In most organizations, once a supply contract has been negotiated and signed, it will be handed off to the business owner to manage. After a successful request for proposal (RFP) project one might think now it is time to sit back, relax, and enjoy the results.
This is the point at which it can fall apart. IACCM research has shown that on average 35% of an organization’s contracts fail to reach the expected value and that a significant proportion of this value loss could be avoided.
Lack of prior stakeholder engagement, poor communication, and limited access to the details of the agreement often result in contracts that fail to deliver the desired results.
So in this article, we'll give you an overview of why contract handover is important and the best practices to ensure success.
Why contract handover is important
The transition phase from contract signature to implementation is vital to success. Contracts fail because the implementation steps are ill-defined and poorly executed. Passing contractual information via email or brief conversations at the water cooler is not enough.
Organizations that have a solid process and leadership capabilities to manage contract handover successfully will:
- Get more value from negotiated agreements
- Realize projected savings
- Use their internal resources more effectively
- Improve business alignment
- Limit their exposure to supplier risks
- Save time and effort in administration
Compliance with the provisions of a contract is important to obtain full benefit from the supply relationship. It takes time for stakeholders, the contract owner, and end-users to familiarize themselves with the terms and conditions of a new contract.
They need to understand the commitments in the Service Level Agreement (SLA) and Key Performance Indicators (KPIs) and any other issues that may be relevant to the performance of the contract.
They may have contractual responsibilities, for instance, related to communication or operations critical information, which they need to be aware of to fulfill those requirements.
A contract is an agreement between two parties – this critical point is often forgotten. If there is no proper transition or handover plan, there will be no shared understanding between procurement, the users, and the supplier.
From RFP to contract
The RFP process is normally managed by a procurement project manager. Business stakeholders, subject matter experts, and end-users will have contributed to the RFP process.
It is the responsibility of the procurement lead or category manager to make sure post-award contract handover takes place as effectively as possible.
The main objectives of the handover process are to agree on and communicate the roles and responsibilities of each person involved at both the buying organization and the supplier.
Each party needs to know their counterparts and whom to contact in contractual and business-related topics. At this stage, the contract owner and relationship lead for the optional supplier relationship management (SRM) program are confirmed.
A face-to-face (or virtual) handover meeting is necessary to communicate all the important elements to ensure a successful kick-off. It is not purely an administrative activity.
The handover process
We recommend that procurement takes the lead in presenting the contract and the SLA and explains the implications of these commitments not being met. Procurement will be aware of the finer details within a contract, and the business stakeholders on the other hand, may be aware of the areas relevant to the business.
The focus should be on the SLA and KPIs - how success is measured, the reporting process, and what happens if service levels are not met - including conflict resolution, corrective actions, escalation, and related processes.
Supply contracts are not static. Specifications change, new products and services are added, and unforeseen events occur. The contract amendment and dispute resolution processes must be agreed upon and confirmed to ensure continuity and accountability.
Any risks raised during the RFP or negotiation process must be addressed and remedies agreed upon. The audit plan and practices need to be agreed upon in the handover.
The handover must be documented, i.e. confirmed in writing. Method of documentation may vary: some compile a handover report, some submit a handover form, some prefer to use Excel with a RACI matrix, and some prefer to communicate key responsibilities of relevant parties via email.
No matter the method, the handover document needs to be understandable, unambiguous, applicable, and relevant to each person.
According to IACCM, over 60% of project managers and implementation teams complain about the problems caused by handover (or the lack of it). More than 9 out of 10 managers admit that they find contracts challenging to read or understand. A contract summary customized to its audience is a solution.
Contract handover success factors
Top-performing organizations invest time and resources in the post-award contract implementation process. They clearly define roles, communicate proactively, and have the supporting technology and tools.
Even the best contract has loopholes and gaps that were not identified at the negotiation time. Activities after the contract signing are the only way to close such gaps and ensure the contract is executed to its full potential.
A fully functional and successfully implemented contract means:
- both parties understand their contractual obligations
- the expected business benefits are realized
- the product or service is fit-for-purpose
- internal stakeholders are satisfied and familiar with relevant contract terms
- the supplier relationship is collaborative and responsive
- problems are solved early and there are few disputes
- changes are managed frequently
- performance, services, and relationships are continuously improved
- both parties are vested in each other’s success
The real value creation starts after the RFP. Effective contract execution builds sustainable value beyond traditional cost management. Ideally, relationships are driven by legality, sustainable development, and innovation culture.
Contracts are too valuable to file and forget
Organizations face increasing pressure to reduce costs and improve financial and operational performance. New regulatory requirements, globalization, and increases in contract volume have added complexity, making it challenging to manage contracts without the supporting technology.
Contract management is one of the least automated processes: over 60% of organizations lack a coherent management reporting application or have the wrong software. Many procurement organizations still lack standardized procedures to administer contracts.
Find out how ISS Group harmonized contract management globally with almost 500,000 employees.
Often contracts are filed locally in each office or uploaded haphazardly as PDFs in Sharepoint. This results in inefficiency, weaknesses in performance oversight, and the inability to detect contract leakage.
The benefits of automation in contract management are to:
- Improve visibility, security, and access to contract provisions
- Harness full savings value from negotiated agreements
- Limit exposure to supplier failure and non-performance
- Improve long-term supplier relationships through better communication
Although the purpose of a contract is to create a benefit between two organizations, there is often too much focus on internal vested interests and the drive for control and compliance.
A supply contract is a business enabler and a tool for growth and relationship-building, not an obstacle to be overcome or a weapon to draw when the time is right.
Header picture by: @linde66 (unsplash.com)