Four Key Considerations for Procurement Organisations Taking a Lead in Contracts Management
November 22, 2022
In last month’s column, I shared my observation that procurement organisations are transitioning from a quantitative role evaluating and selecting suppliers to a qualitative one as they look at ESG, ROI, and the legal risk aligned with the suppliers they choose. Procurement leaders want to control their destinies and are increasingly taking the lead in contracts management initiatives. This has extended to purchasing organisations allocating budgets to acquire contracts lifecycle management (CLM) software and set up contracting centres of excellence.
For procurement departments undertaking this shift, a crucial question is how best to proceed. In this post, we discuss four critical issues that procurement professionals ought to bear in mind. These topics take on added importance given that procurement organisations increasingly codify the relationship with counterparties concerning critical terms not directly related to price, volume, mix, or service levels of the core product or service (e.g., data privacy, cyber security, compliance, etc.). This multidimensionality has created complexity and requires a systematic approach.
1 – What Is the Starting Point?
To understand where to go, you must understand where, conceptually, you are. The first thing a procurement organisation internalises is a particular understanding of the law department – its role, concerns, tendencies, etc. – and the law department’s point of view of procurement. Things are rarely as simplistic as believing that the law department is ’the deal prevention department’ that thinks procurement plays ‘fast and loose’.
These stereotypes spring from the natural tension between these groups’ cultures, goals, and responsibilities. Often, the differences result in disagreements about acceptable risk in a transaction, thus extending the contracting cycle—at times to the point where completing a business-as-usual transaction becomes a mini-crisis requiring urgent action. Few companies have documented in detail their contracts review and negotiation processes. Many lack policies and thresholds for imposing risk and controls on contracts with particular attributes. There are no contracting playbooks, sets of alternative and fallback provisions, clause libraries, escalation protocols, or approval workflows written in contracts management language. Norms and standard operating procedures exist, but more as tribal knowledge in the heads of individuals too busy to document such things. This situation prevents others from repurposing those items for similar transactions. Like running on a treadmill without pausing to tie your shoes, an adverse incident of unpredictable magnitude is inevitable.
Compounding the problem, few organisations have deployed CLM software to ensure a predictable and disciplined process with risk controls. These issues – misperceptions, lack of consensus, non-existent documentation, and insufficient technology – explain why so many large procurement organisations are launching initiatives to create global contracting centres of excellence enabled by CLM technology.
2 – If Not Your First Step, Creating a Negotiation Playbook Must Be an Early One
One age-old debate in adopting technology to systematise a function is what to do first. With CLM, the question typically occurs as whether to start with creating the elements and artefacts of the program or acquiring software (e.g., the contracting modules of their vendor management systems or standalone CLM systems). Despite the volumes of ink spilled about the topic, there is no single correct sequence.
That said, sooner or later, a procurement department will have to focus on creating the material that embodies the contracting process: harmonised contracting templates, functional and flexible negotiation playbooks, and process maps that include intake and triage, review, negotiation, escalation, approval, signature, post-execution activity, and storage in a repository. Of these, the negotiation playbook ‘ties everything together’ and therefore demands a focused effort from procurement. IT
3 – Understand That Your Negotiation Playbook Must Balance Different Emphases
Negotiation Playbooks developed by law departments typically take a different approach than those created by procurement groups. Cycle time is the principal driver for procurement, while legal (as opposed to business) risk is the main driver for the law department. A law department playbook usually highlights fallback provisions (accompanied by guidance and rationales surrounding them) and makes it quite clear when an escalation outside of a fallback is appropriate. A negotiation playbook includes these elements, to be sure, but tends to emphasise how to get stakeholders (e.g., those responsible for data privacy and IT security) outside of the law department involved in the process. The involvement of those constituencies unavoidably extends the contracting cycle time. To minimise delays, procurement details how to ensure adequate documentation of positions to help close transactions quickly. In developing a playbook, it is best to recognise that decisions involving cycle time and risk are not necessarily binary ones but instead options along a continuum defined by each group’s default concerns.
4 – The Repository Is Foundational
Whether a procurement organisation or a law department drives a contracts management initiative, they likely see eye-to-eye on the critical importance of a contracts repository being ‘a single source of truth’ containing contracting material, executed agreements, and sets of metadata. This point of consensus makes a repository a good ‘conceptual starting point’ for developing and implementing a CLM solution. Agreement about what matters (i.e., what a repository should contain) will help drive decisions about workflows, templates, and how to best achieve user adoption. Fortunately, many organisations already appreciate the crucial role of a repository, and it is increasingly common to see them proactively allocate a non-trivial portion of their budgets to conduct legacy contracts migration exercises.
CLM is an enterprise-wide business process involving multiple stakeholders, multi-disciplinary processes, various checks and balances, and technology. A mere five years ago, it was rare – almost unheard of – for procurement professionals to lead the CLM charge. The sea-change we are witnessing demonstrates the impact of practitioners, providers, academics, and others sharing knowledge and best practices—and this post is part of that collaborative effort. As more procurement teams take the initiative on contracts management programs, the abovementioned considerations will grow in importance. Procurement organisations that address those issues thoughtfully and thoroughly will be the most successful at maximising the strategic impact of contracts management.
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