Introduction

Contract management is one area of the IT procurement process (whether for hardware or for software) that is often overlooked. Considerable time and effort would have been spent in careful planning and negotiation leading up to the execution of the contract or purchase order. This is especially so since this is within the law firms’ domain knowledge. However, this effort can be rendered largely useless if the contract is not subsequently managed correctly.

To some degree, the extent and focus of the contract management will be dependent on the complexity and importance of the relationship between the law firm and the supplier. To ensure smooth delivery and operation, a contract involving the installation of, say, a large ICT suite and its subsequent maintenance for three years will need considerably more time and effort than the installation of a couple of new printers.

So, when a contract is to be signed, the contract administrator (usually the ICT co-ordinator) needs to develop a plan to manage it.

Contract management: Basic procedures

The plan should follow a logical sequence of activities, which typically would include the following:

1. Start a contract or purchase file with copies of the following:
   • contract memos affecting the outcome of the contract or purchase.
   • contract amendments and associated back-up information justifying any changes.
   • minutes of important meetings.
   • correspondence plus notes from important phone conversations.
   • the results of inspections, audits and quality assurance checks.
   • any reports required.
   • customer survey results.
2. Make sure that you have fully established what constitutes the major deliverables of the agreed contract or purchase. For example:
   • the performance standards and what comprises acceptable performance.
   • warranty/guarantee periods and requirements.
   • payment dates/schedules.
   • the consequences of available sanctions for failure to meet due dates or performance standards.
   • technical requirements/specifications.
   • products/services due dates.
   • due dates of any reports from suppliers on contract progress or performance levels.
3. Decide on the most effective monitoring methods for the contract. What is to be reported, to whom and at what point? Remember that, if you ask a supplier to furnish information, you need to tell them the format in which the information should be provided. Options could include:
   • regular weekly, monthly or other periodic meetings.
   • surveys of individuals who use the commodities or services.
   • regular and/or random inspections of product deliveries.
4. Make a note of the major deadlines. Establish:
   • the number of options to extend contract or purchase periods and when they occur – for instance, extending the warranty and support for an additional period.
   • the final notification date if the law firm decides not to renew a contract.
5. Determine how changes in the contract will be handled and by whom. You should establish – and advise the supplier – who has responsibility for requesting or agreeing changes to the contract or purchase order and who has the authority to accept any changes requested by the supplier. You should document the required form in which these changes must be agreed – for example, signature of both parties, signature of partner-in-charge and so on.

Set up a post-contract award meeting

After you have sorted out these procedural matters, you should set up a post-contract award meeting. This should include the supplier and the major stakeholders in your law firm – for example, the ICT co-ordinator, principal partners, members of the staff using the equipment or service.

The post-contract award meeting is an opportunity for everyone to meet, carefully review the requirements of the contract and determine the expectations of both parties. The contract administrator should run the meeting. He or she should walk through all the major provisions including performance requirements and issues, insurance requirements and major deadlines for reports or deliverables.

Monitor the contract’s progress

It is vital to set up mechanisms to monitor the progress of a contract or purchase. The monitoring may include regular meetings, monthly progress reports and regular or surprise inspections. Before any payments are made to the supplier, the contract administrator should be sure that sufficient progress has been made on the contract and that all required deliverables have been delivered or that the contract or purchase has been completed to the law firm’s satisfaction.

There exist a number of different tools to help monitor the progress of a contract or purchase. A simple Gantt chart would be a good way of tracking tasks across a time scale.

Gantt charts are probably the simplest of all charting techniques for the planning and controlling of projects. The charting process involves breaking the project into components. List these sequentially, estimate the time required to complete each element, plot them on the scale and then track the actual progress on the chart.

Prepare for potential problems and disputes

Even though you may have effective contract administration measures in place, problems can still arise. For instance, services may not be performed or goods not delivered in line with the contract requirements. Your focus must be on getting the supplier back on track while maintaining your contractual position, a delicate balancing act.

The supplier should be able to identify the cause of the problem quickly and develop a solution. When the supplier is having difficulty in resolving the issue, you should work with it to achieve an acceptable solution while, at the same time, seeking to ensure that the major deliverables of the contract or any other matters of significant importance are not compromised.

Liquidated damages

Liquidated damages can be used as a possible “last” resort when seeking redress from a supplier that has failed. They may also serve as a deterrent to a failing supplier to improve to meet the contract requirements. Liquidated damages must be calculated on the basis of a genuine pre-estimate of loss to the law firm resulting from the failure by the supplier to meet its contractual obligations. They are not intended to be punitive penalties.

If liquidated damages are to be claimed, the contract administrator must clearly and precisely document the performance problems that have occurred in order to assess their impact and calculate the cost to the law firm. This amount may need to be reclaimed from the supplier.

Guaranteed delivery

Another option available to protect against breaches such as late delivery is a guaranteed delivery remedy clause in the contract. Such a clause would give the law firm the right, should the supplier fail to deliver, to purchase the necessary goods or services from elsewhere and then bill the supplier for any excess cost of buying those goods or services, including the administrative costs incurred.

Before making a “request for consideration” (what the supplier will give to the law firm due to its failure to perform according to the contract terms), the contract administrator should weigh up the longer-term ramifications that the request may have on the law firm’s relationship with the supplier. At times, it may be more beneficial to threaten to pursue this remedy rather than actually making a claim.

Termination of contract

If the supplier is unable or unwilling to resolve the problem, termination of the contract for breach is an alternative. Termination should be a last resort, and the contract administrator should never make this decision alone. Consensus on this action should be sought from the other stakeholders in the contract. The discussion should seek to weigh up the consequences of outright contract termination against the effects of continuing with the contract.

The contract administrator should document all the actions that have been undertaken in an effort to resolve the problem. This information will help to justify the decision.

Monitor the supplier’s performance

It is critical to establish mechanisms to monitor a supplier’s performance.

Some typical areas to cover in contract monitoring are:

• the percentage of deliveries that are incomplete – you need to decide on a level of deliveries that can be accepted although they are incomplete and monitor the supplier’s deliveries, to ensure that incomplete deliveries remain within the accepted tolerance.
• the percentage of goods that are ‘dead on arrival’ (DOA) – you also have to decide the percentage of DOA equipment that you are willing to accept, and monitor deliveries to ensure that the level of DOA equipment is not exceeding the agreed level.
• the percentage of deliveries that are delivered on time – again, decide on what is an acceptable percentage of deliveries arriving late or early, and monitor the deliveries to ensure that the supplier is not exceeding this level.
• expediting or chasing of orders – the amount of time spent and number of occurrences.
• the percentage of invoices that are correct.
• the percentage of failures under warranty.
• the mean time between failures.
• price movements against competitors/indices.
• variations requested/agreed.
• quality of the supplier’s customer support.
• technical support and knowledge of the supplier.
• conformity to contractual requirements.
• whether the service is meeting the customer’s expectations.

Measure supplier performance

There are different ways that you can measure supplier performance. We will look at what are probably the two most appropriate for law firms:

• categorical method.
• weighted points.

Categorical method

This is most probably the simplest system to use. It is based on listing performance features and giving an indication of the level of performance achieved for each one. This may take the form of scoring from 1 to 5, with 1 being ‘unacceptable’. The performance could also be expressed as ‘good’, ‘average’ or ‘poor’ or, alternatively, ‘satisfactory’ or ‘unsatisfactory’.

The problem with this method is that it is subjective and does not contain any really objective criteria. However, this can be countered to some degree by ensuring that the supplier is scored by more than one person. It should also be noted that, when using this method, if two suppliers are both viewed as having achieved the same performance level it may be extremely difficult to decide which is actually the best.

Weighted points

This method allows you to take a more objective approach. It takes the relevant factors that are to be managed and then weights them in accordance with their importance to the law firm. If, for example, price is considered to be the most important factor, it will be weighted relatively heavily – say, at 45 per cent of the total – and the less important factors will accordingly be given less weighting.

Careful consideration needs to be given to each item being purchased, as the weighting may need to be altered from item to item. For example, for items that are vitally important to the continued smooth operating of the law firm, delivery could have a heavier weighting.

You should document the level and amount of failure you would be prepared to tolerate (acceptable level of service) and how the supplier will be expected to rectify any performance failures that fall above this level. Your suppliers should be given details of the process that you will use to notify them of problems, the time scales involved and the consequences of failure.

When trying to achieve an acceptable level of service, some of the areas you should consider include:

• the acceptable response time following initial telephone requests in the event of callouts for unplanned maintenance/repair, plus a target figure for the percentage of responses made within that time during a specified period.
• the acceptable amount of time for an engineer to arrive on site as the result of a callout, plus a target figure for the percentage of visits to the site that the engineer makes within that time during a specified period.
• the acceptable amount of time it takes for repairs to be effected once the engineer is on site, plus a target figure for the percentage of repairs that must be achieved within that time during a specified period.
• the acceptable time period for replacement equipment to be delivered and installed if repairs cannot be effected, plus a target figure for the percentage of such deliveries and installations made in the required time during a specified period.
• the acceptable frequency of visits for planned maintenance and the times at which they are to occur, plus a target figure for the percentage of visits that occur when they should and on time during a specified period.
• the regular measurement of the system’s operating speeds and efficiency to ensure that the specific minimums are been achieved.

Dealing with a poorly performing supplier

The contract should include a clause for liquidated damages in the event of delay, in an attempt to get the supplier focused on delivering to agreed time scales. However, you should always aim to take steps to avoid reaching the stage of claiming for damages.

Regular monitoring of the service and frequent meetings with the supplier should help to reduce the opportunity for failing standards to take hold.

Your determination of whether a supplier is in difficulties should begin with an examination of a number of key areas (some of which are listed below) where, typically, if a supplier is in trouble, it will begin to exhibit signs of failure.

Price/total cost of ownership

• Requests for price changes increase.
• Suggestions for improvements decrease.

Price should not really be an issue after the supplier has accepted your order. The main reasons for it becoming a problem tend to be: the supplier initially underbid by too much; the specification supplied was insufficiently clear; or there has been an unexpected change in the marketplace that has had the effect of driving up costs.

Quality

• Requests are made for design or specification changes.
• Requests are made for the acceptance of lower-standard or substandard supplies.
• Defects are beginning to appear.
• Performance levels drop in service situations.

Delivery

• Delivery schedules are frequently not met.
• Processing of orders is often delayed.
• Cycle times increase.

This is often the area where problems first start to show. For instance, if the supplier is manufacturing a product, it can experience difficulties in shortages of raw materials/key components, labour problems, transportation problems and poor management. These factors may disrupt production and delivery schedules.

Service

• Response times to enquiries increase.
• Technical support deteriorates.
• The level of service staff is reduced or they are not well trained/integrated.

When there are service problems, you may also find that there is an apparent unwillingness to return your phone calls and answer your enquiries. As a result, without perseverance your problems can go unsolved.

Organisation

• Communication gaps develop.
• Mistrust develops.
• The interface between the law firm and the supplier becomes unproductive.
• Major restructuring occurs within the supplier’s organisation.

Restructuring or staffing reductions can cause chaos in a supplier’s organisation with such common knock-on effects as expediting taking days and the lack of competent or properly informed personnel becoming apparent.

Financial aspects

• Credit ratings of the supplier decrease.
• Profitability of the supplier decreases.
• Solvency of the supplier becomes questionable – for example, the current and, in particular, the acid test ratios become worryingly low.
• The supplier uncharacteristically requests advance payments.

Evaluating these areas on a regular basis may give you some advance warning of potential difficulties with your supplier. The frequency of your checks will depend very much of the importance of the goods or services supplied to you. However, as a minimum, you should check these factors prior to extending or renewing a contract with an existing supplier, to ascertain whether it is still in sound financial health.

When a supplier is failing, you need to agree with it a clear programme of measures it will undertake to restore its service to the required level. Key dates must be agreed by which each required action must have been carried out, and meetings/updates must take place to ascertain the supplier’s progress back to the necessary standard. It is important to ensure that the major stakeholders from both the law firm and the supplier are involved, and that any solutions proposed are acceptable to both. Otherwise, the relationship is likely to be compromised.

You should always document problems that arise and any solutions that you have attempted. Remember to circulate this information to the major stakeholders as it will ensure everyone is up to speed. By following this procedure, you will have a firm basis on which to decide whether to go forward towards resolution or towards termination.