'Contract Management Is A Preferred Tool In Recession'

With the economic downturn and global credit crisis – organisations are focusing on how to get more value from existing contracts while postponing new ones.

Organisations are adopting innovative methods and practices to bring down the cost by rationalising and re-negotiating IT contracts as they look at ways to reduce their operational costs. This poses a huge challenge on the service provider to offer more with same budget by re-defining the scope of service level agreements. Also, outsourcing customers are looking at ways to work with fewer vendors and do more work at lower rates to reduce management, operational and governance costs.

Organisations are outsourcing their IT services to external suppliers to focus on business and their core activities. Given, however, that these services pose a risk for the organisation, it is of even greater importance that the services and inherent risks are well-managed. A number of organisations are struggling with the issue of managing outsourced services. How a function can be designed to manage, control and acquire outsourced services in an efficient and effective manner is the central focus for enterprises these days. This position is based on an analysis of the dynamics of an externalised client-supplier relationship because an organisation must be equipped for the task of managing its relationships with external suppliers as effectively as possible.

Experience reveals that management and control of (quality) of services often falls short in such an agreement. The relationship between the client and supplier(s) frequently becomes strained. Clients tend to complain that they have the feeling that they are paying too much or that the supplier is not delivering what was requested. Or the client may have excessive expectations of what he wants to see delivered. The result can be a high level of disputes in the client-supplier relationship. Many suppliers also deal with clients for whom formulating simple requests and clear requirements seem to be almost impossible.

In the background of recession, some of the most common challenges associated with managing outsourcing relationships are listed below:

• Lack of clarity in defining company objectives on the part of the client;
• Unrealistic expectations from the client and/or a supplier who promises too much;
• The supplier has bid below cost-price or is financially squeezed during negotiations and, in consequence, can no longer deliver the quality required;
• The client does not adequately structure and manage the deal in terms of attention, time and resources;
• The supplier is not willing to define an appropriate mechanism of control measures available to him with respect to scope, service levels and/or pricing;
• Discussions arise – due to deficient processes and procedures – concerning services, quality and performance;
• Changes in market prices are insufficiently taken into account in the deal;
• A lack of outsourcing experience on the part of employees involved in structuring the deal;
• Suppliers not pro-active enough;
• Not enough employees available who understand the contract’s prerequisites and conditions;
• Unexpected changes in technology or the business itself create a new context for the deal;
• Contract structures are often inflexible and lack transparency. There is insufficient connectivity between the various contract documents

When freeze on business budgets is becoming a common practice across verticals, outsourcing agreements are faced by numerous discrepancies which can be managed only with skilled expertise in this field so as to maximise returns and minimise investments. Contract management becomes extremely effective here in managing expectations and controlling losses. Once the contract has been signed, transition to the outsourcing provider takes place and contract management begins. The outsourcing party now focuses on guaranteeing that high-quality services are rendered at acceptable cost.

Quint Wellington Redwood – a global independent IT management and consulting organisation that provides consulting services on sourcing issues has developed a seven-phased model for helping organisations build an effective methodology and process that helps them to plan and execute a sourcing strategy and put in place an effective governance model. The seven phases of the Quint Wellington Redwood model include: strategy; scoping; selection; due diligence; contracting; transition; and contract management.

The seven pillars of contract management come into play to enable organisations consolidate their demands and suppliers to regulate their offerings in the best possible manner in today’s scenario. An organisation must be equipped for the task of managing its relationships with external suppliers as effectively as possible. Companies especially on the demand side are an important factor in the success of outsourcing relationships.

Contract management principles play an intermediary between the supplier and the client side especially with recession setting in different segments of business this becomes a dependable tool to regulate deliverables and profits.

Srinivasan is regional manager–North with Quint India.

Updated Date: Jan 30, 2009 16:06:38 IST