It may not be a surprise that government and the wider public sector are some of the largest purchasers of goods and services – over £390 billion per annum in the United Kingdom – most of that spend is governed by written contracts. Which is why this quote from their purchasing experts in Crown Commercial Services is pertinent – “Contract management is simply too important to be ignored. Without ongoing diligence, a contract can leak value”.
Their point is a subtle but important one – that without proper oversight, suppliers may fall short of delivering the value that was offered and contracted. The seller’s perspective is an exact mirror image of this, buyer behaviours are just as likely to lead to contracts delivering below expectations.
It isn’t just public sector that uses contracts. At the simplest level there are terms and conditions of sales and purchases that cover almost all business-to-business and business-to-consumer transactions, eBay purchases and even handshake deals are a form of contract.
Private sector organisations frequently enter into contracts, which sometimes need to endure for decades. Contracts can be generated by buyers or sellers, often they will have some form of negotiation to make them acceptable to both parties but in the end an agreement is made and it is incumbent on both parties to abide by it.
Once contracts are made, it is in everyone’s interest to manage them, to ensure that not only all the explicit value is delivered but that the contract is used to effectively unlock all of the value it can for all parties.
As a seller why should I worry about the contract once the deal is signed?
Far too often contracts are negotiated, signed and then lie forgotten in a drawer, frequently only referred to when something goes wrong, or, worse, when the contract comes to an end. But in the competitive world of sales and account management, understanding and effectively managing contracts becomes a crucial skill that can significantly impact your success. Contracts are not just legal documents; they are the foundation of business relationships, ensuring that both parties are clear on their obligations and expectations.
Let us delve into the essentials of contract management, offering sales and account professionals insights on how to navigate, understand and leverage contracts to maximise value and strengthen relationships.
What is a contract?
We are often put off reading contracts by pages and pages of “small print” which is often legalese and jargon. However, you do not have to be a lawyer to understand the important elements of a contract, so let’s see what you need to know.
At its core, a contract is a written or spoken agreement, concerning employment, sales, or tenancy, intended to be enforceable by law. There are four key elements that constitute a contract:
- Offer: A promise to do, or not do, something
- Acceptance: Agreement to the offer
- Consideration: An exchange of something valuable between the parties, such as goods, services, or money
- Intention to create legal relations: Both parties must intend for the contract to be legally binding
Between offer and acceptance there can sometimes be many counteroffers and the accepter may not always be the side that made the opening offer. But be careful, once the other party has clearly accepted an offer, it can be binding. Negotiations between buyer and seller are often treated as a special case as there can be much back and forth between the parties before the offer is agreed.
In the commercial world contracts are usually in the form of a document or set of documents signed by both parties with the proper authority to do so. But that does not always have to be the case.
Beware! Contracts can be made unintentionally
Contracts can sometimes be formed without a formal document. You may have heard the quote “a verbal contract isn’t worth the paper it’s written on” but this is not always the case. Be cautious about what you say and do, as verbal agreements can be enforceable. As can “offers” that you make in emails. Acceptance of an offer does not always need to be in writing either; it can occur through conduct or behaviour, even if the offer itself was written.
A conversation between seller and buyer might go like this, “if you pay the overtime, we will deliver your goods first thing Monday morning, that’s three days sooner than the contracted terms.” “OK we’ll pay the extra” agrees the buyer “we need them Monday as we are going to promise our best customer, they will have them on Tuesday”.
As buyer and seller, you have just made a contract and if you are late, or they don’t pay the overtime there is a “breach” which may have legal ramifications and be costly to resolve. So, understand the consequences and think before you make verbal offers!
Understanding contracts from a non-legal perspective
As we discussed many of the contracts, we must deal with are in writing. To effectively manage a contract, it is essential to read and understand it from a practical standpoint. Often as account managers and directors we get handed the account after the deal is signed. How do you quickly get a handle on what is important in the contract? Firstly, actively read the contract, like translating a foreign language, read then stop and check you have understood it.
The best way to cut through all the jargon is to focus on clauses with direct consequences, often referred to as “active clauses.” These clauses lead directly to outcomes such as payment, extension, renewal, or deductions. Your efforts should be directed toward understanding and managing compliance with these active clauses. For example: “delivery will be made 3 days from receipt of the signed call-off”.
As an account manager this is a clear commitment, you need to make sure that everyone in your business understands and conforms. You equally need to make sure that the customer understands that they need to provide a signed call-off before the clock starts ticking. Understanding these clauses form the fundamentals of good contract management.
On the other hand, “passive clauses” are triggered by other clauses. For instance, if Clause 5 states, “if x happens, then the provisions of Clause 11 shall apply,” Clause 11 is secondary to Clause 5. While it is important to be aware of these, your primary focus should be on the active clauses that drive the contract’s main activities. Back to the delivery and call-off example. The passive clause may say “and if you fail to achieve 100% delivery in three-days we reserve the right to terminate the contract”. Understanding the consequences of failure is what allows great account managers to ensure that their business focus on achieving the contractual commitments.
Certainty of outcome removes the need for debate.
As a seller, you want the acceptance of your deliverables to be a matter of fact, not opinion. Phrases like “to the satisfaction of the customer” can introduce ambiguity and should be avoided. Similarly, payment terms should be linked to as few events as possible. Milestone payments should be tied to specific, clear activities and service charges should be straightforward, minimising potential disputes.
Governance meetings – use them wisely!
Many contracts will require some “governance” where the parties agree to formally come together to check that all is “working.” Properly managed governance meetings can be powerful tools rather than just obligatory tasks. Producing reams of management information and performance statistics every quarter can seem like a “tick box exercise” but do not underestimate the opportunities to build relationships and create growth.
Governance meetings typically involve a mix of attendees at various levels of seniority, providing a valuable opportunity to listen, observe and engage. Key tips for effective governance meetings include:
- Listening and observing: Pay attention to what the customer focuses on. This can guide where you should direct your efforts.
- Communicating key messages: Use the forum to reiterate and circulate your core messages, ensuring they resonate with the attendees.
- Reading the room: Tailor your communication to the interests and concerns of the participants, avoiding unnecessary preaching.
- Setting clear objectives: Understand what both you and the customer aim to achieve from the meeting. This might involve preparing consistent and clear messaging for the customer to report upwards.
- Avoiding meetings for the sake of it: Ensure that every meeting has a clear purpose, potentially consolidating what the contract stipulates.
- Including forward-looking agenda items: This helps in planning and anticipating future needs and challenges.
- Varying locations: Sometimes changing the venue can bring a fresh perspective and increased engagement. They are an opportunity to spot new opportunities to solve problems and create new value. That goes for customers visiting your sites and vice-versa.
Value maximisation
Understanding and maximising value is key to successful contract management. Consider your business drivers: ordinarily one or more of total contract value (TCV), revenue, cash flow and margin. Balancing these can be challenging, as they often need to be traded against each other.
Consider what motivates your customer. Are they driven by cost savings, time efficiency, risk reduction, or competitive advantage? Customers, especially those with purchasing power, typically seek solutions to their problems rather than product features. Understanding and addressing the evolving problems your customers face can lead to high-value changes and stronger relationships.
Great Account Managers use their knowledge of the contract to create more value or simply “sell more.” A recent public sector contract stated that the supplier should work with the buyer to identify and supply new products and services which will help achieve “Net Zero”. This is just the type of clause that often gets forgotten and yet is an open invitation to add more services, charge more, broaden relationships and be seen as a strong partner who will be hard to displace in the future.
Context is key
Most industries are subject to some form of regulation, which can both guide and restrict your operations. Differentiating your offerings from “grudge purchases” is essential. Gain an appreciation of the rules governing your customer’s industry but use this knowledge to guide rather than limit your thinking.
For instance, public procurement processes in the UK present various restrictions and challenges. Understanding how the customer is regulated or managed can help you identify the optimal time for seeking renewals or extensions. Most buyers seek satisfactory solutions rather than optimal ones. Leverage “source loyalty” without overemphasising the cost or risk of change.
Taking ownership of the contract
When asked, “What does the contract say?” be prepared to interpret it in the interest of both parties. Key elements to focus on include the scope or statement of work (SoW)which sits behind the legal terms and describes what you are contracted to do, the acceptance regime, and the charging mechanism. Strive for certainty of outcome. If you are performing well, maintain a literal and factual approach. If there are issues, seek sensible pragmatism.
For example. Invoicing should be straightforward, based on a simple price times quantity (p*q) exercise. Do not let customers hide behind regulations to avoid actions or request free changes. Use rules and regulations to your advantage, understanding both the restrictions and opportunities they present. If something is ambiguous you will find it coming up repeatedly at governance meetings. Take control and suggest a contract change to get clarity and use the time at governance meetings to move forward.
Be confident to suggest changes to contracts to make them more effective. Most contracts will have a change control process. If something is not working or can be done better this can often be changed and the contract updated.
In summary
For account managers, understanding the intricacies of contracts is not just a legal necessity but a strategic advantage. Clear commitments lead to clear actions, making contract reviews opportunities to build value. Treat contracts as living documents that can evolve to enhance relationships.
By mastering contract management, sales professionals can ensure that they not only meet their obligations but also exceed customer expectations, fostering long-term, profitable relationships.
Steve Grange is commercial Director for Sopra Steria with 30+ years’ experience over a combination of pre- and post-signature contract/commercial management, as well as ‘policy and process’. With experience in the following industries: Pharmaceuticals (pre-clinical toxicology), aerospace (civil and military), defence, cyber security, telecommunications, consultancy and IT/business process outsourcing.
Matt Spencer is a fellow of ISP and has over thirty years of experience leading sales teams, bidding, winning and managing major contracts, particularly with the wider public sector and central government. He now focusses on helping businesses to succeed in the public sector market, with strategic planning, frameworks, bidding, marketing and sales.