International In-house Counsel Journal

Vol. 8, No. 30, Winter 2015, 1

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online

The Big White Elephant - “Contract Management state of mind and road forward”

MARTIN LONSTRUP

Senior Legal Advisor, Maersk Oil Houston Inc., USA

Background

I have worked in in-house legal departments as an in-house lawyer for almost 10 years in

various industries both on the customer side as well as the supplier side mainly within

procurement and was actively involved in kick-starting Contract Management as a

discipline in Denmark with the establishment of the Danish Contract Management

Association, closely linked to the global organization within the area of Contract and

Commercial Management, IACCM. Contract Management has developed significantly

over the last 3-5 years and is today a well-known discipline, widely referenced and used

by companies and practitioners globally but what is the state of mind for Contract

Management, how far have we come in actually implementing Contract Management in

organizations? In order to answer that question is it first of all necessary to look into the

definition of Contract Management. Various definitions of Contract Management exist

today of which the majority refer to post-award activities (downstream) as the definition

of Contract Management being the classic understanding of the word management

relating to contract administration and follow-up after the award of the contract to the

supplier. Some define Contract Management on the level of an individual contract which

seems to contradict the importance of cross-functional alignment, one of key aspects of

Contract Management, with optimization being done across departments. Others see

Contract Management as a system or tool which is implemented to manage the company

contracts in a static setup. All these definitions are a result of the journey that Contract

Management has been through the last 8-10 years. Today, best practice Contract

Management (or Contract Lifecycle Management) is defined as “the process of

systematically and efficiently managing contract creation, execution and analysis for

maximizing operational and financial performance and minimizing risk” covering both

upstream and downstream activities including all the processes prior to contract award

being sourcing, category management, negotiations etc., and a wider approach to the

downstream activities including supplier performance management (SPM), compliance,

supplier relationship management (SRM), contract development etc. In this article, I will

apply the same best practice definition of Contract Lifecycle Management. There is often

confusion between Contract Management and Supplier Relationship Management

(SRM). My view is that they are both part of the string of activities that relate to post

contract award management of contracts and suppliers. SRM is defined as actions that

apply across a whole portfolio of supplier contracts and are generally accepted to be

around the more strategic, long term activities we undertake with regards to suppliers.

However the fact is that very difficult to have effective SRM without having aspects of

classic Contract Management in place. How will it be possible to talk strategic

partnerships, innovation or joint ventures if there is no clear view of what contracts the

organization actually has with the supplier or how they are performing day to day.

Effective Contract lifecycle Management is therefore a necessary condition for successful

2 Martin Lonstrup

SRM in my view and something which is part of the Contract Management Puzzle

process model introduced later in the article.

This article proposes a three step process in which I will touch upon the very first steps

required in order begin the Contract Management journey, measuring the maturity of the

contracting organization, introduce my Contract Management Puzzle, a new process

model developed to provide a more visual roadmap in organizations about to start their

Contract Management journey, link the puzzle pieces to and analyzing the current

Contract Management state of mind. The latter analysis is based upon the latest findings

by the National Audit Office (“NAO”) in the Transforming Government’s Contract

Management Report 2014 (“Report”)1 from the audit of the UK government departments:

Ministry of Justice, Cabinet Office and Department of Work & Pensions (“Government

Departments”). This is linked to a best practice scenario (having recently lead a Contract

Management in the Danish conglomerate A.P. Moller Maersk (“Maersk”) introducing

Contract Management in the Group Procurement department for almost 4 years. This

included the transformation of the Group Procurement legal department by developing

new processes, policies, contract templates to become a more proactive and involved in

the Group Procurement projects; optimization of payment terms, development of contract

compliance team in Mumbai, establishment of an incentive/bonus collection process, a

new contract management tool or the introduction of the contract management 12 process

model and, latterly, the update of the current Group Procurement contract management

tool with a new tool available to the entire Maersk Group. This has ensured that Group

Procurement today is considered to be a frontier within the Maersk Group on managing

and controlling contracts and Maersk a frontier in the global scene. A Contract

Management tool that is available across the Maersk Group being +16 business units

globally, covering +100 locations, involving +1800 active users and a contract spend

coverage of approx. 38 billion USD). I then introduce a new approach to Contract

Management and give concrete suggestions on how to get started on Contract

Management whatever the size of the company. The NAO introduced a similar

widespread audit report back in 2008. This Report compares the findings and

recommendation from back in 2008 with the findings in 2014. This means that it is

possible to analyze the development of Contract Management within the public sector

albeit within one of the most mature public section globally. The focus will be on a

selective a number of areas within Contract Lifecycle Management but will not be a

complete analysis of all the individual processes involved in upstream and downstream

activities.

The Initial step (Maturity Assessment)

The initial steps in any Contract Management project should be to measure the Contract

Management Maturity of the organization. Measuring the maturity will create a baseline

for how contracts are currently managed in the organization and provide the organization

with the initial roadmap for optimizations. To be able to award and successfully manage

effective contracts, organizations must have disciplined, capable, and mature contract

management processes in place. But what are disciplined, capable, and mature contract

management processes? How can an organization measure the capability and maturity of

its contract management processes? The Contract Management Maturity Model

(CMMM©)2 is a tool for measuring an organization’s contract management process

capability. It recognizes the value in periodically assessing an organization’s contract

1 http://www.nao.org.uk/report/transforming-governments-contract-management-2/

2 CMMM reference: http://www.ippa.ws/IPPC3/Proceedings/Chaper%2045.pdf

Contract Management 3

management process maturity and using the results of that assessment as a road map for

continuously improving organizational contract management process capability.

CMMM describes the evolutionary roadmap an organization would pursue in improving

its contract management process capability from an ad hoc (immature) process to a

continuously improved, or, optimized (mature) process. Mature contract management

processes describe organizational capabilities that can consistently produce successful

business results for buyers of products, services, and integrated solutions. The CMMM

provides its users with a framework or guide for improving their level of performance. It

provides a visual tool to help an organization assess the major steps which they must

accomplish when either buying products, services, or integrated solutions, in either the

public or private business sectors. The CMMM consists of five levels of maturity ranging

from an ad-hoc level (Level 1), a basic, disciplined process capability (Level 2), a fully

established and institutionalized processes capability (Level 3), a level characterized by

processes integrated with other corporate processes resulting in synergistic corporate

benefits (Level 4), and finally, to a level in which processes focused on continuous

improvement and adoption of lessons learned and best practices (Level 5).

If your organization is about to start the journey of Contract Management, or is

considering doing so, the first step every time should be to do an internal and simple

maturity assessment based CMMM. Create a maturity assessment questionnaire and

request that the organization responds. It is important to include everyone here, not only

procurement and legal but also finance, accounting, HR, operations or any technical

departments, and different locations if the organization is global, in order to capture

cultural aspects and even get feedback from employees not based at headquarters.

Basically, every department in the organization should respond in order to receive the

most accurate assessment of the company’s maturity. Remember that each department

plays some kind of role in the contract, big or small and in order to create the roadmap

for the initial step on the coming Contract Management journey it is important to know

how the entire organization rates the maturity. I have used CMMM several times in

various organizations with maturity scoring 1-2 in the initial assessment almost every

time with a few exceptions. Important to highlight that the initial maturity score sets the

baseline and creates the roadmap for future optimizations, so it is important to highlight

that a score of 1 or 2 should not be seen as an organizational failure but as a state of mind

of the organization’s Contract Management maturity enabling the organization to further

optimize and improve. Once the organization is aware of its contracting maturity it is

possible to plan, prioritize and create the roadmap for becoming a 3 or 4 on the CMMM.

Please note that it’s not required to become 5 out of 1-5 today or in the first try because

then it will probably never happen. Too often organizations skip the step of doing even a

simple maturity assessment and instead focus more on creating a simple “believe”

business case based on risk management arguments (which I acknowledge are important

but not everything). Alternatively they may focus on theoretical cost reduction

percentages which hardly ever see the books, or on implementing a new contract

management tool to begin with without actually knowing the organization and its needs, I

will come back to the tool later in the article. Keep it simple and based on current

maturity, set up some realistic targets in order for the organization to improve and make it

exciting for all departments to be part of the initiative. First thing could be to map the

parties involved in a contract, is there a category manager, sourcing manager who is

responsible for the contract? How are legal and finance involved as stakeholders?

Knowing the ownership and who is involved, how and when makes it possible to look at

processes between departments. What do legal require in order to assist? Are there any

pre-contracting conditions the contract owner needs to make Legal aware of? Like

contract ID, contract title, information about what is being purchased? Do legal require

4 Martin Lonstrup

for the contract owner to provide any basic information prior to assistance? Or more

importantly when legal should be involved? Same goes for finance, when is finance being

involved in the TCO’s, savings, payment terms etc.? Does the organization have a policy

for standard payment terms? So there are many processes, policies and ways of working

that will come into question once the maturity assessment is done and the roadmap is

created. The above also reflects the importance of cross alignment on Contract

Management initiatives as Contract lifecycle Management involves all departments in an

organization big or small. The following sections will introduce the aspects of the

Contract Management Puzzle and, based on the puzzle pieces, drill further down into

selective findings and key messages from the NAO audit report, 2014.

The Contract Management Puzzle – setting the baseline3

The Contract Management Puzzle (“The Puzzle”) was developed based on my experience

having worked with the implementation of Contract Management projects in several

medium and large size companies globally. It is a new and improved way to think about

Contract Management, allowing any organization to work with Contract Management

without having to prepare an extensive business case to begin with. This process model

gets Contract Management out of the shade of theory and ensures that it’s tangible to

everyone, step by step enabling the organization to visualize the process for management

in a concise and clear way. The puzzle pieces and their size determine the business

priorities and provide an opportunity to focus on one area at a time without having to be

top-down. Each piece of the

puzzle further defines a second

layer of puzzles for further

mapping of the underlying

processes and actions, making it

simple but most importantly

keeping you on track and

providing management with

concise, to the point progress

reporting at the same time. In the

following section, I have

highlighted a few potential

second layer processes. The

Puzzle consists of 12 pieces

covering all upstream and

downstream activities under

Contract lifecycle Management and should be considered to be Fundamental Building

Blocks in Contract Management. Creating and presenting a business case in an

organization is time consuming and organizations new to Contract Management find it

hard to justify the investment, convey the scope, role and value of a contracting

management function to stakeholders throughout your organization based on highflying

future optimization potential and cost reduction percentages. The puzzle enables the

organization to identify the overall scope within the organization and use it to

communicate the contracting model to other stakeholders within the organization. As a

result, it is easier to clarify the contracting role and scope to cross-functional colleagues

as well as make the business case to obtain resources for strategic growth opportunities.

3 See more about the Contract Puzzle at http://thecontractpuzzle.com/

Contract Management 5

So with the initial maturity assessment done, it is time to define the activities behind the

pieces to the Puzzle and set the baseline for the up-coming Contract Management project

which, together with initial findings, can be shown as proof to management.

Alternatively, if it is possible to dedicate the time for it, or agree some individual

objectives on activities relevant for a future Contract Management project, that could be

the way to go. The Contract Management project in Group Procurement was initiated

after having presented Contract Management to all the Maersk Group lawyers on an

annual lawyers day, and a few months later shared the presentation with the CPO and

CFO,. That resulted in initial kicked off with an initial maturity assessment, initial clean-

up of current contracts creating the baseline for the potential benefits. Bit and pieces from

the project in Maersk will be used as practical best practice examples through-out the

article. The Puzzle consists of the following pieces: Demand Planning and Sourcing

Strategy, Administration, Performance Management, Contract Development, Contract

Creation, Deployment, Compliance, Renewal Management, Pre-contracting and

contracting, call off, Supplier Relationship Management (SRM) and Risk Management.

Underneath each Puzzle piece is yet another layer of processes and activities related to

consider. So why should the organization create this Puzzle roadmap and what good will

it bring? Well, that is a fair question.

The UK Government did a similar exercise back in 2008 with their NAO 2008 Good

Practice Framework with the attempt to set the baseline for Contract Management in the

UK Government. It was followed up by a report on how to improve Contract

Management in 2009. The Office for Government Commerce accepted the

recommendations but failed to influence the individual departments and focus drifted

away over the years. This is not much different from other organizations, the road to

Contract Management excellence is long and hard and you rarely get more than one

chance. Having used simple tools or the Puzzle would have eased the implementation,

enabling each department to create their own Puzzle which would have built ownership

and commitment from the start. Receiving a large report suggesting how to do Contract

Management from the top rarely works and the latest Report clearly highlight that the

failure with implementing Contract Management goes beyond poor administration or

lapsed awareness. It is clear that the overall value of Contract Management hasn’t been

recognized by the Government and too often Contract Management has been seen as

delivering the deal that was agreed when the contract was signed which means that

Contract Management has been seen as a way to avoid things going wrong, rather than

unlocking value throughout the life of the contract. The departments haven’t taken up the

challenge and the department systems and governance models have focused on approving

new projects as if the responsibility ends when the contract is signed. On top of that

departments haven’t recognized that they are responsible and that they carry the risk for

the services they have contracted. This result in departments rarely having visibility over

their contracts, leaving them unable to monitor and challenge the operational contracts.

The above observations highlighted in the Report are unfortunately not coincidences but

the result of the approach taken back in 2008 and 2009 with the Good Practice

Framework. The Government departments didn’t feel responsible, couldn’t see the

“what’s in it for me” aspects and the baseline was set by one part of the organization. I

would like to believe that using the Puzzle to design individual roadmaps for each

department, linked to the overall UK Government Puzzle, would have enabled the

individual departments to provide feedback, contribute to setting their targets and

objectives creating a sense of ownership. Instead the Report now concludes that poor

Contract Management is a long-standing issue and highlights a large number of critical

findings what you wouldn’t expect from an organization that has been focussing on

Contract Management for the last decades.

6 Martin Lonstrup

The NAO Audit Report

The NAO audit is the first audit exercise comparing the Contract Management

performance and development of UK Government Departments six years after setting the

baseline in 2008 and probably the most realistic to date measuring the performance of

Contract Management implementation. The audit tested 60 contracts for overbilling and

73 contracts against eight areas of the NAO 2008 Good Practice Framework4 (“Good

Practice Framework”). It concluded that Contract Management processes were weak in

343 out of 584 areas (of this, 73 areas considered to create a material risk). It is surprising

to see that the UK Government Departments are faced with that many issues as the UK

has been considered a frontier within Contract Management globally for many years now.

Unfortunately, it clearly show that even the most aware, skilled and educated

Government institutes find it difficult to catch “the big white elephant” that contract

management has become. So how does this term fit here? Well, similar to the definition

of the big white elephant, Contract Management has become an obvious problem and risk

so clear to everyone, yet something only very few organizations dare to address or

manage to capture as also seen here.

If you dive into the detailed observations of the reports done in the UK, it clearly

highlights all the classic textbook issues, from people management (HR), Capabilities,

Legal, Commercial, Finance, Administration and unfortunately displays that departments

are still mainly focusing on their own tasks, KPI’s and deliverables in silos despite the

guidelines for best practice Contract Management set out in the NAO 2008 Good Practice

Framework. The message is clear; the UK Government will not get value for money from

its contracts until it improves Contract Management so how can that happen?

The Report highlighted widespread problems with how the UK Government manages its

contracts, problems that most organizations today struggle with in one way or the other.

The following sections will look further into the Puzzle pieces describing some of the

critical areas raised in the NAO Report.

Administration

Second layer activities could be: Process for contract signing, a tool for storage,

contract summary and/or an operational contract guide, reporting on contract status to

management, legal policy and contract management policy.

Senior Management Visibility and a Contract Management Tool

(Data is King)

The Report highlighted that the departments lack visibility of

Contract Management at board level or are lacking senior-level

engagement with the reason that senior engagement has not

generally been maintained during the operational phase of the

contracts. One reason for that lack of involvement during the operational phase is lack of

data and visual statistics allowing for senior management to familiarize themselves in a

short and easy way with the status of contracts. Contract data needs to be communicated

to senior management in a meaningful way, long excel documents will not do the job.

According to the Report, the UK Government departments are lacking basic contract

information, departments don’t have systems in place that combine procurement, finance,

compliance or contract management. A few larger departments are still working on

4 http://www.nao.org.uk/report/good-practice-contract-management-framework-2-2/

Contract Management 7

putting basic excel overviews in place, and an overall combined system showing all

current contracts, changes and communication is planned but yet to be seen. Moving

from using shared drives, excel sheets or simple hard copy versions of contracts, to

making use of more and more online repositories, contract management tools etc.,

enables closer engagement with senior management feeding them with concise, relevant

information which eventually as management matures and data becomes better and better

will change the picture. Recently, in connecting with the implementation of a new

contract management tool in Maersk, it was a firm requirement that the tool would be

able to provide a one page easily readable dashboard to senior management enabling

them to follow with live data the status of contracts in their individual departments and

transversally but also to provide an easy accessible tool for the everyday users. The

vision was to implement a tool that would support senior management and the users in

having live date at any time they needed it, whether on their laptop, mobile or tablet.

Having all contracts in one tool makes it possible to track various elements like number

of valid contracts, number of expired contracts per location/supplier, payment terms,

delivery terms, or even across contracts: what is the average negotiated payment term

versus the policy? Do we have any incentives schemes and have they been collected if

applicable? What is the spend under the Contract? And more importantly in a

conglomerate the optimization opportunities when being able to look across business

units on generic materials/supplies, consolidating spend that provide enormous potential

on future price negotiations, or more simply limiting the number of services being

contracted for twice or even more, reduction man hours, admin cost etc. This is only a

few areas which become interesting to look at once all contracts are in the same tool and

shown in dashboards, surely something that will catch the attention of senior

management and something which ties together performance management data and

contract administration, and enables best practice negotiations, supplier relationship

management etc. Today, the Maersk Contract Management tool consists of 11.000

Contracts with approx. 7.000 more to be migrated, covering a contract spend of 40 billion

USD across 16 business units in more than 100 locations globally and approx. 1.800

active5 users of the Contract Management tool. It is expected that the number of contracts

in the tool will be much higher in a few years. A relatively unique result6, rarely seen

because the Contract Management tool was implemented together with the Business

Units by creating a project structure consisting of a steering committee and a project

team. The project was led by me as business lead together with a project lead. 21

different tool providers were invited to tender and after the first two evaluation rounds it

was down to five different Contract Management tools, all with the capability to provide

full and secure Contract lifecycle Management and enterprise functionalities and not just

simple SharePoint reporting. In order to reduce from five suppliers, we decided to do a

sandbox session asking all the suppliers to set up a test environment allowing us to test

their tool functionalities in a closed session. That meant that none of the suppliers were

allowed to be in the session, they could provide phone service availability if they wanted

to but this was not a requirement. 15 people with various backgrounds (sourcing,

purchasing, accounting, other business units etc.) were invited to test the tools in sessions

of 20 minutes with a hard stop and 10 minutes evaluation for each tool. The manuscript

was for each participant to access the tool, register a contract, upload the contract and

search for it and create a report on its status within the 20 minutes. The sandbox session

showed that ease of use varies a lot depending on the tools and user backgrounds and that

5 Current data 6 The complexity and size of tool have shown to be best of benchmark for Contract Management tool

implementations.

8 Martin Lonstrup

it is important to do these tests before spending a lot of time and money on a new or first

Contract Management tool. The results of the test varied a lot, from 1 contract being

stored and search for in one tool to 10 contracts being stored, search for and reports

created for in another tool in 20 min so an interesting excise to do. It is important to have

all the everyday users in on it from the very beginning and avoid implementing a tool to

satisfy senior management, because that will likely result in a tool not being used by the

organization, leaving senior management with same risks and no valid data. The sandbox

session clearly highlighted the easiest to use tool for the users in Maersk and made it very

easy to get buy-in in the end for implementing the most user friendly tool based on the

sandbox session plus other evaluation criteria.

Deployment

Second layer activities could be: handover packages, communication through

newsletters, briefings, intro meetings, implementation processes, upload

of contract data into ERP systems, deployment charter and policy.

The Report highlighted that Contract Management is not operating as a

multi-disciplinary function which results in limited interaction between

finance, commercial and operational contract management functions.

One of the reasons for the failure here is that the processes describing

the interaction and split in responsibility and reporting lines required

were either not completely clear, not developed between the involved

parties or even not developed in the first place. In order to get cross-functional

interactions to work, it is important to map out all the reporting lines and develop an

agreed process specifically between the two parties. An example could be on controlling

incentives or bonus collections set out in the contracts. In this case, a process for

collecting and following up on incentives/bonuses needs to be developed, probably

involving finance or accounting, the contract owner, a compliance team and legal.

Creating a process between parties promotes a sense of ownership: accounting will make

sure to follow up with the supplier, the contract owner can be used as an escalation point

as can legal in case of any doubt or questions on the interpretations of the contract, and

all involved parties will make the effort to chase down every dollar.

A second element to this piece is often the question of who should be responsible for

Contract Management? Contract Management is often considered to be something

administrative, or commercial. Sometimes it even ends up in a power battle between

departments, who should be responsible for Contract Management once cost reductions

are shown. That Contract Management should be cross-functional in order to succeed

needs to be seen in a wider sense. Best Practice indicates that Contract Management

should be located in a separate Contract Management function but there are many

examples of Contract Management being managed by the legal department, category

management department or finance which could work perfectly as long as cross

functional involvement is still applied and ownership is clearly known throughout the

organization. In the latest project in Maersk, I was faced with the same question. I was

sitting in the legal department but would that be the right place for Contract

Management? I decided to recommend that Contract Management be kept separately

from legal in a separate compliance team created for the purpose of managing the future

contract management tool recently implemented across Maersk. It made sense to have

Contract Management placed in the same department that would have the future contract

management tool ownership. Other organizations separate the Contract Management

function completely and in other places it is under commercial or even operational

Contract Management 9

departments so depends on the Contract Management approach taken by the organization

and the maturity of the organization.

Compliance

Second layer activities could be: SOP for compliance checks, Anti-corruption

measurements, Clear roles and responsibility, Operational compliance measurements

(Price models, operational use of contracts), Organization awareness

of contracts with reference to deployment, Contract audit checks

(invoice, performance, delivery, quality, and bonuses).

Contract compliance and monitoring is probably the area with the

lowest hanging fruit if argumentation or benefits needs to be

demonstrated in order to initiate a Contract Management project. 8 out

of 10 contract management business cases are based on cost recovery and provide senior

management with a dollar value on top of all the optimization potentials provided under

the other Puzzle pieces. These should definitely be a priority when looking for

optimization potentials. So what are we talking about, cost recovery? Well, the UK

Government tested 60 contracts for overbilling out of which 34 contracts had non-

compliance issues and five contracts were handled over to the Police for further

investigations. The UK Government ended up recovering 179.4 million GBP from two

suppliers in the form of negotiated settlements on rebates, investigation costs and interest

from consistent overbilling. The Report concluded that the audit of the 60 contracts

included both under and overbilling and that given the lack of controls across the

Government, that other instances of overbilling were most likely have occurred across the

wider contract portfolio. This is a clear consequence of not having an overall overview of

contracts, of lack of coordination, communication (processes) between involved

departments. This was a result of just handing over the contract to the next department

without any interaction or formal hand-over policies and tie-backs to the observations

made by the NAO on lack of visibility on contracts, overall ownership and tools. I have

conducted similar exercises before and rarely discovered overbilling close to the amounts

discovered by the NAO even with a much higher consolidated spend. Having said that, I

would still say that some form of under or overbilling has been the case pretty much

every time, however not to the extent that it has been considered to reflect fraud-like

behaviors needing further investigations. I have in previous companies seen evergreen

consultancy contracts lying around for years linked to small consultancy companies or

license agreements that just renew themselves every year which added up considerable

sums. Other optimization aspects of checking supplier invoices against contract could be:

Are items missing from the pricelists? Is there any lack of contract or pricelist

extensions? Are online purchases done without valid pricelists? Are invoices missing the

article/part number references and description? Checking if suppliers are invoicing the

organization the right amounts is an exercise that is possible to do in any organization,

simply by locating 5-10 contracts and requesting the invoices from the same suppliers

from finance. Simply compare the amounts of the contract with the invoices, does it

match? What about the payment terms? Does the payment term match between the

contract and the invoice? Does it match between the contract and the financial system and

when is the actual invoice paid into the system? Now payment terms has been a debate

for year now, as global organizations are squeezing their suppliers by requiring +45 days

or current month + 60 days payment terms but in reality it is more beneficial to have a

look at the actual payment term used in the financial systems and by finance or

accounting before settling the policy of payment terms in general. The exercise could

reflect that the invoices are actually paid too early or provide the proof those 30 days

10 Martin Lonstrup

minimum is required in order to pay in time. This would be valuable information to have

during negotiations and with the financial status globally, many a dollar saved!!

Call-off - Payment and Incentives excise

Second layer activities could be: Roles and responsibility are clear (SLA structure

supporting the business), Process for collecting bonus, Process for

operational use of contracts, Incentive structures (financial or non-

financial and governed with appropriate checks and approval

mechanisms, process for payment terms, and payment flow

One exercise I have done previously reviewing the payment terms in

approximately 300 contracts compared with the financial system showed that invoices in

average were paid 18 days too early. The reason was that the financial systems hadn’t

been updated alongside renewal of contracts resulting in contracts and systems being out

of sync. Now, paying too early doesn’t imply interest, penalties or suspension of

deliveries, typically expected from financial systems but actually not uncommon.

Updating the financial system to match the actual agreed payment terms meant 2-digit

million USD amount improvement of Net Working Capital, the optimization being

simply based on the already agreed payment terms. Another part of the exercise on

payment terms showed that out of 1000 contracts stored in a centralized contract

repository, only approx. 300 made use of the standard payment terms from the fixed

drop-down menu, whereas approximately 700 contracts entered had used the option

“Other” which generated a free text field. Out of the approximately 700 contracts having

used the “Other” option for payment terms, around 126 had typed in “Not applicable”,

whereas the remaining part of the contracts under “Other” had payment terms typed in

that in 90% of the times reflected the drop-down menu options with small nuances. This

again shows quickly non-compliance on simple things arises, leaving the door open for

lost benefits.

Incentive programs and bonuses are again mechanisms agreed during negotiations similar

to payment terms and handed over to a contract manager, or carried through to the end by

one contract owner, depending on the procurement model used. Commercial incentives

and potential benefits which could become applicable in the future, in one year from now

or even later are difficult to manage for any organization. Employee turnover alone

makes it very difficult to control unless a firm process is set up. Secondly, unclear

processes about supplier incentive and bonuses could become a serious risk with the

increasing focus on anti-bribery and the latest FCPA and UK Bribery Acts on anti-

bribery. Another exercise I previously have done was to look into the bonus schemes

with suppliers. This ended up being a relatively manual exercise flipping through all the

contracts in the centralized contract repository looking for bonus clauses etc. The bonus

exercise resulted in a USD amount being recovered in unclaimed bonuses and a two-digit

million USD amount in bonuses received was documented as received. This was

followed up by a new policy on bonus collection being developed between the

commercial departments, finance and legal. The Report does not deal with payment term

optimization or bonus schemes however it is very likely that payments and collection of

bonuses are out of sync in the UK government contracts given they today experience lack

of visibility and transparency of contracts. This is definitely an exercise worth

considering whether the organization has a centralized repository in place already or

contracts/invoices need to be collected manually.

Contract Management State of Mind

So, what is the actual state of mind of Contract Management? Well, whether looking at

the selected areas covered in this article or browsing through the full NAO Report in

Contract Management 11

detail, clear signs exist of the Big White Elephant still being in the room. Looking at

some of the observations done by NAO highlighting issues with visibility, overbilling,

limited interaction or hand-over between departments, payments and contract

development not to mention SPM or SRM, which is considered to be even less mature,

and taking into account that the UK Government for decades have been considered to be

a frontier within public Contract Management, the conclusion must be that Contract

Management has become an obvious problem and a risk that is clear to everyone, yet

something only very few organizations dare to address or manage to capture. The UK

Government would probably be rated between 1-2 in maturity on the CMMM and that is

after having developed the Good Practice Framework seven years ago. It is therefore

obvious that even with all the right intentions and management buy-in it becomes

difficult if the ambitions are set too high, out of sync with the organization. It is important

to avoid making it too theoretical and difficult, because it isn’t! Keep it’s simple, start

tomorrow with the maturity assessment and initial roadmap to create your Contract

Management strategy. Don’t struggle with heavy business cases unless absolutely

necessary, investigate your organization in order to understand how and where a potential

Contract Management project is best initiated. Remember that Contract Management is

all upstream and downstream activities whether SRM, SPM, strategic sourcing models,

purchasing systems, compliance or the legal department etc. so relevant to involve all

departments eventually. Transition of a legal department in order to make it aligned with

contract management principles is a separate chapter and an article in itself. Few truly

global, best practice examples exist having successfully implemented Contract

Management and a Contract Management across +100 locations in a conglomerate

consisting of multiple and individual business units but the Maersk – Group Procurement

project certainly stands as a best case example for future reference in implementing

Contract Management in a simple way.

***

Martin Lonstrup is a Danish Lawyer, having worked with contract management and

legal for the last 8 years, founded the Danish Contract Management Association

(DCMA), former Chairman of DCMA. Worked in various related roles from Head of

Legal, to Legal Counsel and Contract Manager to now Senior Legal Advisor and

experienced in contracting from various aspects with focus on procurement.

Martin worked with operational contract lifecycle management in different companies

and industries, implemented legal department governance models, policies, CM

processes, CM tools, compliance, legal processes ensuring better use of contracts,

financial optimization, and clear overview of contracts. Most recently in the role as

Senior Legal Counsel and Business Lead on implementing a new contract management

tool in the Maersk Group globally before moving to a new position within the Maersk

Group in Maersk Oil.

He has developed the new Contract Management process model, the Contract Puzzle – a

new and improved way to think Contract Management, allowing any organization to

work with Contract Management without having to prepare an extensive business case to

begin with. This process model gets Contract Management out of the shade of theory and

ensures that it’s tangible to everyone, step by step enabling the organization to visualize

the process for management in a concise and clear way.

The Maersk Group

Maersk Group is a worldwide conglomerate. We operate in more than 130 countries and

employ roughly 88,900. In addition to owning one of the world’s largest shipping

12 Martin Lonstrup

companies, we’re involved in a wide range of activities in the transport, energy, logistics,

retail and manufacturing industries. Read more about Maersk and our business units on

www.Maersk.com

The Maersk Group Values

As members of the Maersk family, all Business Units and employees are encouraged to

live by the values of the Group:

Constant Care: Take care of today, actively prepare for tomorrow

Humbleness: Listen, learn, share, and give space to others

Uprightness: Our word is our bond

Our Employees: The right environment for the right people

Our Name: The sum of our values, passionately striving higher

These values symbolize Maersk’s heritage and act as the founding element of the

company.