Contract management in tough economic times

The norm during times of economic uncertainty has always been to tighten budgets, cutting out frivolous expenditure to try to mitigate the impact of the economic turbulence. Experience has taught us that one of the first "victims" of belt tightening is outsourced services, particularly, consulting services, with disastrous unintended consequences.

Cutting back on expenditure during tough economic times is the logical thing to do, however, caution needs to be applied. Businesses could inadvertently expose themselves to more risk, which could end up costing those businesses more in the short, medium and long term. 

Take the area of contract management, for example. Contract management helps businesses mitigate the contractual risks that are brought on by the contracting process. Cutting back on contract management expenditure may expose the business to major risks, which during these tough times may result in big financial, reputational and operational blows to the business.

The question for major businesses becomes, "how do we balance the need to cut costs against the need to ensure sufficient risk mitigation brought on by the contracting process?” 
There are several ways to answer this question, below we look at three:

1. Service prioritization
Service prioritization involves the business and its contract management service provider identifying and agreeing on the contract management areas to be prioritized. This is influenced by business objectives, financial health of the business and the economic state of the sector in which the business operates. This enables businesses to save on costs, while maintaining a healthy standard of risk mitigation. This is called priority contract management (PCM).

2. Partial in-sourcing
Partial in-sourcing involves the contract management consultant staying on in a supervisory role, while transferring contract management skills to internal people. Cost are cut down, without really losing the vision and leadership of the contract management consultant. This process is best suited for organizations with long-term views of the value proposition of the contract management process.    

3. Effective contract management administration
This is one of the most effective ways of ensuring savings on contractual costs. All properly drafted contracts have provisions for penalties in certain circumstances. Most of the time, these penalties are applicable in cases of unsatisfactory performance or no performance of contractual obligations. So, the penalties would come in the form of financial deductions from monies due to the defaulting party. Proper administration entails ensuring that penalty provisions are implemented on the one hand, while making sure that the business does not default on contractual obligations, which would create an additional financial liability for the business.

Contributed by: Fanele Sicwetsha, a Senior Associate in contract management at Bespoke Group Africa 

Article originally appeared in:  BESPOKE.png