Inter-company agreements increasingly make some or all payment contingent upon compliance with standards based on leading practices, benchmarks or arbitrary contractual measures. Many companies already leverage early-pay discount terms with their vendors (and those who don’t, should!), but this is just the tip of the iceberg of potential opportunities.
Many supplier agreements contain, in addition to early-pay discount provisions, other terms of service that the supplier must meet in order to be paid. These may include requirements for such things as timeliness, quality, customer satisfaction or incident response.
In some cases, those agreements will define bonuses or penalties payable from vendor to customer in the event those requirements are not met, are met or are exceeded. However, only a comparatively small number of companies seem to pursue such terms when negotiating agreements or consistently pursue monies payable under such terms. This creates three potential opportunities for companies that are prepared to do so, and to do so well.
3 Opportunities to Improve Contract Performance
1. As a customer, companies may be able to claim monies due based on vendors’ past under-performance, and pursue additional monies where vendors underperform in the future.
Where agreements with their vendors already contain such provisions, companies should evaluate past vendor performance against those terms to determine whether there may be monies due for past instances of under-performance. Finding such instances and successfully collecting any monies due as a result are two separate challenges, but if the amount due is sufficiently material, it may be worth the effort. Going forward, companies may wish to introduce performance targets and associated penalties, or offer bonuses for over-performance where it makes financial sense, as they renew or replace existing vendor agreements. Doing so may create negotiating leverage, a basis for improved pricing and a larger club to swing if the vendor fails to deliver as promised in the agreement.
2. As a supplier or vendor, companies may have existing exposure or opportunities based on their own past performance and something new to offer when pursuing new agreements or extensions to existing agreements.
Receiving a claim for monies due from a customer is never a positive experience, but it is vastly worse when such a claim comes as a surprise. Where companies have offered performance-based penalties in their agreements, an effort to identify instances where performance penalties may be due can take the surprise out of the equation and even provide an opportunity to win points with customers by handing them a check proactively. Conversely, such an assessment may create incremental accounts receivable revenue opportunities that can improve the bottom line in a challenging quarter.
Going forward, where a company has the ability to manage and monitor its performance against terms of agreements with their customers effectively, there may be opportunities to offer more competitive base pricing when pursuing new agreements or extensions with a reliable performance-bonus “kicker” to meet revenue or profitability targets.
3. On either side of contracts, companies may be able to improve their brand and reputation by demonstrating proactivity in managing and monitoring contract compliance.
“Tough but fair” can be an extremely good reputation to have in any industry, especially when companies are seen as being so internally as well as externally. Demonstrating both the willingness and the ability to effectively manage and monitor performance against contracts for themselves as well as for customers and vendors can go a long way to building and maintaining that reputation.
In going through the two processes described above, companies should consider how to communicate that they are doing so and let all parties involved (internally and externally) how they will benefit as a result. Executives should be prepared to take the bad (monies owed) with the good (monies due), and address each with equal priority and effort. Some attrition of employees and customers could result, but those that remain likely are the ones the company would want to keep.
The biggest hurdle to most companies pursuing these opportunities, even those with existing contract management functions, is the level of initial effort required and the long-term investment required to make this enhanced level of contract management effective and sustainable. However, many companies already have all the skills, resources and technology enablers they need to do so… just in a part of the company that frequently gets overlooked when considering how to pursue value-creation opportunities.
A set of contract terms, especially those based on defined performance criteria, have essentially the same characteristics as a set of regulatory requirements and can be managed and monitored in much the same way. By leveraging the people, process and technology already in place to support regulatory compliance, companies can jumpstart an enhanced contract performance management initiative and greatly reduce the incremental effort and investment required to make it effective and sustainable going forward.
Many of the leading monitoring, auditing and reporting approaches companies currently employ to facilitate regulatory requirements already contain provisions for the monitoring, auditing and reporting contact compliance (for example, Yellow Book, Statements on Auditing Standards, and Foreign Corrupt Practices Act). By applying these standards and practices where implemented already, companies can maximize the contribution of their existing compliance resources. Where not already implemented, the incremental investments in people and training to add these standards and practices to the existing compliance stable can be justified and offset by tangible gains expected by doing so.
Similarly, many of the technology enablers already in place to facilitate regulatory compliance can be leveraged to facilitate improved management and monitoring of contract performance. Most audit automation tools and business analysis systems readily can accept additional sets of standards and data against which to record a process or conduct point-in-time analysis, and continuous controls monitoring and business intelligence applications can do the same in real-time to identify potential issues or opportunities on the horizon. Where these technology investments already have been made, the costs to incorporate performance-based contract standards may be minimal and may already be available from the technology vendors. For companies still seeking to justify these investments, the expected tangible benefits resulting from improved contract performance management may tip the scales on putative return on investment calculations.
For most companies, it may be best to undertake a proof-of-concept before launching the compliance function into a comprehensive contract performance management improvement initiative. Compliance executives may want to reach out initially to their contract management or other operations counterparts (assuming they are not already within the same organization) with an abridged, point-in-time assessment of a small group of contracts likely to yield opportunities to be pursued or exposures to be addressed proactively. Assuming such a proof-of-concept shows promise, compliance and contract management leaders should look for additional high-yield point-in-time assessment opportunities and potential interface points in their respective processes that could enable real-time and exception-based monitoring going forward.
Depending on the compliance culture and organization, it may simply be possible for the compliance group to take this on unilaterally, but there may be cultural (and practical) benefits from doing this in a more collaborative fashion. Even if the initial effort does not yield significant opportunities, the collaboration and the learning inherent to the process may create other opportunities for compliance to increase their profile as a source of value for the business.