Contract Management 101 - Why is it Important?

on Wednesday, October 27, 2010

Once a contract is executed and pricing is in place, sourcing professionals will often put the new agreement in a filing cabinet or pass it on to legal and move on to new projects. Time goes by and the contract gets lost in the shuffle, or the person who executed the agreement changes position or leaves the company and fails to transfer responsibility. The contract is forgotten about until the next time sourcing is discussed, or until the supplier calls and indicates the contract is set to expire next week and you will be placed onto a retail rate schedule if the agreement is not renewed by then. No one is in charge of keeping track of expiration dates or contractual obligations. In fact, in many organizations I work with, simply identifying the number and type of commercial commitments that exist can be a daunting task.

There are several reasons why buyers should keep good track of commercial commitments. If you are a publically traded company, the Sarbanes-Oxley Act passed by Congress in 2002 requires that signing officers of a company must certify they are responsible for establishing and maintaining internal controls when disclosing financial information, which makes them liable if financial information is incorrect. Without easily identifying the number and type of contracts in place, and the pricing and obligations tied to those agreements, signing officers cannot reasonably provide assurance that financial disclosures are in fact accurate and correct.

Beyond reporting to shareholders and complying with federal regulations, there are more obvious reasons why contract management is important for a sourcing professional. First, from time to time disputes may arise due to unclear scope of work or unfamiliarity with obligations. Having contracts handy and reviewing them periodically will ensure both you and the supplier are complying with all contractual obligations. Second, suppliers often fail to honor pricing commitments made in the agreement. If you do not have a copy of the contract readily available, it will become difficult to audit invoicing and verify the correct pricing is being charged.

Lastly and most importantly, contract expiration dates and renewal clauses should be closely reviewed and tracked so you can address renewals in a pro-active manner. Relying on the supplier to alert you of contract end dates puts the pressure on you for renewing the contract or falling back to retail or inflated rate schedules - this pressure works in favor of the supplier. Keeping track of end dates can help you plan sourcing initiatives and renewal strategies for the next contract term well in advance and without time constraints. Removing the pressure of time puts the leverage back in your favor, as you now have the bandwidth to request pricing and proposals from alternate suppliers, work internally to identify issues and new develop new requirements, and create a renewal based on changes in in your business needs and forecasts. Essentially, it gives you a chance to do your homework before reacting to a potential expiration.

Tracking expiration and renewal clauses can be as simple as creating a spreadsheet with start and end dates of contracts and other important terms and reviewing it on a regular basis, or putting a reminder on your calendar for the appropriate time. However, neither of those solutions will help if roles and responsibilities shift within your organization. More collaborative toolsets are available that can help you manage contracts. These tools allow you to setup rules to run reports on expiring contracts or receive emails indicating when contracts are due to expire. Some of these tools are freely available on the web, such as on WhyAbe.com (http://www.whyabe.com/contractindex.php); others may require a subscription fee. Regardless of how you track contractual obligations and contract expiration dates, contract management is essential to ensure your next sourcing initiative is as successful as your last.

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