With savings trending to zero over time in some categories, better contract management offers a new way to add real and lasting value, writes Jonathan Dutton.
Former premier of Victoria Jeff Kennett once declared at an industry event that “fundamentally, governments only do two things – make policy and let contracts.”
He then elaborated on the importance of good contract management – a topic he has sustained interest in as chairman of Open Windows Software, a provider of contract management automation, mostly to public sector clients.
In an aside during his speech, Mr Kennett added that governments traditionally weren’t that great at contract management. He saw it as an area of vulnerability, and opportunity too.
Organisationally, contract management has traditionally fallen under the responsibility of the procurement team. In the private sector there is no question on this. The idea that those who ‘created the need, serve the need’ drives the thinking and organisational responsibilities. And suppliers like this too.
Yet public sector culture sometimes assumes that contract management, like contracting, is almost a legal responsibility. This idea is sometimes prevalent in Canberra. But contracting is a commercial activity, and any legal input post-signature is a clear sign of supply side failure.
Of course, contract management work is only really required on long lead time supply lines. Within a public sector context this generally means the supply of ongoing services or capital projects. And this is where contract management’s great responsibility and great potential truly lies. Making things happen where the “rubber hits the road” and ensuring they happen in a complaint fashion.
This is a primary reason that contract management is gaining new respect. The other reason is that diminishing returns are increasingly apparent in procurement processes after so many years bagging savings for eager agencies.
To put it bluntly, there are only so many times you can go out to tender for the stationery contract and expect to generate meaningful savings. The seventh attempt, anyone?
Exacerbating the problem is the fact that Australia is a globally remote market of few suppliers – an oligopolistic market. And often, in the business-to-business landscape, we are buying from a duopoly or even a practical monopoly. Price movement rarely flows in such an environment, and certainly not at the seventh attempt.
So if procurement starts to struggle to make savings, when most addressable spend has been repeatedly addressed, what then is the role for procurement professionals? Why do we need them?
I believe that procurement’s role is to bring value. The difficulty is defining what exactly value is for your agency, because it differs by organisation. And over time, it changes. The challenge for procurement managers is to tune in to the corporate mission (in both public and private sectors) and to make sure their contribution is relevant, meaningful and measurable.
This means the focus may no longer be savings, as such. The value created may still be life cycle cost focused, or it could be risk management orientated, sustainability driven or even compliance or process driven. For that matter it could be innovation inspired, or even quality/service improvement tasked. Perhaps it’s using procurement as an instrument of policy. The only difficulty is then defining what policy is to be achieved through professional procurement, and how?
Good contract management is an area so often starved of the attention and resources it deserves whilst procurement grapples with the far sexier strategic sourcing problem. Yet this contract management work can often make a true difference: where the theory is tested in practice, where on-budget and on-time delivery counts.
Too often in the past, procurement professionals have signed and forgotten. They have celebrated victory early, counted the savings, the cost avoidance, the improved terms, the instant remedies. They they’ve passed the contract over to the business operation to manage. Only not very well, as it turns out.
Operationally, the business is usually customer or stakeholder focused. It typically becomes supplier focused only when there is a supply problem (i.e. non-delivery). The agency effectively outsources contract management of the supplier – to the supplier.
Yet this is where delivery matters. This is where we garner the hard and soft purchase benefits we listed so assiduously in the original business case document or even in the (too rare) conference room negotiation. Yet these wins are often forgotten and unrewarded downstream when they really count. And then they remain undelivered and unrealised.
If savings tend to zero over time, benefits realisation can be the new ‘savings’ for us all. Professional contract management can yield these benefits. It can ensure they are delivered, captured, applied and counted. That they are hard won after all.
To help, contract management automation systems can do the heavy lifting, by keeping documents in one place and sending alerts for key milestones, for instance.
With this sort of help, procurement managers can achieve a lot, especially on operational direct supply lines, long-term service contracts or capital projects. These are all areas, surely, where many agencies are still looking for more value.
Jonathan Dutton is an independent management consultant specialising on procurement and was the founding CEO of CIPS in Australia from 2004-13. He also counts Open Windows as a previous client. He writes a regular column on procurement in government for Government News.