How to manage your outsourcing contracts

With 41% of organizations considering contract management as a top strategic priority, the importance of efficient contract management is now being recognized in corporate India

By: Manoj Marwah, Director, Advisory Services and India Lead for Contract Management Solution

The importance of efficient contract management has only recently been realized by the Indian corporate sector. Earlier, contracts were regarded as pure legal documents to be accessed only in case of legal disputes. However, in the IT-BPO (Information Technology-Business Process Outsourcing) sector they define the entire buyer-seller relationship, covering legal, commercial, service delivery, information security, people,
facility/asset management, and governance aspects by way of contracts. The exponential rise in outsourcing of non-core/core services, globalization and emergence of new business models over the last decade have led to a significant increase in the complexity of IT-BPO contracts. Further, the US and the European regulators (especially BFSI, healthcare, and energy, etc) have tightened their oversight over outsourcing contracts. There have also been several instances of hefty penalties being levied on companies due to weak governance over their service providers.
On the other hand, several Indian IT-BPO companies have lost their customers due to weak management of contractual obligations.

In light of the enhanced regulatory focus, most of the outsourcers have launched remote and onsite monitoring programs to maximize value and minimize risk from the outsourcing contracts.

The increased focus on customer contract management has highlighted certain fundamental gaps in the process followed today. For instance, companies don’t even maintain an electronic repository for customer contracts, which implies there is no record of the latest Master Service Agreement/Scope of Work (MSA/SOW) documents. A survey conducted by EY India of 200+ organizations across multiple sectors on the subject of contract management practices revealed alarming results. Nearly 80% of the organizations surveyed do not have a single point of accountability even for high value contracts. There are disparate departments owning separate parts of the contract and the contract lifecycle involves multiple handovers.
However, 41% of the respondents recognized contract management as a top strategic/CXO priority and another 40% recognized it as an important effort needed to drive their organization. Thus, the survey highlighted the importance of an efficient contract management framework.
THE CONTRACTING CHALLENGE
The key areas of concern for companies managing their contracts fall under six broad areas:

PRE-CONTRACTING
Pre-contracting is difficult to manage as most of the global clients insist on using their own template for outsourcing contracts. Service providers are trying to mitigate this risk by developing a standard clause library for most of the key areas such as limitation of liability, indemnity, intellectual property, etc, to safeguard themselves from entering into contracts prejudicial to the company. They are also defining fall back and nogo clauses in case standard terms aren’t accepted by their customers. However, finding an optimal technology solution to handle pre-contracting requirements is still a big challenge.

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POST-CONTRACTING
Obligation management as per the signed contract is challenging as most of the contract hard copies are voluminous and rarely looked at once the contract is signed. Most of the outsourcing contracts have 100+ obligation elements spread across multiple stakeholders (service delivery, finance, HR, etc) which get lost in the voluminous contractual documents which no one attempts to read and understand. Further, the confidential nature of the document prevents the team from accessing it. This, in turn, leads to client audit issues, regulatory non-compliance and penalties, under/over billing, customer disputes, missing out on KPI/SLAs, information leakages, and ultimately an adverse impact on the company’s reputation and image.

MATURITY ASSESSMENT
Before an organization embarks on the journey to reorganize its contract management function, it is recommended to do a quick maturity assessment to help define the problem statement. Some of the key questions which should be addressed in the maturity assessment are:

„„Standard contracting policies and procedures for both pre-contracting (before contract sign off) and post-contracting activities (ie, obligation/commitment management, issues, billing, renewals, etc)

Defined standard contract clauses, fall back clauses or no-go clauses.

„A defined system workflow to take approvals for deviations to contractual terms

„„A searchable electronic repository/database for customer contracts and the same is updated for all changes, amendments, and renewals

„„Contracting roles/responsibility clearly defined across organization, ie, legal, finance, service delivery, etc.

„„A mechanism for real-time monitoring of contractual obligations and taking remedial actions for any non-compliances.

A typical IT-BPM contract is owned by six-seven separate functions across the organization ranging from sales, legal, finance, HR, service delivery, audit, information security, admin/facility, and thus, getting a consensus among all stakeholders is critical.

APPROACH TO STRUCTURED AND EFFECTIVE CONTRACT
MANAGEMENT
Depending on the maturity level of the function in an organization, one can make investments for the revamp.
These are usually in the following areas:
Centralized Contract Management Team: A team to manage and monitor contracts which liaisons with the other line departments in the company will aid in establishing a clear responsible accountability structure. The key questions to be addressed here are:

The boundaries of such a team, ie, the authority to take decisions
„„The ideal model in terms of a center of excellence, hub and spoke or an assisted team model
„„The department that the team would be a part of—for example legal, finance or risk, and the reporting structure thereof
„„The Key Performance Indicators (KPIs) of such a team
APPROPRIATE TECHNOLOGY TOOLS DEPLOYMENT:
A number of global software providers offer contract management automation solutions. Despite the availability of 10+ off-the-shelf solutions in the market, the key is to find an optimal technology solution to address both pre-contracting and post–contracting activities. Frequently, companies find it more feasible to develop their own proprietary technology solutions to manage customer contracts. One of the key reasons for this is most of the available IT tools are generic and not customized to any sector.
Further, none of the current tools can fully handle the pre-contracting challenges since each customer contract is unique.
STANDARDIZED POLICY AND PROCESS FRAMEWORK:
Automation is only as good as the processes and people developed to deploy the same. Thus, it is imperative to develop a robust process framework and train the staff in the company’s way of handling contracts and complex situations. Processes need to be developed for contract creation, negotiation, start-up, administration, and closeout. That contract management is now receiving its fair share of attention and action in corporate India as it is a big step towards comprehensive risk management. This subject is expected to dominate CXO/board level agenda in the near future. Absence of a ‘one fit for all’ off-the-shelf solution in the market has forced the companies to be open to experimentation and the tipping point for the best fit solution is closer than ever.

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