Who owns a contract?

Rethinking ownership, for better

Who owns a contract?
Rethinking ownership, for better

Agreements between parties are of fundamental importance and intersect all areas of human endeavour. Contracts are the agreement blueprint, providing clarity, transparency, and fairness, enabling things to get done. But when ownership of a contract is in doubt, things can be in danger of going wrong quickly, notes Nicola Brooks, Legal Operations Transformation.

The process of contracting is messy and inefficient. Many organisations lack an integrated view of contracting because contract-related activities are embedded in many other processes, leading to fragmentation of roles and underlying data. The overall ‘flow’ of the contracting process is typically disjointed because each phase is led or influenced by a different group or function, with multiple stakeholders or interests that must be reconciled.

As complexity in contracting arises, so does its downfalls; it is costly, it creates delay, and too often it fails to build on the trusting, collaborative relationships on which modern business depends.

The reason for this is simple: it is because no one owns it. The average contracting lifecycle has at least seven different functional owners with competing goals and objectives. Many can lay claim to parts, but none accept accountability of the whole. When things go wrong, it is always someone else’s fault.

The contracting problem

Contracts are at the heart of any functional organisation, impacting revenues, risks, reputations, rights, and responsibilities, and directly impacting the health and wealth of a business. Yet on average, contracts suffer more than 9 percent of value leakage. They generate avoidable resource costs, delays and friction between customers and suppliers.

Research shows that for almost 85 percent of organisations (especially in B2B markets), reaching agreement on those terms or practices is frustratingly slow at a transactional and strategic level. Building consensus across multiple stakeholders is difficult and time-consuming. This leads to inefficiencies, incremental cost and missed opportunities. Current studies suggest that, on average, organisations are expending 4.2 percent of contract value on avoidable post-award management. Ensuring the capability to perform and deliver against commitments is a major source of risk.

Timing and performance costs

Identifying the appropriate form of agreement and then streamlining stakeholder review and approval are obvious candidates when it comes to speed and ease of doing business. There are also wide variations in the time it takes different organisations to reach agreements with their customers and suppliers. For simpler agreements, ‘world-class’ performance yields an average cycle time from bid to contract of just under two weeks, comparing with an average of 10 weeks for the worst performers. As complexity increases, those weeks stretch into months, creating tensions and delays to key programmes, projects, and relationships.

The cycle time leading to contract signature is the most obvious source of frustration, but the reality is the equivalent and often greater value is lost during other phases on contract performance. The transition of agreements from pre-signature to post-signature implementation and performance is often poorly defined and in many cases the resources applied to contract performance are untrained and lack appropriate tools or systems. According to a World Commerce & Contracting study, the average organisation could improve margins by almost 3 percent through reductions in the operational costs associated with managing its contracts.

Digital transformation and strategy

Digital transformation and a review of contract performance should go hand-in-hand. Digital transformation is, above all else, an opportunity for holistic examination of an organisation. Leaders should seek to understand pain points and inefficiencies as well as opportunities for investment and growth before overhauling a regime. This involves scrutinising embedded practices and challenging the status quo, and reassessing things with a creative, innovative, and cognitively diverse mindset. The contracting process is ripe for this kind of transformation.

Post-pandemic and well into our technology age, most organisations are some ways along this process of digital transformation. They know contracts matter and are focused on reducing cycle times and improving data flows, implementing shiny new tech to help embed their digital transformation as it becomes available. But most will not succeed in their overarching goals because real and sustainable improvement can only be achieved by tackling the underlying problem of process ownership fragmentation. Progress and quality depend upon a single point of process ownership.

The ownership question

Over January and March 2021, together with the organisation World Commerce & Contracting, KPMG Law surveyed more than 300 respondents spanning a range of industry and geographic perspectives. They conducted roundtable discussions with 40 executives to gather their views on the contracting problem and to understand key trends in commercial and contract management.

The respondents held widely dissenting views on who the owner of a contract should be. Of those that believe digital transformation will lead to a designated process owner, 60 percent thought that owner would likely be the commercial/contract management executive, while 23 percent expect it would be the sales or procurement executive and only 9 percent see it falling to the legal function.

There should be a clear distinction between the operational responsibility for performing the multiple activities undertaken during the life of a contract and a responsibility for overseeing the process that guides and supports those activities; combining these operational and strategic responsibilities rarely works.

Additionally, awarding core stakeholders ownership is fundamentally risky as the whole point of contracts is that they must represent a balance of views – risk versus opportunity, revenue versus costs, innovation versus compliance.

How might better contract ownership look like in practice? Our view, supported by the majority of survey respondents, is that process integrity and maintenance depend on a single point of accountability, effected through the creation of an independent Office of Contracting (OoC). The OoC would take responsibility for the quality and integrity of the contracting process, streamlining the disparate contracting elements, and thereby extracting greater value for all parties.

World Commerce & Contracting and KPMG Law’s report findings

One in nine organisations require the personal sponsorship of the CEO to make change happen. This is indicative of the issues highlighted elsewhere by the research – in particular, the absence of established process ownership, the fragmentation of activities and competing stakeholder objectives.

There is little evidence that initiatives are being viewed holistically to address both buy-side and sell-side contracting.

The GC is the sponsor for 44 percent of sell-side digitisation projects but only 12 percent on the buy-side (where 41 percent are led by the Chief Procurement Officer/Head of Supply Management).

The CFO is driving 21 percent of buy-side projects and only 9 percent sell-side.

All sponsors view increased speed and efficiency as the top priority, but there are notable variations in other drivers, e.g., the CEO, CFO and GC community view improved business and management information as an important goal (second place) whereas CPOs and CIOs consider resource and cost savings to be more important.

The Office of Contracting solution

KPMG Law’s view is that it is time to develop a defined capacity and accountability for the coherence of contracts and commercial practices. Organisations need an owner of the contracting process – an Office of Contracting that is independent of functional stakeholders. The OoC as posited would have a clear and distinct role, maintaining the operating model around contracting, and working across the business to consult and enable performance.

The benefits of the OoC are manifold. A clear front contender is that the OoC would operate independently, ensuring the contracting process supports the strategic goals and objectives of the business. The OoC would own the whole process and ensure a clear service delivery model with agreed RACI (responsible, accountable, consulted and informed) definitions in place.

It would manage the core technologies for contracting, with responsibility for business-wide data, analytics and reporting, and protect against contract value erosion.