Who Owns Contract Management of Major Projects: Procurement or the Business?
Proponents of integrated supply management propose that successful Contract Management (both pre and post award) requires a collaboration between the business functions (Engineering, Operations, Maintenance) that have the need (demand, specifications & service levels) that require contracting with third party services. The procurement function (contracting supply chain) typically provides the market & commercial expertise for creating the contract.
At many companies the traditional model is that the Business function is the “Contract Holder” given that it establishes (“owns”) the demand, specifications and service level requirements. The Business function is thus deemed to chair a collaborative Contract Management Team of Procurement, HSSE, Key Users, Finance, etc. The standard approach involves a progressive transition of delegated responsibility that begins with three Pre-award Elements (Assess Demand, Develop Strategy, Award and Source) stage in which Purchasing has the primary responsibility for the activity. Their role is then transitioned whereby responsibility for Post Award Elements (Implement Contract, Execute & Manage Contract) is carried out by the Business function.
But is this the only model enterprises should follow on major projects?
In addressing this question, I interviewed a number of oil and gas executives and looked to research in the Journal of Strategic Contracting and Negotiation. The findings points to the general best practice that joint ownership of the contract should be assigned to both the business and to procurement. It is general acknowledged that the business may not have the necessary skills to manage the contract independently, and that procurement does not have the vested interests of the business in the contractors, so the ideal outcomes seems to be that joint ownership occurs.
For instance, one of the most important differentiators of “successful” projects in a recent study was that projects risks were identified early during the contract negotiation phase (77% of respondents). Early risk identification was found to be a function of getting the right people at the table early on in the negotiation process. The results also indicate that having key stakeholders at the table during contract scoping will more likely lead to identification of project risks, and better outcomes. This is especially true for large complex oil and gas projects in which clients and sponsors (especially investment companies) are seeking returns on large investments with multiple stakeholders involved.
A number of other interesting themes were also discovered. For example, many of the companies designated specific roles for contract managers from procurement that was accountable to ensure all contract terms are in accordance with the contract, the business contract owner ensured the work was completed according to the scope of work, and a contract coordinator form the business who was accountable to the contract owner to ensure the daily work was being down according to the plan. What is also clear from this and other responses is that the process must be documented to clearly define roles and responsibilities, because in the end the contract management work requires close cooperation between the business and procurement. It is also interesting that organizations such as IACCM are doubtful that the “typical” procurement department, with its focus on cost savings and lump sum bids, do not have the right capabilities to drive value. I agree in so much as the right type of people who understand how to drive continuous cost improvement throughout the life of the contract cannot focus on the upfront price, but rather should focus on risks, identifying non-value-added costs, and explore opportunities for on-going productivity and efficiencies.
Executives in the oil and gas industry I interviewed by and large advocate that procurement/category managers should be the primary drivers for commercial negotiation, whilst business owners be accountable for daily performance management and operational details. This separation of duties suggests that each group must develop a well-defined process that assigns clear roles and responsibilities. The research also suggests that both parties be involved in identifying and prioritizing risks in the early stages of the project contract formation period, and that procurement’s role should be one of being informed and present during major performance milestone reviews, as well as involved in payment processes at major milestones.
Several parties advocate having procurement own the entire end to end process, including operational details, but this may result in confusion and poor outcomes. For example, Tim Cummins from IACCM notes that “You can’t really give ‘ownership’ to Procurement – or impose the cost of their resources onto the business unit – unless you are going to hold them accountable. And that really doesn’t work because you have essentially removed operational responsibility from the business.” The implication here is that operational accountability must reside with the business, as they are most familiar and knowledgeable with what needs to “gets done” and whether performance is in fact meeting the specification and service levels outlined in the contract. If procurement takes over all ownership of the contract, a dysfunctional situation can arise as there may be too many parties involved in managing the complexity of the contract who are not directly involved in the operation. For example, a field contract manager at Suncor Energy noted that:
“The field personnel were .. confused and miffed about the entire supply chain matrix. As a result they began to do their own things (not unheard of when field personnel become frustrated). Initially when the category management process was put in place their input and feedback was significantly requested and provided by them as everyone was excited about this new process that was advertised as making things better. When the bureaucracy and administration became too much for the field personnel, they began to push back, slowly, but then more pronounced. Unfortunately those changes were not good for anyone, and as a result, I suspect that the field personnel have really made an effort to rein back their contract control (by just doing their own thing, again), without any supply chain input up front, and then dumping what they have then subsequently done to supply chain management, after the fact.”
It is also interesting that the two individuals (Tim Cummins from IACCM and Katherine Kawamoto from UnitedLex) both expressed the need for a separate and distinct contract management professional that does not reside either in procurement or in the business. However, this could be something that is in the future, as Tim notes that “None of the companies doing this are very mature”, and he acknowledges that “Most companies are struggling with this issue.”