consider improvement of their contract management to be of high priority or are already in

process of improving their contract management, 13% recently finished improving, see Figure 8.

Identified reasons for recently improving contract management or giving contract management a high

priority in this research population are:

• Sudden awareness of lack in visibility and control

• Unwished-for tacit extension of a contract with relatively high business impact

• Recent threat of a merger, acquisition or big reorganisation.

• Demand from legal for more insight in rights and obligations

Figure: 8, % of companies improving their contract management (n=15)

Companies giving contract management a low or no priority declared to be laggers in the range of

procurement and contract management. Procurement and contract management is not a primary

business process, it has low risks and low business impact.

6.2 Definition of contract management

Defining contract management is a challenging task. The challenge lies within the issue that it can be

considered from multiple point of views, involves multiple stakeholders, is performed on multiple levels

in the organization and can be argued on scope. For that reason many different definitions of contract

management exist in different literature, different business cultures and within different organizations

In the literature research in section 3.2 different Dutch a

important differences between the two types of definitions were on scope. The American definition takes

sales and procurement contracts in scope where the Dutch definition merely focuses on procurement

contracts. Another difference was on the beginning in the contract management process where in the

Dutch definition the contract management process begins with contract creation and the American

definition starts earlier in scope.

The key elements distinguishing the Dutch definition from the American definition are confirmed in the

empirical research. The two key elements distinguishing the Dutch definition from the American

definition are: The difference between sales and procurement contracts against only procur

contracts in the Dutch definition and the beginning of the contract management process. T

elements distinguishing the Dutch

fifteen participating cases.

0

No priority

High priority or in process

Recently improved

Demand from legal for more insight in rights and obligations

% of companies improving their contract management (n=15)



business process, it has low risks and low business impact.

Definition of contract management



zation and can be argued on scope. For that reason many different definitions of contract

management exist in different literature, different business cultures and within different organizations

In the literature research in section 3.2 different Dutch and American definitions are stated. The most



. Another difference was on the beginning in the contract management process where in the


the Dutch definition from the American definition are confirmed in the

The two key elements distinguishing the Dutch definition from the American

definition are: The difference between sales and procurement contracts against only procur

contracts in the Dutch definition and the beginning of the contract management process. T

elements distinguishing the Dutch definition from the American definition were found in thirteen of the

0 10 20 30 40 50

44





zation and can be argued on scope. For that reason many different definitions of contract

management exist in different literature, different business cultures and within different organizations.

nd American definitions are stated. The most



. Another difference was on the beginning in the contract management process where in the


the Dutch definition from the American definition are confirmed in the

The two key elements distinguishing the Dutch definition from the American

definition are: The difference between sales and procurement contracts against only procurement

contracts in the Dutch definition and the beginning of the contract management process. The two key

definition from the American definition were found in thirteen of the

60

In one case contract management entailed a focus on the availability of materials as well which can be

considered as an element of the American definition. In the second

used as well, including sales contracts, but still different

were used.

The found definitions in literature do

complete. The participating organizations were asked what their definition of and point o

contract management was. In the next

management found in this research

6.2.1 A multi-level activity

Contracts are managed on different levels within the organization, contract m

interpreted as a multi-level activity.

“Contract Management is executed on a tactical level as well as on an operational level. Tactical

contract management entails managing risk

management entails the transition in the business

“contract management differs per level. Management of a master agreement aims at relation

management and keeping up with internal and external developments.

operational. All these levels however are within the scope of contract

Based on the interviews it is concluded that t

business on an operational level. S

performances, managing risks and mak

contract management. The core of contract manage

management is to have good communication and a good information flow between these two

organizational levels in contract management, see

Figure: 9 The information flows between the operational and tactical level in contract management

tract management entailed a focus on the availability of materials as well which can be

considered as an element of the American definition. In the second case a more American scope was

s well, including sales contracts, but still different repositories for sales and procurement contracts

The found definitions in literature do not cover all aspects of contract management and are

The participating organizations were asked what their definition of and point o

n the next sections other contributing points of v

in this research are stated.

level activity

Contracts are managed on different levels within the organization, contract m

level activity. Some examples of translated interview quotes are:

Contract Management is executed on a tactical level as well as on an operational level. Tactical

contract management entails managing risk profiles, milestones and financial risks, operational contract

management entails the transition in the business”

contract management differs per level. Management of a master agreement aims at relation

management and keeping up with internal and external developments. Management of a SLA is

All these levels however are within the scope of contract management”

Based on the interviews it is concluded that the monitoring of KPI’s and SLA’s is performed in the

el. Steering on the basis of contracts, providing feedback to the supplier on

performances, managing risks and making the end/extend decision are made on a tactical level in

contract management. The core of contract management and a key feature of professional


management, see Figure 9.

between the operational and tactical level in contract management

45

tract management entailed a focus on the availability of materials as well which can be

more American scope was

repositories for sales and procurement contracts

ts of contract management and are therefore not

The participating organizations were asked what their definition of and point of view on

points of view on contract

Contracts are managed on different levels within the organization, contract management can be

Some examples of translated interview quotes are:

Contract Management is executed on a tactical level as well as on an operational level. Tactical level in

inancial risks, operational contract

contract management differs per level. Management of a master agreement aims at relation

Management of a SLA is

he monitoring of KPI’s and SLA’s is performed in the

teering on the basis of contracts, providing feedback to the supplier on

ing the end/extend decision are made on a tactical level in

ment and a key feature of professional contract


between the operational and tactical level in contract management

The operational level in the contract management process involves

• Maintaining overview and insight

• Using the contracts, ordering

• Monitoring the agreed SLA’s and KPI’s in the contract.

• Maintaining overview in contract spends

• Identifying and communicating the upcoming needs of the business. For example monitor

expiration dates in contracts before it terminates.

This information is communicated to the tactical organizational level in contract management

use the information to steer and react to contract performances. The tactical organizational level in

contract management provides the operational level with contracts, make

the end/extend decision on an existing contract. This in

• Contract creation/implementation, not only creating the contract but also communicating the

existence of a new contract or new agreements to the operational level.

• Supplier relationship management, rating vendors and providin

• Managing risks related to contracts

• End/extend contract decision making

• Specifying needs, needs are identified on the operational level but specified on a tactical level in

contract management.

In this point of view, the core of contract management is the communication between the tactical and

operational level. Replacing the oval representing

Capgemini in Figure 3 in chapter 3.2 with

flows in contract management and the definition of contract management as a whole. S

Figure 10. Contract management

ract management process involves:

Maintaining overview and insight by registering the contracts in a database.

Using the contracts, ordering

Monitoring the agreed SLA’s and KPI’s in the contract.

Maintaining overview in contract spends

Identifying and communicating the upcoming needs of the business. For example monitor

expiration dates in contracts before it terminates.

This information is communicated to the tactical organizational level in contract management


the operational level with contracts, makes new agreements or make

the end/extend decision on an existing contract. This involves the following aspects:

Contract creation/implementation, not only creating the contract but also communicating the

existence of a new contract or new agreements to the operational level.

Supplier relationship management, rating vendors and providing feedback.

Managing risks related to contracts

End/extend contract decision making

Specifying needs, needs are identified on the operational level but specified on a tactical level in

he core of contract management is the communication between the tactical and

operational level. Replacing the oval representing contract management in the procurement model of

3 in chapter 3.2 with Figure 9 makes a more complete picture

and the definition of contract management as a whole. S

46

by registering the contracts in a database.

Identifying and communicating the upcoming needs of the business. For example monitoring the

This information is communicated to the tactical organizational level in contract management which can


new agreements or makes

Contract creation/implementation, not only creating the contract but also communicating the

Specifying needs, needs are identified on the operational level but specified on a tactical level in

he core of contract management is the communication between the tactical and

contract management in the procurement model of

makes a more complete picture of the information

and the definition of contract management as a whole. See Figure 10.

47

6.2.2 The contract management process

Several steps in contract management are identified in the different cases, some of them however are

still arguable and differ in different definitions and scopes:

• Creation

The creation of the contract is arguable to have in scope of contract management. In some definitions

and in some organizations, contract creation is part of the tactical purchasing process. For this research

contract creation is in scope in the definition of contract management. Uniformly created contracts and

the use of standard clauses contribute to the visibility and quick overview in contracts.

• Approval

The contract must be signed and approved by the right authorized people in the organization

• Registration

From the tactical level in contract management the contract is implemented and registered in a database

or repository in the operational level in contract management.

• Implementation / order

Ordering of the contract is arguable to have in scope of contract management. Implementation is in

scope of contract management but the actual ordering and using the contract is sometimes also seen as

part of the procurement order cycle.

• Monitor

While ordering from the contracts the contracts are also being monitored. Contracts can be monitored

on several aspects but most important are the SLA’s KPI’s and spend.

• End/extend

With the help of the information delivered by monitoring the contract an termination or extension of the

contract decision is made.

In Figure 11 the steps in the contract management process are visualized, again as the linking pin

between the strategic sourcing cycle and the procurement order cycle.

Figure: 11 The contract management process cycle linking the strategic and operational procurement

cycle

The two organizational levels in contract management can also

management process cycle. The three steps on

approval can be seen as the tactical level in contract m

circle: Registration, implementation and monitor ca

management. The bridge between approval and registration is

and the bridge between monitor and extend/terminate

contract performance and needs etc.

6.2.3 Multiple stakeholders

When thinking and writing about the definition of contract management it is also important to keep in

mind the different stakeholders in an organization. All

benefit from professional contract management. This research identified

contract management in and out of the

supplier, to the business they can all benefit from professional or mature

benefits of mature contract management for several stakeholders are listed below

Figure 12:

• The board

The board can profit by mature contract

insight and transparency in roles, responsibilities and value of all contracts gives the organization more

agility and readiness to respond. Another benefit for the CFO is that it can easi

good insight in all contract spends and moreover out of contract spend.

• Supplier

Suppliers benefit by good contract management because agreements are made clear, good feedback is

provided and all payments are on time.


The two organizational levels in contract management can also slightly be distinguished in this contract

rocess cycle. The three steps on the left side of the circle: End/extend

approval can be seen as the tactical level in contract management and the three steps on

: Registration, implementation and monitor can be seen as the operational level in contract

management. The bridge between approval and registration is then the communication of the contract

and the bridge between monitor and extend/terminate can be interpreted as the communication of

mance and needs etc. wherefrom the end/extend decision will follow

6.2.3 Multiple stakeholders


mind the different stakeholders in an organization. All these different stakeholders are related to and

benefit from professional contract management. This research identified several stakeholders involved in

contract management in and out of the organization. Ranging from the organization’s board

they can all benefit from professional or mature contract management.

benefits of mature contract management for several stakeholders are listed below

The board can profit by mature contract management if central visibility in all contracts is provided. Good


agility and readiness to respond. Another benefit for the CFO is that it can easily monitor all its costs by

good insight in all contract spends and moreover out of contract spend.


provided and all payments are on time.

48


be distinguished in this contract

side of the circle: End/extend, creation and

anagement and the three steps on the right of the

operational level in contract

the communication of the contract

the communication of

wherefrom the end/extend decision will follow.


these different stakeholders are related to and

al stakeholders involved in

organization. Ranging from the organization’s board, to a

contract management. The

benefits of mature contract management for several stakeholders are listed below and visualized in

management if central visibility in all contracts is provided. Good


ly monitor all its costs by


• Stockholders and press

With mature contract management it is less likely to make mistakes and the organization is more in

control. This is good for the organization’s reputation, will satisfy stockholders and generate positive

news in the media.

• Legal department

The legal department befits by mature contract management by always having insight in the most

current versions of contracts and better insight in upcoming rights and obligations.

• The business

The business benefits by mature contract management by

well implemented contracts.

• Purchasing department

The purchasing departments is provided with clear information about the performances of all contracts

and suppliers.

Figure 12: Contract management involves




current versions of contracts and better insight in upcoming rights and obligations.

The business benefits by mature contract management by clear insight in all made agreements due to


Figure 12: Contract management involves multiple stakeholders

49




clear insight in all made agreements due to


50

6.3 Contract management and the maturity model

After answering the first research question in the previous section, this section focuses on the next two

research questions.




To answer these research questions, the conceptual research model presented in section 4.2 was tested

in the empirical part of this research. In order to give some key determining elements of the empirical

research, several quotes from the interviews have been selected, translated and stated below.

“Every product category needs a different approach, another level of maturity”

“There is a point where more maturation is not profitable any more”

“A good contract management system is expensive. It is difficult to foresee the prevented costs by a good

contract system, but probably is doesn’t always repay itself”

“For mature contract management it is important to find a balance between costs, revenues and risks”

On the other hand, one interviewed clearly stated:

“Good contract management will always repay itself”

Concluding from the interviews in the empirical research, the answer to the last two research questions

of this research is that contract management does not mature as a maturity model implies, as was

assumed at the beginning of this research. The interviews in the empirical research clearly state that

there is an optimum in contract management. A maturity model was presented as the conceptual model

of this research. But a maturity model implies that maturing is always better and a good maturity model

can help an organization get to the highest level of maturity. See the definition of Garret and Rendon

(2005).

“It should describe an evolutionary roadmap an organization would pursue in improving its contract

management from an ad hoc (immature) process to a continuously improved, or, optimized (mature)

process” (Garrett and Rendon, 2005)

The conclusion of this research is that it is not always better to be more mature and for that reason a

maturity model does not apply. There is an optimal level in contract management.

51

7. Discussion

Since the conclusion is that a maturity model does not apply, the discussion will attempt to come up with

an alternative model and will attempts to still reach the second part of the objective stated in section

1.2.1.

• Make a contribution to the consulting activities of Capgemini Netherlands B.V. and contribute to

the professional contract management development of large Dutch companies.

From all the information gathered in the empirical research in combination with the literature research

and the conceptual model this research can still make a contribution to the professional contract

management development of large Dutch companies. Reaching back to the literature the optimal level

can possibly be found in the transaction costs theory with the help of quality management theory which

was not discussed in the literature part. This is demonstrated in section 7.1. Next, the identified factors of

influence on the optimal level, identified in the empirical part of this research, are stated and shortly

explained in section 7.2. Finally in section 7.3 two possible models to help identify the optimal level in

contract management are demonstrated for both the previously identified organizational levels in


7.1 Transaction costs vs. opportunity costs

In neo-classical economy perfect information is assumed and prices coordinate the market and economy.

Perfect information for both parties however is often not available. Different economics have thought

about this and came up with different theories and papers about issues related to imperfect information.

The agency theory describes two actors: The principal and the agent, the principal hires the agent to

perform a certain action. The theory is founded on two presumptions: In the relationship between

principal and agent there is a conflict of interest, wherein the agent has different interests than the

principal. The second presumption is that the principal is not able to see the agent’s actions, so there is a

lack of information. The agent is closer on the subject and therefore has an information advantage. The

result of this incomplete and asymmetrical information distribution is inefficiency. Both have different

interests and have different information which will lead to inefficiency. The challenge to overcome this

problem is to design a contract on the basis of different interests and incomplete information which

would give the right incentives to the right agent to do exactly what the principal would want him to do

and this way stop his opportunistic behavior (Anderlini and Felli, 1998).

In order to overcome this problem contracts are put up to make clear agreements about the trade and

the levels of quality, performance and service. Price and quality negotiations, putting up long contracts to

prevent opportunistic behavior and monitoring all these agreements cost time and effort for both the

principal and the agent (transaction costs). It is in the interest of both principal and agent to reduce the

transaction costs as much as possible and come to a mutual agreement quickly. On the other hand there

is also the importance of making clear agreements and monitoring those agreements to overcome

opportunistic behavior by the agent (opportunity costs).

This theory is also applicable in contract management. An optimal level in maturity can be identified

where the opportunity costs meet the transaction costs in contract management. This same principle is

demonstrated by Juran et el. (1962) in the quality control handbo

product quality against the costs that can arise when quality fails. He doesn’t strive for full 100 % quality

but defines an optimum level of quality where the costs of quality and the costs that can arise from

failure meet. This same principal is applied in

Opportunity costs arise in contract management due to the opportunistic behavior of the supplier and

people inside the organization: e.g. maverick buying, tacit

to SLA’s or KPI’s. Transaction costs however arise due to extensive monitoring of agreements, keeping

overview and insight in all contractual agreements, supplier relationship management, training people in

contract management and managing the involved risks. On the basis of the amount of opportunity costs

involved in managing contracts, an optimal level in maturity and the additional transa

determined, see Figure 13.

Figure 13 The optimal level in contract management maturity

The dotted lines in Figure 13 represent

management. The full black line represents the growing transactions costs plotted against the growing

level of maturity. These lines however are hypothetical and not quantified. It only helps to v

research finding that different contracts and

More mature is not always better.

7.2 Factors of influence on the optimal level

Different factors are of influence on the amount of oppor

purchasing. These factors are therefore of influence on the optimal level of maturity in contract

management and the matching transaction costs

optimal level of maturity in contract management on the operational level in contract management and

on the tactical level in contract management in the organization

research.

demonstrated by Juran et el. (1962) in the quality control handbook wherein he plots the costs of



. This same principal is applied in Figure 13 for the transaction costs and opportunity costs


people inside the organization: e.g. maverick buying, tacit continuation of contracts and non



ract management and managing the involved risks. On the basis of the amount of opportunity costs

involved in managing contracts, an optimal level in maturity and the additional transa

l in contract management maturity

represent the lowering opportunity costs due to more mature contract


level of maturity. These lines however are hypothetical and not quantified. It only helps to v

research finding that different contracts and organizations have different optimal levels of maturity.

More mature is not always better.

7.2 Factors of influence on the optimal level

Different factors are of influence on the amount of opportunity costs that can occur in contract


and the matching transaction costs. Described below are the factors of influence on the

turity in contract management on the operational level in contract management and

on the tactical level in contract management in the organization identified in the empirical part of this

52

ok wherein he plots the costs of



13 for the transaction costs and opportunity costs.


continuation of contracts and non-compliance



ract management and managing the involved risks. On the basis of the amount of opportunity costs

involved in managing contracts, an optimal level in maturity and the additional transaction costs can be

the lowering opportunity costs due to more mature contract


level of maturity. These lines however are hypothetical and not quantified. It only helps to visualize the

have different optimal levels of maturity.

tunity costs that can occur in contract


. Described below are the factors of influence on the

turity in contract management on the operational level in contract management and

identified in the empirical part of this

53

7.2.1 Amount of contracts

A growing amount of contracts makes it more challenging to maintain overview and compliance in all

contractual agreements, contract performances and internal compliance. This automatically makes

staying in control of your contracts and maintaining low opportunity costs more challenging. With more

contracts, more focus should be on implementing a good system, standard processes, transparency and

well trained people to help staying in control of your contracts. This again will lead to high total

transaction costs, but can eventually contribute to low transaction costs per contract.

7.2.2 Total spend under contract

The absolute amount of opportunity costs that can occur in contract purchasing are directly related to

the total spend under contract, because the savings are often in a percentage. With more spend under

contract a higher level in maturity in contract management will sooner be cost-effective.

7.2.3 A national organization vs. an international organization

Keeping overview in all contractual agreements in an international organization, with international

contracts and foreign business units, is much more challenging and more important compared to a

national organization. An international organization will much more perceive the effects of international

political instability in other countries. In those situations it is key to have quick insight in all contracts

related to that region of the world in order to reduce opportunity costs.

Another aspect of international organizations are the presence of international contracts. Monitoring

these types of contracts can ask for more effort in terms of different currencies and international law and

trading agreements. Not monitoring on these aspects in international contracts can cause major

opportunity costs.

7.2.4 Threat of a merger, acquisition or other major reorganization

During these types of threats it is more of interest to keep clear overview in all agreements, roles,

responsibilities and the value of contracts than it would be in a “business as usual” environment. Mature

contract management supports the decisiveness and agility of an organization to help get the most out of

a merger or acquisition situation. Stated below is a quote from one of the interviews:

“In a business as usual situation “good” contract management is sufficient. In a merger or acquisition

situation a higher state of maturity is necessary”

7.2.5 Interface with primary business process

Procurement contracts that directly relate to the primary business process experience a higher impact on

the core business of an organization. Cost savings can be made in the secondary business process, but the

biggest risks and impacts for the organization are in the primary business process. A more direct

relationship with this primary business process automatically implies higher opportunity costs. A more

mature level in contract management is therefore more cost

procurement is more related to the primary business process.

7.2.6 Position in the “Kraljic matrix”

Closely related to the previous factor of influence is the place of the individual contract in the

matrix. This factor is the primary factor of influence on the optimal level of maturity on the tactical level

in contract management. The Kraljic m

purchase categories: Commodities, leverage products, bottlenecks and strategic products with all

different levels of business impact and supply risk. As the business impact and the supply risk goes up,

the optimal level in contract management should go up.

Figure: 14 Growing maturity in tactical contract management in the

One individual procurement contract responsible for purchasing a commodity i

level than a contract related to a large innovative project impacting the entire business.

Managing a commodity contract implies monitoring: SLA’s, KPI’s, spend and the expiration date of the

contract. The relation with the supplier however is a transactional relationship based on d

financial transactions with perhaps a periodical vendor rating meeting. The maturity of the tactical level

in contract management is low, there is no risk management or extensive supplier relationship

management involved or necessary. The oppor

management and the related transaction costs.

A contract related to a large innovative project, a strategic product, on the other hand needs operational

management as monitoring of SLA’s, KPI’s and

transaction based. More personal involvement in a contract results in higher transaction costs, but is

mature level in contract management is therefore more cost-effective in business segments where

procurement is more related to the primary business process.

Position in the “Kraljic matrix”

Closely related to the previous factor of influence is the place of the individual contract in the


in contract management. The Kraljic matrix is shown in Figure 14. It identifies four different types of



el in contract management should go up.

Growing maturity in tactical contract management in the “Kraljic” matrix

One individual procurement contract responsible for purchasing a commodity is managed on another

to a large innovative project impacting the entire business.


contract. The relation with the supplier however is a transactional relationship based on d



management involved or necessary. The opportunity costs are low and so are the maturity of tactical

management and the related transaction costs.


management as monitoring of SLA’s, KPI’s and spend as well but is much more personal rather than


54

effective in business segments where

Closely related to the previous factor of influence is the place of the individual contract in the “Kraljic”


It identifies four different types of



s managed on another

to a large innovative project impacting the entire business.


contract. The relation with the supplier however is a transactional relationship based on delivery and



tunity costs are low and so are the maturity of tactical


spend as well but is much more personal rather than


55

cost-effective if opportunity costs are just as high. One strategic contract can easily be managed by ten

managers and one manager can easily manage a hundred commodity contracts.

The same goes for leverage products and bottlenecks. Higher opportunity costs make higher transaction

costs due to more mature contract management on a tactical level cost-effective.

7.2.7 Other factors of influence

Finding the optimal level of maturity in contract management can however not only be explained by the

preliminary factors. Maybe all factors are not identified in this research and other, less-rational, factors

also play a part in determining the optimal level in contract management. These non or less-rational

factors can be: company culture, structure or ambitions. These factors are sometimes less rational or

relatable to opportunity and transaction cost, but are still of major influence on the optimal level of

maturity in contract management. No general assumptions however can be made on the basis of these

factors.

7.3 The contract management development models

In this section the contract management models to help find the optimal level are issued. They will not be

called maturity models but contract management development models because a maturity model implies

one must grow to the highest level in maturity. Part of the objective of this research was to help large

Dutch companies in developing their contract management. These models can possibly help them with

their development in contract management and help them identify and develop towards the optimal

level. That is the reason why they will be called the operational and tactical contract management

development models.

In the first part the contract management development model for the operational level is explained and

in the second part the contract management development model for the tactical organizational level in

contract management is explained.

56

7.3.1 Operational level

The model is shown in Figure: 15, key features of all levels are stated below.

• Aware

This is the lowest level of maturity. In this level of maturity the people in the organization are only aware

of the fact that contracts need management, but are not managing them. There are no standard

processes, no one is responsible and contracts are individually created and stored everywhere in the

organization without any overview in contractual agreements.

• Basic

In this level of maturity a start has been made in implementing standard processes. These processes

however are still fragmented and applied on an ad hoc basis. Responsibilities are still not clear and

transparent. Contracts are centrally stored in a paper format. Contracts are reported upon in a reactive

manner from signals from out the business.

• Visible

In this level of maturity a document management tool is implemented to keep overview in contracts. All

contracts are scanned and accessible by the right authorization, but can still be clustered through the

organization. Further in this level of maturity standard processes are implemented but not monitored

and always followed, mostly only in case of “big” contracts. Manual reports of contracts are made in a

proactive manner. Responsibilities are clear but not fully transparent throughout the organization.

• Control

The key difference with level three is that implemented standard processes are also monitored and

followed. Roles and responsibilities are trained, clear and transparent on all levels. One document

management tool is centrally implemented and can provide alerts on expiration dates for all contracts.

Reports are made up periodically on contracts on spend, KPI’s and SLA’s.

• Integrated

Key issue over control is the integration of all systems and processes in the supply chain in the contract

management process. For example sales, finance, stock management and production can be linked to the

contract management system and processes. A special contract management tool is implemented which

makes it possible to automatically report on spend KPI’s and SLA’s.

57

Figure: 15

1. Aware 2. Basic 3. Visible 4. Control 5. Integrated

Process

No standard processes exist

Based on individual efforts and

performance

No monitoring of internal or

external compliance

No contract reporting

Diversity of fragmented processes

exist

Ad hoc appliance of standard

processes

Ad hoc monitoring based on

individual effort

Reactive reporting on signals from

out the business

Standard procedures are

documented, but not always

followed

KPI’s and SLA’s implemented but

not always monitored, “big”

contracts only.

Policies for internal compliance

exist, but are not always

followed or monitored

Ad hoc pro active manual

reporting

Standard processes described ,

trained and followed

Consistent monitoring of all SLA’s

and KPI’s

Policies for internal compliance

are being monitored.

Proactive periodical manual

reporting on spend, KPI’s and

SLA’s

All processes in the supply chain

are linked , clear and integrated.

Automatic periodical reporting on

spend, budgets, KPI’s and SLA’s

Monitoring of internal compliance

automated

People

No one responsible

Individual efforts, relies on heroes.

Individual responsibilities,

functions and tasks are not

transparent

Unstable situation relies on

‘heroes’

Contract owners assigned,

Roles and responsibilities are

transparent, but not on all levels.

Tasks and responsibilities are

communicated but not trained

Clear roles and responsibilities

on all levels

Trainings implemented for

contract management roles and

tasks

Senior management responsible.

System

No specific application for

registering contracts

Contracts are everywhere in the

organization

No visibility or overview

Only central visibility in paper

contracts, no digital contracts

available

Contracts are scanned and put in

a document management tool.

Clustered contract databases

throughout the company

A document management tool

with additional alerts on

expiration dates implemented

One contract database for the

entire company

Company wide web-based contract

management tool in use with

alerts on multiple milestones (e.g.

Spend, budgets) integrated with

other ERP systems in the

organization.

58

7.3.2 Tactical level

There were little or no questions in the interviews related to the tactical contract management process in

the different companies, still the observations and remarks made related to the tactical contract

management process were noted. The model is build up the same way as the development model for

contract management on an operational level with again process, people and system as three different

aspects in contract management and five levels of maturity.

• Tacit

In this level of maturity little attention is paid to contracts. Most are tacitly extended and often lost in the

organization. New contracts are individually created and implemented.

• Reactive

Paper contracts are centrally stored and retraceable. Feedback to the supplier is reactive from signals

from the business and managed in the business. Contract implementation process is still fragmented and

not clear. Little use of standard templates for contract creation.

• Managed

When the contract expires the contract is evaluated on the basis of the contract and supplier

performances. Feedback is provided and there is a professional relationship with the supplier. For every

contract a contract owner is assigned. The system provides digital insight in all contracts. Standard

templates are available and used for some contract categories.

• Proactive

Contracts are proactively managed and standard procedures for contract implementation are trained and

followed. Best practises and lessons learned are being documented. The contract is managed by senior

management and there is a intensive relationship with the supplier. The system is providing a weighing

system for the evaluation of offers, supports making risk profiles and provides uniform standard

templates for contract creation.

• Integrated

There is a collaborative business partner relationship with the supplier and a cross functional team

approach together with the supplier for monitoring agreements. The system automatically reports on

contract performances, supports the bidding process and supports contract creation with the help of

(preapproved) clauses.

59

Figure: 16

1. Tacit 2. Reactive 3. Managed 4. Proactive 5. Integrated

Process Tacit extension of contract

No feedback to the supplier

Contract implementation is an

individual effort.

No serious new negotiations

when contract expires

Reactive feedback to supplier on

performance

Fragmented process for contract

implementation exists.

Contract is again negotiated on

the basis of contract performance

when contract expires

Feedback is provided to the

supplier

Standard procedure for contract

implementation exist, but not

always followed

Proactive steering on supplier and

contract performance

Standard procedures for contract

implementation trained and followed

Documentation of best practises and

lessons learned

A team approach together with supplier in

monitoring contract obligations and

performances

People No relationship with supplier

Contract not managed

Normal professional relationship

with supplier

Contract managed in the

business.

Professional relationship with

supplier

Contract owner assigned

Contract managed by middle

management

Intensive personal relationship with

supplier.

Contract managed by senior

management

Use of company risk profiles

Collaborative business partner

relationship with shared responsibilities

and risks

Cross functional contract management

teams

System No system

All contracts are made up

individually

Paper contract is retraceable

Standard templates available for

some contract types, but not

always used

Digital insight in contractual

agreements

Standard templates available and

used for some contract categories

Weighing system in use for evaluation

of offers

A system to help make risk profiles of

different suppliers

Uniform standard templates in use for

all contracts

Automatic reporting on spend, KPI’s and

SLA’s

A paperless system to support the bidding

process

Standard clauses available in system.

Automatic contract creation

60

7.4 Limitations

The research sample used for this research were all clients of Capgemini. The measured high level of

activity in contract management could have a relation with being a Capgemini clients. In some of the

cases Capgemini recently consulted in implementing a new contract management system.

There is no formal model or framework used for analyzing the cases. This was an iterative process in the

head of the researcher and the interpretation of the researcher could have influenced the outcome. Also

none of the interviews were recorded which makes the results less traceable and reliable.

61

8. Recommendations

This chapter deals with the recommendations this research wants to make to Capgemini and large Dutch

companies. During the interviews in the empirical research many best practises of different organization

were identified. Best practises are used to describe the process of developing and following a standard

“best” way of doing things. These “best practices” on the other hand don’t automatically apply to every

organization and can be considered more as a tip from another organization. By sharing these best

practises organizations can help each other in their professional development in contract management.

In the other sections of this chapter expected future trends in contract management found in this

research are described. The last section deals with possible topics for future research.

8.1 Best practices

8.1.1 Process

– Prioritize what needs monitoring

Dependant of the risks involved and the business impact of a contract prioritize what needs more and

what needs less monitoring. Routine contracts for example need less monitoring compared to contracts

with a high business impact or supply risk. Some contracts can easily be managed in the business, others

need corporate involvement. Find the right organizational level for management in the company for every

contract.

– Good communication between the tactical level and the operational level in contract

management

Well implemented processes for communication are the core of mature contract management. Standard

processes need to be in place for implementing a contract in the operations and standard processes need

to be in place for providing feedback on the contract performances back to the tactical level in contract

management. If this is not done right the tactical level will not have any information to steer upon, and

the operational level will have no contracts or will not know that it has contracts.

– Use templates to streamline contracting cycles

Where possible, use templates to streamline contracting cycles, minimize risk and maximize compliance.

An example found in one of the companies interviewed is the use of a standard data sheet for

communicating a new contract to the business with only the relevant information needed in the

operations on it. Specially developed systems are developed to support this process.

– Transparency

Transparent communication, clear information and clear expectations between all business units and

regions of the company and also transparency towards the suppliers are important in mature contract

management.

62

– Funnel towards catalogue or procurement department

Catalogues and e-ordering systems lead requesters directly to the right catalogue or otherwise to the

relevant procurer or procedure. The ease of ordering offered by catalogues is a very effective weapon. In

addition, employees are directed to the right channels (procurement) when products are not in the

catalogues.

– No purchase order, no pay

Return invoices without the right purchase order back to the supplier. This way suppliers will direct the

internal customers in the use of the right processes and the right contracts. This is considered to be an

effective weapon against maverick buying.

– Measure the savings made

Measure savings made by mature contract management and share the (positive) results with all

stakeholders involved. This will help create a platform for contract management processes and will help

discipline and motivation.

8.1.2 People

– Short lines in the internal organization

Since contract management is a multi level activity, short lines can help ensure clear and quick

communication between the relevant stakeholders which is necessary for good contract management.

– Clear roles and responsibilities

Uniform alignment of roles and responsibilities, supported by trainings, are crucial in contract

management. Every person involved in contract management must know his role and responsibility and

should be well trained. Appoint process owners and contract owners and make them responsible for good

execution of processes and contract implementation.

– Build towards a constructive relationship with suppliers

A constructive relationship with suppliers make communication lines shorter and feedback easier. This

helps steering and making you in control of your contracts.

– Provide trainings to help implement processes and systems

For clear roles and responsibilities it is important to train the people involved in their new role and for

using the system. Trainings are also a good way of communicating new procedures or systems.

– Discipline

Discipline is often mentioned as an important factor to keep the systems up to date and make contract

management work. Too often the system gets the blame, but it’s the people working with the system.

Also during the implementation phase of a new system, discipline is an important factor. KPI’s for internal

compliance and sanctions for non-compliance can be a solution.

63

– Involve all relevant stakeholders

Early and frequent involvement of all cross-functional stakeholders is important for implementation of a

contract management system or process. It also helps define the right requirements for a system and it

speeds system rollout and adoption. Possible stakeholders are (board level) senior management,

procurement (categories), IT, finance, the business, legal etc.

– Ensure proper executive and stakeholder support

Organizations must secure executive support for a contract management project. You need to have senior

buy-in, or the rest of the organization won’t follow.

8.1.3 System

– Create a central database

Creation of a central database can provide you with a clear overview in all your current contracts.

Managing the contracts however should be a local activity and should be as closely to the business as

possible. On the other hand, for quick divestment of a business unit a local database is much easier to

hive of.

– A good and supportive system

Over a certain amount of contracts a good and well supporting system is vital for managing contracts.

– Uniform use of systems for good quality of information

A uniform use of the system is necessary to maintain a consistent quality of the information in the system.

One should prevent getting a “polluted” system with much irrelevant information in it.

– Keep it clear

Define detailed functional requirements for a contract management solution –and stick to them. Don’t

get carried away with all options a contract management tool can provide. Particularly in case of a large

global company with a global central repository containing ten thousands of contracts a simple reliable

system and simple but effective processes can be considered to be the best practise. In a local company

with 500 to a 1000 contracts for example a more sophisticated system with more options could be

beneficial.

– Create a compelling business case with both benefit and crisis

Audit internal contract management processes, systems, and controls before investing in a contract

management solution. A good business case should also help you find the optimal level of maturity in


– Step-by-step build up into systems

By first setting up processes and then automating these step by step, employees become familiar with

new methods of working, without great changes.

64

8.2 Future trends

The spend under contract in organizations is continuously growing. Companies are focusing on their core

competences and many non core activities are more and more being outsourced to either low-wage

countries or specialized organizations. As a result of this form of globalization and outsourcing trend,

procurement and contract management will play an important role in future business and organizations.

An expected result of the increase in outsourcing is an increase in the use of preferred suppliers in a long

term relationship. The tiered relationships with preferred suppliers will result in a more integrated

organization of contract management. This will again have less but more complex contracts as a result.

A negative counter side of this development is that it will become more difficult for small suppliers to

survive.

Another result of further integration of organizations is further integration with the sell side in the

organization. Already in the U.S. contract management is as much managing procurement contracts as it

is managing sales contracts. Further streamlining of sales and procurement activities in the supply chain

and thinking in terms of total cost of ownership is an expected future development in the Netherlands.

8.3 Future research

For future research this research can give some suggestions:

• Testing the contract management development models as a new conceptual model.

• Test and work out the identified factors of influence.

• Possibly identifying more factors of influence on the optimal level of contract management.

• Quantifying the transaction costs and opportunity costs related to the optimal level in contract

management.

• Applying the contract management development models in a large Dutch organization in order to

identify the optimal level in contract management and quantify the related cost savings.

More research on contract management will be necessary in the future since contract management is

evolving in definition and will continue to grow in management priority.

65

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Rooks, G (2002). Contract en Conflict Strategisch Management van Inkooptransacties. Proefschrift

Sekaran U. (2003). Research Methods for Business A Skill Building Approach. Fourth edition, John Wiley

& Sons inc. Carbondale p. 227

Van Dale (2005). Groot woordenboek van de Nederlandse taal. ’s-Hertogenbosch

Verschuren P. & H. Doorewaard (2001). Het ontwerpen van een onderzoek. Derde druk, Publisher Lemma,

Utrecht, Netherlands. - ISBN: 90 5189 886

Weele van, A. (2001). Inkoop in strategisch perspectief 4e druk, Kluwer Den haag p. 29

Williamson, O. E. (1981). The Economics of Organizations: The Transaction Cost Approach. American

Journal of Sociology 87(3): 548-577.

Williamson, O. E. (1975). Markets and Hierarchies Analysis and Antitrust Implications. New York: Free

Press.

Williamson, O. E. (1985). The Economic Institutions of Capitalism. New York: Free Press.

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Websites

Wikipedia.org:

http://en.wikipedia.org/wiki/Agency_theory (September 2007)

http://en.wikipedia.org/wiki/Contract (September 2007)

http://en.wikipedia.org/wiki/Capability_Maturity_Model (September 2007)

Economischebegrippen.nl:

http://www.economische-begrippen.nl/pqrs.htm#principaalagenttheorie (September 2007)

FEMbusiness.nl

http://www.fembusiness.nl/bedrijven.html?WT.srch=1&gclid=CP3m3vuRspMCFQQluwodU1traw

(September 2007)

Ketens-netwerken.nl:

http://www.ketens-netwerken.nl/Pages/Begrippen.html (August 2007)

Knowledgeleader.com:

http://www.knowledgeleader.com/KnowledgeLeader/Content.nsf/Web+Content/ML_CMM

(September 2007)

Managementsite.nl

http://www.managementsite.nl/250/Supply-Chain-Contractmanagement.aspx (July 2007)

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Appendix I: Initial questionnaire

System

kennis & data

Wordt er bij de contract creatie gebruik gemaakt van standaard contract templates?

* Standaard teksten

* Standaard vanuit IT applicatie

Waar is de opslag van contracten?

* Is deze centraal, decentraal of geclusterd?

Hoe is de opslag van contracten geregeld?

* Is deze volledig digitaal?

* Is de eventuele centrale opslag geïntegreerd met verkoop?

* Welke gegevens worden er eventueel digitaal opgeslagen?

In welke mate is er inzicht in de huidige lopende contracten?

* Zijn er overzichten van de lopende contracten (afloop, duur, omvang)?

* Is er voor iedereen inzicht, of slechts voor enkelen?

Hoe snel zijn contracten te vinden, wijzigen of implementeren?

* Zou ik zo ieder willekeurig contract in kunnen kijken?

Is er ook een database voor 'lessons learned' en/of 'best practises'?

In hoeverre geven systemen transparantie, inzicht en mogelijkheden om te

consolideren/rapporteren binnen een portfolio van contracten?

Process

monitoring

Hoe zijn de processen voor contract management binnen de organisatie?

* Zijn deze processen hetzelfde geregeld door het hele bedrijf?

* Zijn eventueel verschillende processen wel transparant naar anderen?

Hoe wordt contractinformatie gelinkt naar het operationele inkoopproces?

In welke mate is er sprake van automatisatie in het CM proces?

* Hoe wordt bekend wanneer een contract afloopt?

* Welke contractinformatie wordt gemonitord in het automatisch systeem

* Hoe worden milestones in contracten bewaakt? Kwaliteit, volledigheid, verantwoordelijkheid

* Welke systemen zijn er nu in gebruik binnen het inkoop/cm proces

Zijn er standaard processen voor CM geïmplementeerd?

* Welke systemen worden er gebruikt om inzicht te krijgen in SLA's, aflooptermijnen etc.

* Op welke wijze wordt er ingegrepen bij het niet nakomen van contract afspraken?

* Hoe verloopt de terugkoppeling naar de leverancier?

* Hoe worden bepaalde 'milestones' in contracten gecommuniceerd?

* Welke processen zijn gestandaardiseerd?

In welke mate worden alle contracten actief bewaakt?

Zijn de CM processen geïntegreerd met verkoop?

Bestaan er ook processen ter verbetering van het huidige CM proces?

People

organisatie & verantwoordelijkheid

Waar is CM aangebracht in de organisatie?

Wie is er na het tekenen verantwoordelijk voor de naleving van het contract?

Is het CM centraal geregeld?

Is er een organisatiebreed ingezet beleid voor interne contract compliance

* In welke mate houden interne betrokkenen zich aan intern beleid mbt contracten?

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* Maken werknemers gebruik van de raam contracten? (maverick buying)

* Wordt er rekening gehouden met kortingen en bestelgroottes?

Worden er targets gesteld, is er een visie of een doel van bovenuit de organisatie?

Algemeen

Hoe is de organisatie door de jaren heen geëvolueerd op het gebied van CM

Best Practises

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Appendix II: Final questionnaire

Algemeen

A. Wat is binnen uw organisatie precies contract management?

* Door welke afdelingen loopt contract management allemaal?

* Welke aspecten vallen er wel en niet onder?

* Welke aspecten van contract management vallen onder welke afdeling?

B. Hoe groot is contract management binnen uw organisatie?

* Hoeveel contracten? (afdeling, global)

* Hoeveel FTE?

System

kennis & data

1. Wordt er bij de contract creatie gebruik gemaakt van standaard contract templates?

* Standaard teksten (juridisch)

* Standaard templates vanuit een IT applicatie

* In welke mate zijn de contracten uniform?

2. Waar en hoe liggen de contracten opgeslagen?

* Is dit centraal, decentraal, per afdeling of per niveau?

* Hoe liggen de contracten opgeslagen? digitaal, tool, gescand?

* Welke meta-data worden er ingevoerd en gebruikt om over te rapporteren?

3. Hoe worden de contracten gemonitord / bewaakt?

* Zijn er allerts, rapportages, dumps? Hoe vaak?

* Op welke aspecten worden er allemaal gemonitord, gerapporteerd of allerts gegeven?

* Hoe worden de milestones, afspraken, prijzen, kpi's en sla's in contracten bewaakt?

4. In welke mate is er inzicht in de huidige lopende contracten?

* Wie hebben er wel/niet inzicht in de contracten?

* Is er voldoende inzicht in de juiste contractgegevens bij een wisselende omgeving? (fusies, koerswijzigingen, politieke instabiliteit)

* Welke dwarsdoorsnede zou u nog wel willen zien die er nu nog niet zijn?

5. Is het contract management systeem gekoppeld aan andere systemen of processen?

* In welke mate is contract management gekoppeld aan bijvoorbeeld finance?

* Is er een link met verkoop?

* Is het contract management nog gekoppeld aan andere it systemen?

6. In welke mate wordt er aan het versiebeheer van contracten gedaan?

* Zijn alle contracten actueel?

* Op welke manier heeft u dit ingeregeld?

* Wat gebeurd er met het contract na beëindiging?

7. Is er ook een database voor 'lessons learned' en/of 'best practises'?

* Zodat deze weer gebruikt kunnen worden bij het afsluiten van andere contracten in de toekomst

Process

monitoring

8. Zijn er standaard processen ingeregeld binnen het bedrijf voor contract management?

* Voor welke zaken zijn standaard processen? (contract beeindiging/conflict/sla's)

* Op welke wijze wordt er bijvoorbeeld ingegrepen bij het niet nakomen van contract afspraken?

* Hoe verloopt de terugkoppeling naar bijvoorbeeld een leverancier?

* Zijn deze processen hetzelfde geregeld door het hele bedrijf?

* Zijn deze eventueel verschillende processen wel transparant naar andere bedrijfsonderdelen?

9. Hoe wordt het contract management proces gevolgd en gemonitord?

* Zijn daarvoor KPI's gedefinieerd? Spend under contract?

* Vanaf welk niveau in de organisatie wordt er gemonitord?

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10. Hoe wordt de informatie in het contract gelinkt naar het operationele inkoopproces?

11. Bestaan er ook contracten tussen de verschillende bedrijfsonderdelen?

* Worden deze ook gemonitord?

* Worden deze ook opgeslagen in hetzelfde systeem voor andere contracten?

* Wordt hier eenzelfde beleid op gevoerd?

12. Bestaan er ook processen ter continue verbetering van het CM proces?

People

organisatie & verantwoordelijkheid

13. Wie is er na het tekenen verantwoordelijk voor de naleving van het contract?

14. Is er een organisatiebreed ingezet beleid voor interne contract compliance

* In welke mate houden interne betrokkenen zich aan intern beleid mbt contracten?

* Maken werknemers gebruik van de raam contracten / preferred suppliers? (maverick buying)

* Hoe wordt mavirick buying tegen gegaan?

* Wordt er rekening gehouden met kortingen en bestelgroottes?

15. Worden er targets gesteld, is er een visie of een doel van bovenuit de organisatie?

* Wordt er gestuurd vanuit beleid?

* Wat zijn de gevolgen als je je niet houdt aan het beleid?

* Hoe wordt dit gecontroleerd?

Maturity model

C. Wat zijn volgens u de belangrijkste zaken die goed geregeld moeten zijn in een CM systeem of proces?

* Wat zijn voor u best practises of lessons learned in contract management?

D. Welke factoren maken voor u contract management meer of minder volwassen?

* Key maturity indicators

E. Hoe hoog schat u uw huidige volwassenheidsniveau in CM in?

* Hoe bent u op het huidige niveau van CM gekomen?

F. Wat is uw toekomstvisie voor contract management?

* Zijn er nog toekomstige ontwikkelingen relevant?

G. Gelooft u dat er een optimum is in contract management, of is volwassener altijd beter?

* Zijn er altijd meer kostenreducties te halen in cm, of wegen de kosten op een bepaald punt niet meer op tegen de baten?

Heeft u nog aanvullingen?

* Andere interessante mensen binnen het bedrijf?

Documents

Contract Management in the Netherlands - WUR