‘Data shows that 1-5% of telecommunications companies’ income is subject to revenue leakage‘, according to PwC.
Technology, financial services, pharma, energy, and utility companies face the same issue.
The reasons are anything and everything from differences over sales contract/license fee interpretation, regulatory penalties, and missed deadlines to collection failures, maverick pricing, lost sales, and transaction errors.
One way to tackle the issue is to manage contracts proactively. To avoid leakage, you can divide your contract management into upstream and downstream processes. World Bank’s procurement guidelines identified four upstream and five downstream activities in the contract management processes.
Upstream Phases of a Contract
The upstream phase refers to the early stages of the contracting process, from the initial idea to negotiating and finalizing the contract.
“The success of contract management is strongly influenced by upstream activities such as those undertaken during the procurement planning, choice of contract, and contractor selection phase.”
- World Bank
Below you’ll find an overview of the upstream contract phase.
1. Good Procurement Planning
A good procurement plan means that you have accurately assessed your procurement needs, done market research, and developed a procurement plan. The goal is to optimize costs and mitigate risks.
2. Comprehensive Specifications
Documenting your specifications is also part of the upstream phase of managing contracts, and it involves accurately understanding your contract needs described in the requirements.
3. Right Contract Selection
World Bank defines contract selection as “the contractual mechanism, including terms and conditions and risk allocation”. It matches the type of contract for a specific project or procurement.
4. Careful Supplier Selection
You select suppliers with the most appropriate attributes and capabilities. The aim is to avoid cost overruns and delays in delivery. You judge potential suppliers against three critical factors: budget, time, and quality.
Downstream Phases of Contract Management
The downstream phases of contract management kick in once your award the contract. Below we list the crucial processes in this phase.
5. Contract Management Plan
Sound contract management is practical and thorough and reflects the size, scope, and complexity of the contract you plan to award. The essential parts of a contract you may include in your contract management plan are:
- Contract Initiation
- Contract Execution
- Contract Monitoring
6. Delivery Management
The phase involves the delivery of promised goods and services. You have to systematically implement the contract with due consideration to the terms and conditions agreed upon and documented during negotiations.
Apart from the usual aspects you might control (like cost, time, and quality), delivery management involves monitoring the progress of the work, managing ongoing issues and changes, and maintaining open communication with the supplier to ensure that they are meeting their obligations. It is the most crucial and, by far, the most influential stage of managing supplier-customer relationships.
7. Relationship Management
You might have heard of ‘relationship management’ in banking. Big contracts are equally important and necessary because they often involve a long-term partnership between the buyer and the supplier. Hence, it requires ongoing collaboration and communication to ensure successful delivery.
8. Systematic Contract Administration
It is the ‘record keeping’ part of a contract where managers ensure a complete and accurate record of all agreements. This process aims to cover bases (risk avoidance) and save time/effort managing contracts.
9. Contract Monitoring and Evaluation
Only mature organisations have a systematic method and tooling to monitor and evaluate the performance of all ongoing contracts. C-level executives (like Chief Legal Officer) pay attention to this phase, which can impact the organisation’s bottom line and reputation.
Failure to optimize this contract management phase can result in potential legal or financial issues arising from poor performance or non-compliance.
A banker once told the CEO of a legal tech consultancy, “You leak because you just forget what’s in the contract; the machine can help you remember to use the rights you bargained so hard for ahead of signing/execution.” (Alistair Maiden, CEO of SKYE)
To avoid revenue leakage and save time, ask our experts how Docfield can help your contract processes and discover more about Docflow Contract Management and automation software.
If you have read this far, check out the article that captures five unique features of contract management software for large organisations.