Contractual obligations in outsourcing contracts are often quite exhaustive, complex, cumbersome to manage, and most often, the forgotten risk management tool.
Clients spend hours of negotiations to close out the BAFO (best and final offer) with their chosen suppliers, often under the conspicuous scrutiny of an advisor. The resulting contract and the associated obligations become the new Bible to manage a complex relationship ahead. But yet, even before the ink has dried, these contractual obligations often seem like an overpowering entangled net, so difficult to manage.
Following may be reasons that may be attributed to such behavior. And this may apply both to the buyer and supplier communities.
- Managing RACI: Multiple stakeholders are required to manage the obligations within the client and supplier organizations. How aware are these stakeholders about their responsibilities to manage these obligations? Ownership is key.
- There are so many of these: Identification of an obligation can be a tricky. More so when these are hidden between pages of contractual language.
- Transition Management: Last but not the least, the team that negotiated the contract and the team that currently manages the contract “may” be different. Was an effective knowledge transfer conducted? This may be important to also understand the “intent” behind a contractual obligation, rather than the actual definition of the same in the contract.
However, those who have been able to manage this subject, would tell, it may not be as complex, and may be a pretty effective way to handle outsourced relationships.
- Build the inventory – One may start with building an inventory. There are market leading practices and enough to “Google around the Web” (I suppose I can use this term.). However, there is always an advantage in using expert advice.
- Using tools – One can always use the rudimentary form of managing obligation cadence through spreadsheets. However there are matured tools and platforms (ahem! read SirionLabs) in the marketplace that are making life much easier than one can think. Cognitive technologies are catching up to further enhance the experience.
- Lastly, understanding the underlying risk may assist in negotiating strategies to eliminate, reduce, transfer, or even absorb the risk of obligation failures – this is the most critical aspect of the need to manage contractual obligations.
Badly managed contractual obligations can lead not only to value leakage, but also to relationship dilution over the term of the contract. No wonder marriage is a tricky subject.