In contract management, understanding the concepts of value leakage and value add is crucial for optimizing the benefits derived from contracts. For Arjen van Berkum, Chief Strategy Wizard at CATS CM®, value leakage is about organizational issues and value add is about seizing opportunity.
Here’s a breakdown of the differences:
Value leakage refers to the loss of potential benefits or value from a contract due to inefficiencies, oversights, or failures in managing the contract effectively. It has several causes.
– Operational disfunction: This occurs when there are breakdowns in processes, such as missed deadlines, non-compliance with terms, or poor communication among stakeholders.
– Lack of monitoring: Failing to regularly review and manage contract performance can lead to unnoticed deviations from agreed terms.
– Ineffective risk management: Not identifying or mitigating risks can result in unexpected costs or liabilities.
The impact of value leakage is often financial, but it can also affect relationships, reputation, and strategic goals. It represents missed opportunities to maximize the contract’s potential.
Value add in contract management refers to the proactive efforts that enhance the benefits and outcomes of a contract, going beyond the basic terms and conditions.
Now if you want to realize added value you should do:
– Proactiveness: Engaging actively with the contract lifecycle, from negotiation to execution and renewal, ensures that all potential benefits are realized.
– Innovate and improve: Looking for ways to improve processes, introduce efficiencies, or capitalize on new opportunities can create additional value.
– Cherish real partnerships: Building strong relationships with stakeholders and suppliers can lead to collaborative opportunities that enhance contract value.
Value add leads to improved financial outcomes, stronger partnerships, and strategic advantages. It transforms contract management from a reactive process to a strategic function that contributes to organizational success.
By focusing on minimizing value leakage and maximizing value add, contract managers can significantly enhance the effectiveness and profitability of their contracts.
Author: Arjen Van Berkum