Fixing Contract Value Leakage: a massive opportunity to increase annual revenue this year

Every business transaction creates a strategic partnership, whether this is a contract with a supplier or a customer. A strategic partnership is a recognized union of two parties that establishes rights and obligations between them.

I often compare business partnerships to marriage. Consider entering into a marriage without the knowledge and understanding of the promises you have made to your partner and the promises your partner has made to you.

If lawyers and consultants are akin to vow writing service providers; you may consider seeking their help to articulate your thoughts into words, but is it conceivable that you enter into a marriage based on mutual intentions and promises determined entirely by a third party, and unbeknown to you?

Did not think so.

Yet, you do just that in your business relationships when you turn over the formation and implementation of business contracts entirely to lawyers and managers.

Food for thought

We are all struggling to maintain stakeholder returns and profitability in current economic times.

Yet we are losing roughly 17% to 40% of the value on our typical contract — from the time of execution to the close-out date. The main sources of value leaks are 1. disagreements over contract scope; 2. failures due to over-commitment; 3. weaknesses in contract change management; and 4. performance issues due to disagreement over what was committed.

In this blog, we share solutions that can help increase revenue from contracts.

A massive boost to bottom-line figures can well be achieved by focusing on an often neglected discipline: Contract Management. Good contract development and management could improve your business profitability by the equivalent of a massive 9% of annual revenue.

Symptoms of Contract Value Leakage

1. missed expiration dates or deadlines.
2. serving outside the scope of agreed obligations.
3. not knowing and utilizing their rights either timely or at all.
4. not adjusting price, scope creeping
5. time spent on non-value adding activities

FIRST Understand the Contract because you don’t

Contract language expresses the intent of the parties, but many times one party or both parties don’t even know what the contract says. The contract lays out a framework, but it is people who actually assure that it comes to fruition. Relationships, not contracts, produce meaningful results.

THEN, Create Contract Playbooks

Start with the simple, thought profound project, improving the quality of contract templates.

You will need a separate playbook for each contract type: think of key vendors, customers, partners, contractors, and employees. A contract playbook is a playful and creative term for a spreadsheet that breaks down the company’s standard contract terms in four to six columns:

1. contains the standard clause language
2. meaning and purpose of the clause/ language
3. common anticipated objections from the other party.
4. alternative language for the clause that is otherwise acceptable to the company.

For example, your standard governing law preference is Dubai, United Arab Emirates, but your clients may object to that option, particularly those outside the UAE. So, for fall back, you might add that you will accept DIFC law in the UAE, and the laws of England or Singapore outside the UAE.

You might alert the playbook user that if the client responds to fall back options, the company must go to the legal department or a contract approval committee. This is called the escalation process.

The playbook would develop contract quality more systemically and prevent it from being eroded in the negotiation process.

Post-Award Phase

Just because the contract is signed, it does not mean that the work is done and the negotiation has ended. The organization must ensure those contract responsibilities, benchmarks, and expectations are fulfilled. All of this needs consistency and a high degree of commitment to settle all claims and conflicts, and comply with terms and conditions.

Without a well-functioning system, it’s easy to miss a crucial contractual responsibility essential to both parties. The agreement’s post-award period is just as important. You have a signed contract and commitments at this stage and must comply and behave on contract terms.

Contract Orientation

Begin with a post-award presentation to take note of the rights and obligations of each party. Consider adding flowcharts and graphs — visuals are always helpful for creating understanding.

Contract Administration

Contract administration is necessary to successful management of:

• compliance of terms and conditions
• contract restructuring needs
• contract milestones including payments
• expirations and renewals
• service delivery requirements
• disputes, and claims

Go a step further and leverage technology

1. A playbook is a dynamic document that requires continuous updates. Leverage technology to maintain deviation trackers to monitor the change of policies/regulations/business strategies, and publish updated versions to all ‘concerned.’
2. Get an online contract repository — the single source of truth.
3. If you cannot retrieve it, why retain it? Contracts must be stored in one place, have master templates and allow for quick retrieval and limited-time retention after project closure.
4. consider taking baby steps towards contract management solutions generating additional value through mining contract data. Machine learning and AI help in the identification and analysis of clauses and other data. AI can pull out previously unseen patterns and relationships, identify anomalies, and optimisation.

The purpose here is to raise awareness and provide food for thought to all corporate leaders to do something about these issues and explore opportunities to increase bottom-line performance.

Where to begin?

Have you done any analysis around value leakage? Ever? This is an ongoing mental exercise. This is not a delegable exercise. The stakeholders themselves know best the source and extent of value leakage. Reflect on your past experiences. Examine company experiences on what has caused problems?

Let’s say you have decided to do something about the loss of contract value. Start with the playbook. Consider what contracts do you want to include in this playbook? Start with the simplest standard contract, for example, a Non-Disclosure Agreement?

Who is the playbook for? Consider your audience to be the business, in particular, the sales or business procurement teams. You are the audience of your first playbook. Hence, you must keep the playbook relatively short and written in a way that the business-savvy can understand.

How and why to use it? For a contract playbook to be effective, consider annual or intermittent training. The purpose of the business training is to get users of the contracts familiar with basic legal concepts and the “what” and the “why” of the company’s positions on different clauses in the contract.

Where will you store the playbooks and standard clauses? Consider how your company contracts are stored and managed after signing. Consider a repository. Store the master playbook online. Sometimes contract value leakage may be due to difficulties in finding the contract, not having access to the contracts, or having multiple versions of a contract that have a lot of amendments making it difficult to read the contract and understand your obligations.

The reality is that successful alliances don’t just happen. Board members are good at the start-up phase of contracts but then step back and leave the execution and management to others. The Board will have an important role to play in making sure companies are systematically optimizing contracts.

It is critical that senior executives remain involved in oversight of the partnership.