CPM/U3 Topic 3 Contract Performance Management
Contractor Performance Management is a significant lever to add value to your company’s operations. Today, a significant portion of operating expenses is paid to externals such as suppliers and/or service providers (for simplicity called “contractors” in this post). Therefore, steering Contractor Performance by proactively managing the collaboration has a significant potential for improving service quality and reducing costs.
Contractors need to be managed carefully. Cooperation with external partners often comes with high expectations towards a growing number of contractors: they should, at the same time, reduce costs, increase flexibility, supply/provide services at highest possible service level, and bring in specialized know-how.
We observe that many companies struggle with managing their contractor portfolio; and many contractors fail to fulfill customer expectations. The reason is that Contractor Management is often understood as a procurement core discipline only. This approach neglects the fact that many more stakeholders, such as contract beneficiary and-owner as well as controlling and legal departments, need to be involved to ensure good performance and successful cooperation.
Choose the right Contractor
Companies manage a contractor portfolio. The portfolio’s setup, however, differs from company to company and depends on strategic aspects such as degree of vertical integration, differentiation of core and non-core businesses, supply chain risk management, agility requirements of resource planning and so forth. Three important topics set the ground for effective Contractor Management:
Supplier selection needs to fit the corporate strategy, meaning that selection criteria have to be set up accordingly: is the contractor capable of doing what I want him to do? Is the contractor big enough to react flexibly to unforeseen situations? Does the contractor fit my regional setup (local vs global)?
Very often a company has more than one contract in place with a contractor. Therefore, steering the contractor means dealing with all business relationships (contracts) in parallel. Supplier Relationship Management and supporting IT systems need to cope with this complexity. What makes this situation even more complex is the fact that companies in many industries often have an international footprint, dealing with global suppliers in al regional markets.
Contractors perform locally. Besides covering the global requirements of Supplier Relationship Management, it is also necessary to successfully steer the contractor locally. This means – in the most complex case- that global supplier governance needs to be ensured by local cooperation, whereas local information about day-to-day performance is required for global Performance Management.
How to manage the contract during its Life Cycle?
To manage Contractor Performance means to manage the Contract Life Cycle i.e.: Define Contract Strategy & Concepts, Create Contract, Negotiate Contract, Administrate Contract and Close-out Contract.
(i) Define Contract Strategy & Concepts
As explained above, contractor selection depends on corporate strategy, however, the contract itself should incorporate certain aspects that go beyond: clearly defined scope, detailed service strategy and performance oriented pricing including a bonus malus concept. Last but not least it is important to set up a business case based on reasonable demand planning. Firstly, it indicates the feasibility of successfully implementing the contract. Secondly, it leads to requirements towards a successful contract model and a target for price negotiations.
(ii) Create Contract
The contract defines the rules of cooperation with the contractor. The more clearly the cooperation mode is defined, the higher the chance that the contractor understands the mode of operation and performs accordingly. However, the contract itself includes aspects relevant for many stakeholders on the contract e.g. operations, procurement, legal, finance, taxes, top management. During the contract creation phase, it is crucial to include and manage this cross-functional cooperation successfully and set up a contract model fitting best to requirements while using proven standards to ensure efficiency.
(iii) Negotiate Contract
Negotiations should be based on a defined and commonly agreed negotiation strategy, which should be set up prior to each negotiation round as well as to each bidder negotiation. An excellent tool to support negotiation preparation is the “Negotiation Cook Book”. It summarizes the comprehensive bid analysis and interpretation in a manageable slide deck to pro-vide a full picture to the negotiation team. Nevertheless, all involved parties should actively participate in negotiations, clearly address their opinion according to their role and to the agreed negotiation strategy.
(iv) Administrate Contract
After selecting the contractor and making the contract operational, it is crucial to measure the contract performance based on selected KPIs and costs. In case that performance tends to appear below expectations, the contract manager should take immediate action, analyze the root causes of the issues and agree with the contractor on countermeasures. A link to a structured claim management has to be established.
(v) Close-out and Analyze Contract
Companies often neglect the fact that contracts expire and suddenly realize that they could be left without service provision/supply. Therefore, it is important to track expiry dates and to plan reasonable close-out activities in advance. This is the right time to learn from the cooperation model: derive an ex-post business case calculation, set up lessons learned workshops, draw conclusions for future contract standards and cooperation models, and restart to process for next life cycle early enough avoid delivery / service gaps.