Few companies are getting the value they deserve from their outsourcing agreements.
As this report demonstrates, companies of all shapes and sizes increasingly see outsourcing as a key growth driver. Yet, our experience suggests that few companies are getting the value they deserve from their outsourcing agreements. It’s time for a better approach to contract lifecycle management.
By Nicolaj Bruun, Director, KPMG Denmark and Anne Rechter, Senior Consultant, KPMG Denmark
When it comes to managing outsourcing agreements, most organisations are leaving significant value on the table. The problem is that few organisations take an active approach to managing their contract lifecycle. And, as a result, they are missing out on around 40 percent of the identified potential of the contracts.
Growing urgency for improved Contract Management
The need for better contract management is becoming more acute. Indeed, our study provides evidence of a high request for value-based and input-based contracting models. As value creation takes a more central role and assessing deliveries becomes more complicated, many organisations are starting to recognise the need for improved contract lifecycle management.
Our data also suggests that service providers may have the upper hand when it comes to contract lifecycle management. In fact, just 17 percent of the suppliers participating in our survey think their customers are better at contract lifecycle management than they are. 44 percent believe their capabilities outstrip those of their customers.
Focus on the lifecycle
Our experience indicates that most organisations place far too much focus on creating attractive contracts and not enough focus on managing the contract throughout its lifecycle. That means they are missing out on the value that could come from improving the way they conduct financial management, the management of contractual obligations, contract changes and supplier relationships.
In part, the challenge is one of ownership and awareness. In most organisations, outsourcing contracts are passed from procurement to legal and then on to the business unit. Nobody along the chain takes responsibility for ensuring the contracts are being maintained and managed.
Yet, building a strong contract management capability starts with having individuals that are dedicated to the discipline.
The challenge is also often complicated by scope. Most organisations maintain hundreds or thousands of contracts and subcontracts. According to our study, the scope of these continue to grow, and managing and monitoring each one through manual processes would be extraordinarily complex and time consuming. Thankfully, technology is rapidly solving that challenge.
Indeed, many of the companies we work with are already highly focused on adopting the right tools and technologies to enable the automation of many elements of contract lifecycle management. Many of the larger organisations have started to shift their various contracts into contract repositories. Some have also started to apply machine learning technologies in order to help them track changes in contracts and streamline the terms and conditions of more standardised contracts.
Use data to visualise contract execution
While the adoption of newer contract management tools is certainly helping organisations improve the value of some of their outsourcing relationships, we believe that more can be achieved by developing contract management ‘systems’ that allow organisations to draw data from multiple sources to achieve a much more granular view of how their contracts are being executed.
Consider, for example, the insights that could be gained by linking the contract repository to the ERP system. Similarly, linking contract repositories to the IT Service Management system would encourage alignment to contractual KPIs and value-based metrics. Centralising all contract-relevant information in a dashboard, providing decision makers with updated information on the financial, delivery-related and contractual status could provide a valuable tool to ensure that contract value is captured and managed throughout the entire contract lifecycle.
Delivering on the organisational agenda
With an increased focus on the value of the contracts, we believe that this is the optimal time for most organisations to be rethinking their approach to contract lifecycle management. For some, this may mean taking the rudimentary steps of developing contract management capabilities and implementing a contract repository. For others, this may require the adoption of new technologies such as machine learning and robotic process automation.
At the end of the day, it’s not just about the value that could be captured; it’s also about the innovation and agility that could be gained through more active contract management. And, in today’s customer-centric environment, innovation and agility are key. It’s time for a better approach to contract management.