Contract Management: Why Use A Shotgun To Kill A Fly?

Contract management platform… A few years back, at a UKTI event, I briefly met with the CFO of one of the largest oil companies in South America. His company was about to embark on a multibillion dollar investment program to develop its vast pre salt reserves.

When I inquired about his plans for mitigation against risk in managing the significant contracts that would underpin this investment, he advised me that his company was embarking on a “wall to wall” rollout of SAP.  My immediate thought was that this would possibly be the wrong hammer for that particular nail and not what was required, a contract management platform.

So, what is the problem with the way many would approach the issue of managing contact risk in capex projects? Well, think of it in terms of fly swatting. Picture the scene, a fly buzzing around your food is disturbing you. You chase it around the room with various “tools,” and when they don’t work you try to guide it to follow you through an exit point—usually an open window.

Soon you are left with no choice but to reluctantly accept that the random, unpredictable movements of the fly mean that you must abandon all hope of outwitting it. Now, if the fly could only enter and exit via one visible point and if you could predict its movements from point A to point B, then you could minimize its germ-spreading activities with a fit for-purpose tool for the job. The same is true with any system you employ to manage your contract risk: Understand the problem then chose the right solution to address it.

The cradle-to-grave process of evaluating and selecting the “right” contract strategy, pre-qualifying contractors, evaluating contractor bids, executing capex contracts, close out, and transition to operations, is fraught with complexity. True, a part of this process is managed in the ERP system, but the riskiest parts of the process, including disciplined management of every single interaction with the contractor, are not the preserve of ERP. Otherwise, in an industry saturated with wall-to-wall ERP, we would not be witnessing the scandalous and unnecessary “hidden” overpricing in contracts, overruns, claims, and general inefficiency that is plaguing large capex projects today.

Managing the plethora of random contractor interactions and change orders while minimizing the possibility of damages and costs associated with “mismanagement” needs a fit-for-purpose solution. Indeed, many of our customers are now measuring and benefiting from the “negotiated cost-avoidance” that they reap by forcing all contractor interaction across one single channel and using workflows to cease all random interaction.

8over8 works with, and listens to industry leaders responsible for managing contractual risk in some of the largest capex projects across the globe. Our team is constantly refining the ProCon platform to align with what contract practitioners articulate they need from it.

To lend a little perspective, we thought you might want to know what these capex project custodians have been telling us.

So here are their top 3 challenges:

1. A lack of technical solutions that support MUST DO and HOW TO business processes which enforce corporate standards for contract award and execution across global and regional teams.
2. Ensuring that decision making across the life cycle of capex projects is not hampered by siloes and the ephemeral nature of project teams. Early decisions in contract award are often made by corporate supply chain and procurement teams and then handed over the fence to remote project teams to execute. These project teams receive regular change requests, so there is an urgent need to route commercially sensitive change order requests via the contract management system to have them evaluated by the engineering teams. This would facilitate connected decision making across contract and engineering teams involving other stakeholders in a structured way.
   
   
3. Enhancing the predictability of a project commercial outcome. A solution that facilitates and forces ALL contract-sensitive interaction with the contractor across a single auditable interface (and this is NOT email), during both the contract selection process and its execution. This includes correspondence, change order requests, authorizations, approvals, rejection notices, claims management, and amendments. Not only does the solution need to recognize KPIs from this mass of interaction, it also has to deliver predictive and prescriptive analytics.

What’s next?
Download the Lower prices demand a hard look at costs whitepaper here

This article was orginally published here