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Effective contract management is crucial for organisations seeking to optimise the value from their IT investments. Experience consistently indicates that companies with comprehensive contract management strategies and software can achieve cost savings of between 10-25% on their total contract spend, cut contract lifecycle time by half, reduce administrative overheads by 25-30%, and improve compliance by 50% or more. Furthermore, well-managed IT contracts can facilitate better supplier relationships, improve risk management, and increase business and innovation benefits.

Risks associated with poor contract management

Neglecting contract management continues to cost organisations up to 9% of their net income and can result in a range of significant negative outcomes for organisations. Here are some key examples:

• Cost overruns: In 2019, the contribution of poor vendor selection, inadequate contract oversight and contract scope changes during the rollout of a state public transport ticketing system in Australia led to cost overruns exceeding $AU750 million – almost double the initial budget.
• Delays: In May 2020, the UK Government awarded contracts to various companies, including contact tracing and testing services during the COVID-19 pandemic. The inefficient management and execution of the Test and Trace contracts negatively impacted the program’s effectiveness in controlling the spread of COVID-19, leading to criticism from the public, healthcare professionals, and opposition parties. The program’s shortcomings also contributed to the strain on the NHS and affected the overall response to the pandemic in the UK.
• Legal disputes: In 2019 an Australian state, and a major technology supplier went into dispute over a data breach. The breach, allegedly caused by vulnerabilities in the Service Provider’s cloud platform, sparked legal disputes over breach notification requirements, data security obligations, and potential financial damages.

IT contract management lifecycle – key considerations

To minimise the risks associated with poor contract management and maximise the value obtained from IT investments, procurement and sourcing professionals should consider the following key aspects throughout the contract lifecycle:

Before contract signature

Requirements analysis: Am I buying the right thing?

Thoroughly understanding and defining the organisation’s business needs and ensuring they are considered in supplier selection, and that they flow through to the scope of services defined in the contract is a core component of effective contract management. This involves understanding the organisation’s short- and long-term business strategy and IT strategy which should support the business’s operational and strategic goals and objectives, client market, KPIs and take advantage of emerging technology trends. Often this area does not receive the appropriate focus from procurement functions but is an important input to help identify and prioritise the specific IT services and/or products required now and into the future. This also enables effective evaluation of the potential suppliers’ capabilities and expertise, as well as their ability to innovate and continue to bring efficiencies or a competitive advantage to the organisation.

Contract drafting: Am I signing a contract that I can manage?

Developing flexible, well-structured, and modular IT contracts based on the type of services to be provided (e.g., managed services, Hardware/Software, Cloud, IT Professional Services) that outlines the rights and obligations of all parties will go a long way to avoid misunderstandings and potential disputes. This includes focusing on robust and unambiguous clauses for common contract issues that may arise, such as confidentiality, liability and indemnity, Intellectual Property (IP) rights, service levels and warranties, data protection and security, Force Majeure (including Pandemic events), payment terms, dispute resolution, contract renewal terms and termination provisions.

Supplier selection and due diligence: Am I contracting with the right supplier?

Selecting the right technology suppliers is essential. A Sourcing plan or strategy which is tailored to the organisation’s specific eco-system is a good place to start. A number of sourcing approaches could be dependent on the business requirements, governance and policy obligations, state of the market and timing for contract renewals. These can include a traditional multi-stage RFx approach or more agile sourcing approaches such as competitive dialogue/direct negotiation, Proof of Concept (PoC)/prototyping, and vendor hackathons. Use an evaluation plan to define both mandatory and scored weighted criteria and other risk criteria to evaluate potential suppliers. We recommend Evaluation Criteria that cover a holistic view of the product (and/or Service) and third-party suppliers based on factors such as company fundamentals, proven experience, capacity to deliver, case studies, product functional and non-functional requirements, delivery model, commercials, pricing and transition approach.

During the contract term

Once the contract has been established, the sourcing outcomes must continue to be achieved. The following elements are critical in maintaining or even improving contracted value and their successful delivery will depend on the maturity of the commercial function within the organisation.

• Strategic management is the most challenging aspect. If it is done correctly, it will enhance the long-term success of the contract and supplier relationship. This element is about ensuring the organisation defines and manages the value that it anticipates from the IT investment. This can include benchmarking, industry peer analysis, measuring innovation value and benefits tracking.
• Contract level management is important because it can provide an early warning system before issues arise. This aspect includes contract administration and records management, contract change management, contract governance and dispute management. A key consideration should be establishing or consolidating to a centralised enterprise accessible repository or system that stores all contracts, amendments and related materials pertinent to agreements. This can also include information on supplier contacts, location and profile and include or integrate financial systems for billing/invoicing.
• Supplier management may include the requirement for new organisational roles and/or teams such as Relationship Managers and Contract Managers. Focusing on the supplier relationship in day to day dealings and through procurements and negotiations allows for the opportunity for regular satisfaction check-ins and open conversations to be held early, allowing for corrective action before formal remediation is required.
• Risk management involves identifying and mitigating potential threats to and opportunities enabled by IT contracts and Technology suppliers. This also includes issues such as vendor concentration risk (lock-in to one or more third-party suppliers), regulatory compliance and potential disruptions to an organisation’s operations. Look at segmenting and managing suppliers based on risk profiles and conduct ongoing supplier due diligence activities (e.g. Financial Viability Assessments and ESG Assessments) for suppliers supporting critical processes or systems. Grouping suppliers across tiers allows for the holistic management of strategic and critical suppliers and helps to ensure efforts are aligned with key areas of risk.
• Performance management involves monitoring supplier performance to ensure the organisation receives the expected value from its IT investments over the initial term of the contract and beyond. This involves establishing and reporting on service levels, KPIs and conducting periodic reviews to assess suppliers’ compliance with contractual requirements, quality of delivery, customer satisfaction and any material changes (e.g., financial, operational, legal) in their risk profile. As service levels play an important part in the quality of delivery, the level of resourcing to deliver the contract obligations and the price of doing so, monitoring performance against expectations allows for resets as the environment changes.
• Financial management helps to ensure the costs of the contract are captured and managed over the lifecycle, within the agreed parameters and budgetary considerations. This should include invoice validation, spend analytics and optimisation and budget forecasting. Having a clear understanding of what the contract scope includes for the agreed price is the key to ensuring costs do not exceed the agreed envelope and allow for close scrutiny of change requests, particularly if the core services are well defined prior to signing.

Contract expiry preparation

Depending on the organisation’s regulatory and compliance environment, end of contract could necessitate a new procurement process. For contracts with extension options it is still important to think ahead, conduct analysis to ensure the on-going contract remains fit for purpose and delivers value. Any identified gaps can be taken forward as improvement opportunities for the supplier to address during the extension offer submission.

Renewal management involves evaluating the vendor’s performance over the initial or previous term of the contract and determining if renewal is beneficial. This should be considered 6-18 months prior to contract renewal (depending on contract complexity to allow consideration of alternative options).

Renewals or extensions can be run as mini-RFQs which allows for the same rigour as a sourcing process but with a lighter focus. Ensuring key elements of scope, performance, pricing and commercial terms are reconsidered ensures the contract and supplier relationship continues to deliver value for both parties.

• Transition management involves planning for the transition of services from incumbent/in-house provider to a new service provider (or to in-house staff) including transition in/out planning, knowledge transfer to ensure continuity of service after contract expires or is terminated.

In most cases, adequate planning does not occur, resulting in significant gaps in service delivery as well as costs to fill those gaps, which at times results in paying two suppliers. Planning should focus on how the organisation will deliver the change holistically rather than leaving the responsibility to the new and incumbent service providers.

• Continuous improvement is critically important and lessons learned from the contract and supplier experience should be documented to inform and improve future contract management practices.

Establishing a continuous improvement loop allows for lessons to be integrated into the commercial governance framework. At the very least they should be considered at each contract renewal or extension however there is no need to wait until the contract expires before improvements are discussed with the supplier.

Author: Marty Hunt