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The future of CONTRACTMANAGEMENT
OW2016 USER Conference
Jonathan Dutton Interim Sales & Marketing Director Open Windows
How it is changing and WHY … The Future of
Contract ManagementHow & why it’s changing
openwindows.com.au
Why does CONTRACT MANAGEMENT
feel so relevant today?
openwindows.com.au
‘Corporate Virtualisation’ 2013The refocus on CORE business
• Organisations now focus more on their point of difference
• Their CORE business, where they are experts, and where they need to succeed
• And, so, OUTSOURCE more, where they are not experts
• And become MORE dependent on their ‘external resources’ … their suppliers
Corporate VirtualisationA global study of
Cost Externalisation 2013
UK Research of 2,000 major GLOBAL firms …. . Average labour cost 12% Revenues (down 8% since 2009) . Average non-labour costs 70% Revenues (up 6% since 2009)
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• Open trade & free currencies
• Globalisation
• Better shipping & logistics
• Technology then the internet
• Specialisation
• Accounting pressures
• RISK management perceptions
• Low cost country sourcing differentials
• Tighter margins but higher profits
Corporate Virtualisation – WHY?
70%ASX200 spend
40-70% costs on 3rd party
goods & services
Others do things better/faster/
Cheaper/safer/greener
70%
openwindows.com.au
• Open trade & free currencies
• Globalisation
• Better shipping & logistics
• Technology then the internet
• Specialisation
• Accounting pressures
• RISK management perceptions
• Low cost country sourcing differentials
• Tighter margins but higher profits
Corporate Virtualisation – WHY?
70%ASX200 spend
40-70% costs on 3rd party
goods & services
Others do things better/faster/
Cheaper/safer/greener
70%
Local Councils
too …
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So, how are we doing at CONTRACT MANAGEMENT?
openwindows.com.au
Contract Management in the old days ….
Procurement Dept… does the deal
The Business… manages delivery… not so well usually
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Then P2P arrived ….
REQUSITION and RECEIPT
ORDER
INVOICE
Three different people sign-off
Three adjoined processes
Now central to all P2P systems
The backbone of good contract management
Request
Purchase
Pay
PROCESS
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Those EVIL Twins:
ERP & P2P
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Downstream Dramas …
• Late delivery … not just in time (JIT) but JTL or JSU
• Wrong delivery …
• … Doesn’t work
• Cost overruns & blow-outs
• Non-compliance
• Assumptions
• Disasters ….
• Variations
• DISPUTES
Cost Risk
Dis-benefits
ΧΧΧ
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Contract Management discipline is under-rated • Top THREE issue in PROCUREMENT for over a decade
• Benefit & utility start when the contract is signed
• Visibility on delivery and business benefits are key
• Direct supplier input … helps reporting & compliance
• An organisation’s style of CM can be distinctive
– The difference between success and failure …?
CONTRACT MANAGEMENT Where the “rubber hits the road”
DELIVERY
SCHEDULE
PROJECT MGT
COMPLIANCE
RELATIONSHIPS
INNOVATION
BUDGET
BENEFITS
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CONTRACT MANAGEMENTFIVE lessons from experience
1. The work starts when the CONTRACT is signed
2. SPECS are never tight enough : Always room for creep
3. It is difficult to foresee events months/years out, when the contract is forged : Assumptions are the mother of all stuff-ups …
4. Ultimately, the CONTRACT is trumped by the relationship
5. Process is the KEY to good contract management …
… and Automation enforces process, probity, compliance … as, increasingly, good procurement process & software, are indivisible.
openwindows.com.au
CONTRACT MANAGEMENTFIVE lessons from experience
1. The work starts when the CONTRACT is signed
2. SPECS are never tight enough : Always room for creep
3. It is difficult to foresee events months/years out, when the contract is forged : Assumptions are the mother of all stuff-ups …
4. Ultimately, the CONTRACT is trumped by the relationship
5. Process is the KEY to good contract management –
and Automation enforces process, probity, compliance … as, increasingly, good procurement process & software, are indivisible.
The key to success is GOOD management: Organisation Process Proactivity Diligence Timeliness
openwindows.com.au
CONTRACT MANAGEMENT Five Base principles
1. The work starts when the CONTRACT is signed
2. SPECS are never good enough
3. It is difficult to foresee events months/years out, when the contract is forged - as assumptions are the mother of all stuff-ups …
4. Ultimately, the CONTRACT is trumped by the relationship
5. Process is the KEY to good contract management –… and increasingly good procurement process & software are indivisible
The key to success is GOOD management: Organisation Process Diligence Proactivity Support Timeliness
Especially in THREE scenarios:1. Long term SERVICE contracts 2. DIRECT supply lines 3. Capital works PROJECTS
openwindows.com.au
CONTRACT MANAGEMENT Five Base principles
1. The work starts when the CONTRACT is signed
2. SPECS are never good enough
3. It is difficult to foresee events months/years out, when the contract is forged - as assumptions are the mother of all stuff-ups …
4. Ultimately, the CONTRACT is trumped by the relationship
5. Process is the KEY to good contract management –… and increasingly good procurement process & software are indivisible
The key to success is GOOD management: Organisation Process Diligence Proactivity Support Timeliness
Especially in THREE scenarios:1. Long term SERVICE contracts 2. DIRECT supply lines 3. Capital works PROJECTS
openwindows.com.au
CASE STUDY: Why LARGE projects blow-out
TEN common reasons why big capital projects often blow-out:
1. We don’t spec requirements in enough detail2. Thin business cases pass with too little challenge in the first place; and
demand unrealistic timescales 3. Up front Cost–Benefit analysis work is usually idealistic and best-case
orientated4. Our risk plans are inadequate, and sensitivity analysis often unrealistic5. We often meet the unexpected during major projects 6. We get too focussed on milestone dates and delays, and not on getting
it right7. Our teamwork and communications with suppliers could always be
better 8. We maintain an adversarial relationship with the prime contractor too
long into the project9. We are poor managers of resources ourselves, and often poor project
managers too 10. We make assumptions too often, and act as if they are facts
Source: The Buyers Blog www.pponline.com.au 28 Feb 2011
openwindows.com.au
CASE STUDY: Why LARGE projects blow-out
TEN common reasons why big capital projects often blow-out:
1. We don’t spec requirements in enough detail2. Thin business cases pass with too little challenge in the first place; and
demand unrealistic timescales 3. Up front Cost–Benefit analysis work is usually idealistic and best-case
orientated4. Our risk plans are inadequate, and sensitivity analysis often unrealistic5. We often meet the unexpected during major projects 6. We get too focussed on milestone dates and delays, and not on getting
it right7. Our teamwork and communications with suppliers could always be
better 8. We maintain an adversarial relationship with the prime contractor too
long into the project9. We are poor managers of resources ourselves, and often poor project
managers too 10. We make assumptions too often, and act as if they are facts
Source: The Buyers Blog www.pponline.com.au 28 Feb 2011
The conspiracy
ofoptimism
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The 12 best practices of contract management
Control Interact Adapt Plan
1. Ensure performance - set,
review, and monitor KPIs
2. Watch over the finances -
budgets, billing and
payment, total cost of
contract, and trends.
3. Record keep and report -
real-time audit trails and
reporting
4. Audit compliance - of both
parties to contractual
documents
5. Invest in the
relationship - strong
SRM at all levels
6. Orchestrate the CM
network - of your people
to act within the
contractual frame-work as
a cross-functional team
7. Handle disagreements
and disputes - prevent
and treat internally and
not through third parties
8. Gauge issues and
risks - ongoing
identification,
prioritisation,
tracking, and
resolution
9. Manage variations
-written, verbal, and
behaviour-based
(estoppel) variations
10. Forecast demand and
supply - business needs
and changes, provider
capabilities, etc.
11. Maintain market
intelligence - over your
providers and the market
as a whole (e.g. prices,
technology, market
conditions, standards)
12. Drive continuous
improvement - within
both parties and their
interfaces
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The benefits of goodCONTRACT MANAGEMENT …
• Specs work
• Risks reduce
• TCO reductions
• Teamwork improves
• Compliance strengthens
• Technical support expand
• Resolutions come much more easily
• Motivates suppliers’ staff to drive better service
• Supplier Relationship Management programmes develop
Innovation is a PRIZE of good
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Capturing Innovation - from the supply side
• Innovation is a prize of good SRM
• It is not a prize from good contract management
• INNOVATION is just “new ideas that work”
• Suppliers know their business – ask them for solutions, and they often have them …. but do they share?
• Much innovation comes from 2nd TIER suppliers
• INNOVATION is a source of competitive advantage
Innovation distinguishes between a leader and a follower
Steve Jobs
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But doesn’t good PROCUREMENT process
take care of CONTRACT MANAGEMENT
as well?
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HISTORY is not on Procurement’s side: Contract Management in the old days ….
Procurement Dept. The Business.
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Suppliers
Sub
contractors
Buyer
The supply value chain
‘Procurement really needs to do the simple stuff first;
and get it right’
DR NICO REINEKE, McKinsey & Co. & Professor at Wharton Business School, Penn. USA – Oct 2010
RIGHT kitRIGHT qualityRIGHT placeRIGHT timeRIGHT price…. The five rights
ERP
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A focus on Outcomes
Developing Strategic Options Managing Outcomes
Why What Specification How Tender Processing& Contract Award
Management
Source: CIPS Australia 2nd Annual PSPF Govt Conference 2006 - Paul Hopkins (Deputy Director-General Procurement) NSW Department of Commerce
Re
sou
rce
C
om
mit
me
nt A narrow view
of the Procurement Function
• Issue Request for Tenders
• Evaluate bids
• Award Contract
Valu
e
Procurement effort tends to focus on the middle bit – always
The 5 RIGHTS
openwindows.com.au
The procurement sourcing process
Source: PMMS Consulting Group/Arc Blue
contract management
openwindows.com.au
The procurement sourcing process
Source: PMMS Consulting Group/Arc Blue
contract management
openwindows.com.au
The procurement sourcing process
Source: PMMS Consulting Group/Arc Blue
contract management
openwindows.com.au
What does the future hold for CONTRACT MANAGEMENT?
openwindows.com.au
• More compliance
• More transparency
• More reliability
• More value
• More flexibility
• More responsible
• Less cost
• Less risk
• Faster service & changes
Corporate Virtualisation continues … Means organisations are more dependent on their external resource base
70%ASX200 spend
40-70% costs on 3rd party
goods & services
Better/faster/cheaper/Greener/safer
70%
openwindows.com.au
Other questions around the supply side …… presenting genuinely new challenges
• Cause related buying … Walk Free & Supply Nation
• The internet of things … buying only technology
• Ethical standards … extorting SUPERMARKET suppliers
• Market volatility … AUD/USD -30%, Oil -50%, Rouble -50%, Iron Ore –40%
• Technology … CLOUD, drones & 3D printing + BIG data
• Information … not just data, analytics and BIG data
• The rise of contract management … Benefits REALISATION
Saving money or creating VALUE?
openwindows.com.au
Modern procurement faces 4 BIG criticisms :
1. An unproductive fixation on cutting costs
2. Organisational isolation – no customer focus
3. Glacial processes
4. Acting without inquiry – not asking WHY?
Source: Proxima, in HBR 27th March 2014
UNALIGNED
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The potential of modern procurement
1. Define procurement’s role in your company Is it a process for savings – or a strategic contributor? What is value for you?
2. Link measures to business needsDefine objectives & measure innovation, customer benefits, risk mitigation; spending wisely not less
3. Ensure the broad capabilities to deliver are thereInvest in training, education, recruitment, talent, partnerships, systems, service, automation, relationships
4. Encourage procurement to welcome suppliersBuild SRM, be customer of choice, capture innovations, use your organisation’s external resources as critical partners for success
Source: Proxima HBR article 27 March 2014
Defining the PVP – the Procurement Value proposition
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IACCM viewpoint …. Research on THREE perspectives of three players -
1. The Suppliers’ perspective
2. The Enterprises’ viewpoint
3. Procurement’s mindset
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IACCM viewpoint of …. 1. The SUPPLIERS’ perspective – they see:
• Suppliers mostly see PROCUREMENT people as the enemy still – Internally, PROCUREMENT are seen as an obstacle
• Vendors are consolidating & specialising to meet demands– In Australia, oligopolies are even becoming duopolies & monopolies
• Pricing strategy is shifting, as suppliers recognise opportunity – From UNIT prices with discounts, to payment-by-results …
• Suppliers reactions are driving new skill needs for Procurement – More relationship orientated, EQ not IQ, Commercial not Buyers,
– Collaborative approach, driving outcomes not process, using judgement
– Increasingly time demanding
– Managing more attention to detail … not ‘HIRE and FORGET’
Suppliers are changing to adapt to buyers’ behaviour
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IACCM viewpoint of …. 2. The ORGANISATION’s perspective - they see:
• Organisations are disaggregating to become more flexible & agile– Smaller & more specialised is better – not bigger is better, aggregation suffers
– But does not mean absolving responsibility: You cannot outsource RISK
• Business relationships are becoming much more important – Delivery & cost less important: Risk, value, speed, brand reputation MORE so
• Capturing insight, creativity & innovation is especially prized – To generate competitive advantage …
• Suppliers ‘actions’ are driving new skill needs for PROCUREMENT – More relationship orientated, EQ not IQ, Collaborative approach
– Commercial not Buyers, driving outcomes not process, using judgement
– Time demanding and managing attention to detail … not ‘HIRE and FORGET’
Organisations are changing to adapt to changing needs, move faster and empower people not restrict them
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IACCM viewpoint of …. 3. PROCUREMENT’s perspective : Buyer’s think …
• Commoditisation is good, competition even better … – Minimise cost, maximise value, shift burden & risk to suppliers
• The control paradigm is key … – Process, policy, procedures, tenders, approvals, categories, commodities …
• Process is king, not relationships, and contracts are a lever … – To keep control, mandate ruthless objectivity and gain morale high-ground
• Demanding inclusion precludes need to earn relationships – Manage requisitions, promote licensing, cost-cut your way to greatness ….
– IQ not EQ, reducing cost is the priority, subservient ‘clients’ preferred
– A seat at the table by right … supported by licensing
But is buyers’ behaviour truly changing… yet?
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The real challenge for PROCUREMENT now … 1. Move the conversation beyond cost savings to VALUE
2. Invest in relationships & avoid organisational isolation
3. Make business decisions not purchase decisions
4. Resist total process, for commercial acumen
5. Speed up …
6. Recruit, train and embrace talent
7. Play fair and ethically and pay-up quick
8. Welcome suppliers and work with them
9. Source innovation and creativity not supply lines
10. Automate transactional procurement
openwindows.com.au
The real challenge for PROCUREMENT now … • Move the conversation beyond cost savings to VALUE
• Invest in relationships & avoid organisational isolation
• Make business decisions not purchase decisions
• Resist total process, for commercial acumen
• Speed up …
• Recruit, train and embrace talent
• Play fair and ethically and pay-up quick
• Welcome suppliers and work with them
• Source innovation and creativity not supply lines
Automation helps … … It saves time
… And enables talent… Let’s you refocus on strategy
openwindows.com.au
The Open Windows technology
MODULAR procurement systems are flexible
Cloud based SaaS or On-Premise private server platform
Fully integrated with all leading ERP and P2P systems
Highly secure systems with supreme data confidentiality
Quarterly new release cycles … 8am-5pm service line
Helps manage contracts – not just ‘oversee’ them
Reduces total cost, lowers RISK, strengthens compliance
Improves delivery reliability & supplier performance
Saves time, offers real-time audit trail, supplier inputs
Automation enables talent
Increasingly, good procurement process & software, are indivisible. NINE unique modules
Modular Procurement
openwindows.com.au
Introduction Jonathan Dutton FCIPSInterim Sales & Marketing Director
Open Windows
Jonathan Dutton was founding managing director of CIPSA, the peak body for procurement in the region. Since leaving CIPSA in 2013, Jonathan has worked as an independent management consultant. JD is currently working on several projects as well as Interim Sales and Marketing Director for Open Windows based in Melbourne. Full biography at www.jdconsultancy.com.au
. Thirty years in business management
. A BUYER and a SELLER …worked on both sides of the negotiating table
. Founding CEO of CIPSA 2004-13
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