Thank you for joining us for This Week in Contract Management. Did you happen to see the article about the West Australian Health Department official who overspent on an IT contract in excess of $40 million? That is not a typo folks. $40 million! Can you imagine walking down the hallway of your office to tell your supervisor that your mismanagement of a contract will cost your company an additional $40 million? Good luck with that conversation.
Contract Management has become a huge priority in today’s dynamics of corporate management. According to Gartner, the leader in technology research, Contract Lifecycle Management is no longer a “nice to have" initiative, but rather a “need to have" business practice. With a direct impact on both revenue and expenses, as well as the risk profile of a company, many businesses have an elevated interest in implementing automated solutions.
More pointedly, Contract Management has become a C-Level initiative for business executives worldwide. Case in point is the mismanagement of this IT contract by the Western Australian Department of Health. Key to this catastrophe was the failure by the contract manager and management team to review the contract and ensure it was being managed appropriately. Important provisions were not flagged for management, spending was not tracked, and the appropriate alerting, approvals and escalations were not put in place to ensure that actions were completed, as requested, on schedule, and within identified spending parameters. While this all seems obvious, it is a not so uncommon error in contract management.
Says WAtoday, who broke this story, “Acting auditor-general Glen Clarke found a series of irregularities and weaknesses in the contract’s management resulting in millions of wasted taxpayer dollars, including the health department paying $90,000 per month to store $3.3 million worth of unused IT equipment." While the story doesn’t specify the length of time that this storage took place, it’s safe to say that this spending process should have been monitored with a much stronger attention to detail.
So what happened here? Where was the breakdown in the contract management process and how could this have been mitigated?
Tim Cummins, President and CEO of the IACCM, also known as the International Association for Contract and Commercial Management, references in his blog “Commitment Matters" just how important Contract Managers are in the accurate management of an organization’s contracts. “Contract Managers serve as the point of contact for customers on contractual matters. They act as the contractual ‘middleman’ between company employees and customers, ensuring timely review and approval/reconciliation of variations."
The NCMA, commonly known as the National Contract Management Association, in their February, 2016 journal of “Contract Management-Voice of the Professional Contract Management Community", further supports the importance of effective contract management in overseeing the entire contract lifecycle. Says Dr. Rene Rendon, a contributor to the NCMA and an authority in supply, contract, and project management, “The contract manager should be among the first to identify external risks to the integrity of his or her organization and should be empowered to act and to deal with these situations appropriately."
Perhaps this contract manager was tasked with managing too many contracts? Or perhaps he or she was unaware of the key terms and provisions of the contracts? In any case, the use of a contract lifecycle management application would have prevented this gross contract mismanagement. Contract management software, among its many unique capabilities, ensures that the contract manager and other business users have proper visibility into all of their contracts and have the tools necessary to foresee potential problem areas before they ever come to fruition. More specifically, the contract itself, should have been stored in a central repository with key contract details readily accessible to those responsible for the management of the contract. Line of business integration into a procurement system could have taken place to more closely monitor contract spending. Automated workflows should have alerted the necessary management figures that their approval was necessary for certain spending thresholds. Alerting should have taken place when these approvals were not received or the thresholds were reached. Any actions which were required by the contract manager or counter party should have been logged into this system for the appropriate follow up, completion and audit compliance.
Contract Management requires proper resource allocation within any organization. This resource allocation includes not only people, but the supporting processes and technology to make them successful. The failure to properly allocate these resources and manage them throughout the contract lifecycle process results in revenue loss, unnecessary spending, damaged credibility, and legal and compliance issues.
Next Week’s Blog
Get ready for next week! Contracts 365 is committed to constantly being up to date and on top of industry trends. Join us as we attend a conference focused on compliance and industry regulations. I will provide key take away points from the conference and how you can use these practices and recommendations in the day to day management of your contracts.