Procurement contracts are overly complex and destroy any savings and value generated throughout your RFx/Sourcing process. Lucky for you, this is the area I like to nerd out in.
We will focus on three areas in this article where you can radically improve your contracts and realise an ROI in the contracting process whilst ensuring you obtain the value generated pre-signature.
A keen insight into this transformation comes from a recent World Commerce and Contracting report, The ROI of Contracting Excellence, which sheds light on some of the pragmatic approaches organisations can adopt to harness the full potential of their procurement contracts.
The first point is focused on the Simplification of Agreements. This explores how de-jargoning contracts and making them…well, simpler can speed up the agreement process, reduce performance risks, and enable better adherence to the evolving environmental, social, and governance principles. Not to mention everything else we need to worry about.
The second point, Clarity of Contracting Lifecycle, underscores the necessity of demystifying the contracting lifecycle to avoid costly delays and make informed, proactive decisions. In short, we’ll be covering how you move away from a reactionary method of working to a proactive way of working.
The final pivot, Portfolio Segmentation, discusses a systematic approach to categorising contracts based on their volume and risk profile, enabling a more focused and resource-efficient management across the contract portfolio. I’ve built a segmentation model for contracts that I’ll share later in this article.
The underpinning thread across these strategies is the reactive to proactive contract management shift. By simplifying, clarifying, and categorising contracts, organisations set the stage for immediate ROI and foster a conducive ecosystem for sustainable, value-driven procurement practices.
Simplification of Agreements
Procurement contracts are horrendous at times. I’ve had the displeasure of working through hundreds, perhaps thousands, of crappy contracts.
And ultimately, the issues boil down to the following pain points:
Complex language and legal jargon: Contracts often use complicated words that can be hard to understand. And this applies to legal pros such as lawyers and laypeople who do not understand the law. When the lawyers are confused, you know we have an issue.
Ambiguity and poorly structured agreements: If a contract isn’t clear or well-organised, it can lead to misunderstandings. This is a common problem with the structural element of a contractual document. The worst offenders can be online agreements linking to several (I’ve seen contracts link out to 10-40 different documents). Reading, reviewing, and then trying to negotiate is a nightmare.
Long approval times: The harder a contract is to understand, the longer it takes to get it approved.
Tested Language Orthodoxy: Some people stick to old ways of writing contracts because they think it’s safer, even if it’s hard to understand. Ken Adams, a wonderful legal pro who wrote this incredible book (#ad) that anyone who works with contracts should buy, is on a mission to simplify contracting. He focuses on the Tested Language, Orthodoxy, as it makes absolutely no sense. We should not rely on contract language brought to the courts for being unclear. We should rely on the contracts that avoided ambiguity and that were clear, that never made it to court.
I’ve had to deal with all of these. I’ve headed up Contract Management at a FinTech, and a Defence Consultancy, and led on several high-profile government contracts. Every issue I’ve ever had with them post-contract signature has usually boiled down to one of the above four points.
Improvement Measures:
Utilising plain language: Using simple, clear words makes contracts easier to understand. People overlook that you can use easy-to-understand language. It comes back to the point that Ken Adam’s makes. However, when I approached these projects, I worked with a Plain Language Expert (yes, they exist). I was initially sceptical, like others I worked with, but they are seriously good. It turns out you can make a contract much simpler that is legally binding.
Incorporating visual elements: Pictures, diagrams, and other visuals can help explain things better. However, I do want to caveat this point. This should never be done for the sake of it. Where it’s often useful is if there is a process, such as delivery or payment, and where each has multiple options.
User-centric design: Organising contracts with the reader in mind helps people find what they need faster. This is the quickest win for you. If you did this but didn’t change the language, it may be a huge improvement. I’d suggest sectioning your contracts into areas such as operations, payment, and legal and bundling all the relevant clauses under each. Think about it like this: if a finance stakeholder picked up the contract, we’d want them to be able to easily navigate the contract, find the payment piece, and understand it. This could be considered a moot point. As contract tech improves, extracting contract metadata may remove the need for this for many - but there will always be those that don’t have that tech…at least for the next decade.
Story time. In my first role as a Commercial Graduate, I got the holy grail project. I say that with pure joy and a dash of sarcasm. My project was to take a 200+ page contract that was used with small-medium businesses (SMBs) and simplify it. This was a personal project that the most senior MOD Commercial Leader/Director, and he wanted the contract to be no more than 2 pages and still de-risk the entire agreement.
I got it down to 6 pages.
And this contract, and variations of it, were rolled out across the Ministry of Defence. With my name rubber stamped on it as the joint author (I worked with the Head of IP - a legendary man who taught me so much).
The principles followed were similar to those that Elon Musk employs (I’ll be writing on this more soon).
Elon’s Algorithm, found in the book Elon Musk by Walter Isaacson #ad, that applies to this (points 1-3) are:
💡 1. Question every requirement. Each should come with the name of the person who made it. You should never accept that a requirement came from a department, such as from “the legal department” or “the safety department.” You need to know the name of the real person who made that requirement. Then you should question it, no matter how smart that person is. Requirements from smart people are the most dangerous because people are less likely to question them. Always do so, even if the requirement came from me. Then make the requirements less dumb.
💡 2. Delete any part or process you can. You may have to add them back later. In fact, if you do not end up adding back at least 10% of them, then you didn’t delete enough.
💡 3. Simplify and optimise. This should come after step two. A common mistake is to simplify and optimise a part of a process that should not exist.
I kid you not. I worked out every living person who wrote the clauses for the existing monolithic contract. And do you know what happened every time…?
Ken Adam’s called it.
The clauses were not written by them. It was precedence. And they used these clauses to stitch up a horrific Frankenstein monster of a contract.
I beat every clause up and deleted almost every clause…I actually had a one-pager for a while, but I had to add more back in to cover some risks that could not be ignored. We then rolled this out and continued to optimise and simplify it until I left.
It can be done, my friend - that is the message here.
ROI of simplifying contracts:
Reduced legal expenses: Simpler contracts can lower the costs of legal help. For one, you don’t need to involve legal in everything. Self-serve contracting becomes much easier with your procurement teams, and the legal gets to reap the benefits of dealing with the matters that truly need their attention.
Time efficiency: When contracts are easier to understand, they get approved faster. It sounds simple, and it really is this simple. However, we need to caveat this with the process, and we’ll cover that next.
Enhanced compliance: Clear contracts help everyone know what to do, reducing mistakes. When contract management is done well, it is done outside of legal and procurement. It is done by the relationship manager - the person who I call the contract manager. They’re usually the person who request the service or goods and deal with the supplier day-to-day. When contracts are clear, they can run them like an open-book contract, and that’s where things get sexy.
Clarity of Contracting Lifecycle
In any procurement process, a contract doesn’t just spring into existence, get signed, and then fulfil itself. It goes through a journey, from creation to negotiation, execution, and finally, closure. Understanding this journey, every phase, and how they interlink is crucial for smooth operations and making informed decisions.
Yet, this area is often neglected.
Pain Points:
Disconnect between different lifecycle phases: A contract’s journey comprises various phases, each with tasks, checks, and approvals. A disconnect, be it in understanding or execution between these phases, can result in missteps, delays, and, in some cases, financial losses.
I included a contract lifecycle process map in our last article, which you can find here. If you haven’t already, check out this article, and then return to this one. If your contract intake, review, and signature process is broken, then you’re likely going to mess this all up.
This might require a decent digital front door for your intake. We focused on Intake in our State of Procurement Tech Report - July 2023.
Lack of insight and analysis: The ability to glean insights from past contracts, assess the current ones, and plan for future agreements is pivotal. An absence of insight and analysis can lead to reactive decisions, often made under pressure and without fully understanding the implications.
Improvement Measures:
Lifecycle Mapping: Creating a clear, visual map of the contracting lifecycle, showing each phase, what it entails, and how it leads to the next can be a game-changer. This map should be easily accessible to everyone involved, ensuring a unified understanding and approach towards contract management. Use this lifecycle map to help you.
Utilisation of Analytical Tools: Technology has graced the procurement sector with tools capable of dissecting contracts to fetch valuable data. Whilst these are not as advanced as sales and marketing teams, these analytical tools can help identify patterns, measure performance, and predict potential roadblocks. By harnessing these tools, procurement professionals can make data-driven decisions that are proactive rather than reactive. But don’t underestimate the challenge of sourcing the right tech for your organisation. You will take many steps back if you screw this up and get the wrong tech solution.
However, analytical tools can measure those roadblocks/bottlenecks. These are a great way to identify the phases you need to re-work. It might be that you’ve got sequential approvals that take too much time away when you could actually have sent approvals at the same time to everyone.
It might be that you’re treating all of the contracts the same, and they are cluttering up an approver’s inbox (more on that soon).
In short, data tells you what is happening and where you should pay attention.
ROI Realisation:
Operational Efficiency: A well-oiled contracting lifecycle not only shortens the time between initiating and closing contracts but also minimises the room for errors. This efficiency can translate to cost savings and better vendor relationships.
Informed Decisions: With a clear understanding of each phase of the lifecycle and data at their fingertips, procurement pros can make informed decisions. This clarity can lead to better negotiation outcomes, risk mitigation, and a healthier bottom line.
Portfolio Segmentation
In the world of procurement, not all contracts are born equal. They vary in volume, value, and inherent risks, and treating them with a one-size-fits-all approach can be a recipe for inefficiency and potential pitfalls.
Segmentation of the contract portfolio allows for a tailored management approach, aligning resources and strategies with the unique characteristics and requirements of different contract segments.
You could pair this with your supplier segmentation model. The caveat to this is that you may still have complex agreements with suppliers that you're not concerned about from your supplier segmentation model but still need some level of oversight from a contractual angle.
So, let’s cover the segmentation model you could use.
Segmentation Criteria:
Volume of Contracts: The sheer number of contracts managed within a specific category can significantly impact the resources and strategies required for effective management.
Risk Level: Every contract carries a level of risk, be it financial, compliance-related, or concerning data privacy, among others. Assessing and understanding these risks is pivotal for effective contract management.
Segmentation Matrix:
High Volume, Low Risk (HVLr):
Examples: Routine procurements like office supplies or maintenance services fall into this quadrant.
Handling Approach: Procurement Self-Serve: Leverage automated procurement systems to orchestrate order placements, approvals, and renewals, minimising manual intervention.
Standardised Contracts: Employ standard contract templates to expedite and streamline the procurement process.
High Volume, High Risk (HVHr):
Examples: Complex and critical contracts such as IT contracts or software licenses.
Handling Approach: Dedicated Procurement Support: Entrust contract managers to helm the procurement processes, ensuring stringent compliance and securing optimal terms.
Regular Legal Review: Foster a regime of periodic review and risk assessment, engaging either in-house or outsourced legal counsel to navigate the legal intricacies, usually on Supplier terms, which adds complexity.
Low Volume, Low Risk (LVLr):
Examples: Sporadic engagements like occasional consulting services or one-off purchases.
Handling Approach: Ad-Hoc Procurement: Traverse through standard procurement processes with minimal dedicated support, addressing each contract as it arises.
Template-Based Agreements: Utilise basic contract templates to orchestrate agreements, with an optional legal review calibrated to the specific needs of each contract. Where possible, self-serve and push through.
Low Volume, High Risk (LVHr):
Examples: High-stakes contracts such as strategic partnerships or major project contracts.
Handling Approach: Dedicated Contract Manager: Commission dedicated contract managers to provide meticulous oversight and management, ensuring each contract aligns with the organisational goals pre-signature and the obligations are managed post-signature.
Comprehensive Legal Support: Engage seasoned legal counsel for an in-depth review, prudent negotiation, and robust risk mitigation, safeguarding the organisation’s interests. Legal to work closely with procurement throughout the life of the contract.
By plotting the volume of contracts against their risk level, we can categorise them into four distinct segments. This segmentation allows for a more focused and resource-efficient management approach for each segment.
Risk Weighting Matrix:
In the Risk Weighting Matrix:
The Risk Rating is on a scale of 1 to 5, with higher ratings indicating higher risk.
The Weighted Risk is obtained by multiplying the Risk Rating by the Weighting.
The Examples provide a context for the type of risk associated with each area.
You then need to decide how you risk rate the contract. The most risk-averse approach, or the most prudent, might be to suggest that a contract is considered “high risk” if any risk area is a weighted risk above 60%. And you work backwards from there.
This is here to get you thinking about this and to create a more prudent way of dealing with this. Usually, this is all based on gut feeling, and I don’t trust that when every person has a different gut.
You can use this and change the weightings, use different risk ratings (removing 3 in a 1-5 index is useful), and add new “Risk Areas” to make this work for you.
Process Guidelines:
Automation and Technology:
In this digital epoch, leveraging technology is no longer a luxury but a necessity. Only the Procurement Dinosaurs would suggest otherwise (rawwwrrrr). Especially in segments where the volume of contracts is high, automating routine processes via procurement technology can be a massive time-saver.
Moreover, contract management software isn’t just a repository for contracts but a potent tool for better oversight, compliance tracking, and deriving actionable analytics. It’s like having a vigilant sentinel that never sleeps, always keeping a close eye on the contractual landscape. At least some of the solutions are like that. I also like to think of it as something that works, whilst I’m not.
Training and Development:
Contracts can be a maze; without a well-trained team, navigating this maze can become a perilous journey. One that I’ve stepped into all too often armed with a wet piece of paper. Equipping procurement teams and contract managers with the requisite skills and knowledge is akin to having a well-drawn map through the maze. I still believe contract managers are the secret to highly functioning procurement teams.
Regular training on legal and compliance aspects isn’t just about avoiding missteps. It’s about empowering those handling high-risk contracts with the knowledge to negotiate better terms, understand the legal jargon, and ensure compliance. I’d recommend proper legal training occasionally, especially if there is a big regulatory change. That’s going to help you adapt your segmentation model under your wider risk profile in the business.
The problem here is that most legal content is a snooze fest.
I hope my content might be useful to your wider teams, and they can access this with a group subscription.
Performance Metrics and Analysis:
Establishing performance metrics is like having a well-calibrated compass. It helps assess different contract segments' efficiency, compliance, and value generation, ensuring we’re always on the right path.
A continuous evaluation and refinement of the segmentation model and associated processes, driven by analytics, is the key to staying ahead of potential issues and continuously improving the procurement process.
Only measure what is important to you; otherwise, you’ll end up with a horrendously large dashboard from which no one can get any meaning.
Supplier Engagement:
It’s not just about our internal processes but also about how we interact with our vendors. Fostering collaborative relationships, especially in high-risk segments, ensures a mutual understanding and alignment of expectations, which is crucial for the smooth execution of contracts.
Continuous Improvement:
The procurement landscape isn’t static; it’s a dynamic field where feedback is gold. Collecting feedback from all stakeholders - procurement teams, contract managers, legal counsel, or vendors - provides a rich source of insights for identifying areas ripe for improvement.
Moreover, a periodic review and update of the segmentation model and process guidelines ensure they remain relevant and adaptive to changing business needs and risk profiles. It’s about ensuring that our procurement process evolves, becoming better with each iteration.
Closing Thoughts
To anyone that has read all of this - thank you. I know it’s long. But sometimes length is required. I know that these strategies work. If I was going to focus on one, I’d focus on the process and then simplification. Segmentation of contracts is complex and can give you that final 5% improvement to make you world class.
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