There's no visibility
Centralisation efforts usually have two sides: yays and nays. The most common line from the nays always is: A central team cannot have the viability of the local team; therefore, we must stay as we are. Usually, this reasoning includes the argument that centralisation will cause the company to lose the deep market knowledge, strong business partnering, and quick troubleshooting. This is sometimes a trap to prevent the business from further expanding.
Seeing without looking
Generally, the Chief Executive Officer, or Owner in a smaller business, will delegate authority to business units and managers to approve transactions and run the business. This includes approving most income and expenditure, contracts, refunds, and payment authorisations. In this model, the most senior person is not going to look at every contract or transaction; however, they want to see that it has been carried out according to the control environment and vision of the company.
What is the difference between seeing and looking?
Looking is the review process. In order to take a decision on the contract, refund, or other authorisation, that authority holder needs to look at the documentation and ensure it can be approved according to company standards.
Seeing is passively reviewing these transactions. Normally, someone who needs to see documentation is more concerned with something else tangential to the contract itself. For example: The Chief Executive Officer is going to be more interested in the income generated from the contract than the name of the customer.
As authority is further delegated, there are fewer who need to look, but there are more who need to see. As a company grows, the business leaders need more comfort that their policies and protocol are adhered to.
Looking without seeing
The right contracts governance is very important to reduce the resource to look at every transaction. The below process map illustrates a very simple local contracts management process.
This simple (and high level map) have many people who need to both look and see the contract signed.
The business unit manager looked at the contract and also will need to see it. They need to be able to find the contract when needed, and unless the agreement was physical scanned, will have to ask the office manager for a copy. This can be very inefficient.
The office manager also needs to look at the contract. This is because in order to have it filed, they need to know what type of contact it is and the name of the counter-party. The office manager will also need to see that the filing process is working and be able to explain it back to the leaders.
Any support functions (not mapped) will also need to see the contract, with a strong possibility they will want to look at it. Unless the files are open to everyone, these support functions will need to as for a copy.
As the company grows, having a standard and formal contracts process is important. The office manager will need to liaise with many business units and staff in order to maintain all of the different agreements. This key administrative role is more than just cataloguing, but actually serves as a compliance check. This is where a central contracts managers add more value than office managers.
Central contract managers are can review contracts and collect additional approvals, raise purchase/sales orders, and manage exceptions. The business no longer needs to manage each approval, rather they can rely on the contract manager to assist with the necessary approvals before it is signed.
In this example, we can see how a contract manager can request approvals from a legal and finance before permitting a contract to be signed.
As the business grows, business unit managers and other senior leadership will be less interested in the contracts themselves. They will look at the process to gain assurance that company policies are followed. This process combined with a good workflow system will reduce the compliance monitoring costs and ensure that support departments look at the contracts they need to but can see the supporting documentation when needed.
The contracts manager provides is the central support role in compliance checking, but can also provide analysis and commentary roles to the P2P and O2C processes and can also provide invoicing and purchasing support as contracts are agreed.
When to centralise
Centralisation is not required in every situation and sometimes having a decentralised structure provides more efficient operations. In offices where each works independently of the other, provides vastly different services, or have mostly B2C business, having centralised contracts review probably isn't necessary. In these situations, it would make more sense to have agreements managed locally because they are standard and specific to the local market. Where decentralisation is used, central business leaders must ensure that there are corporate standards set explaining how to review, approve, and store contracts. This includes NDAs, standards for procurement, and retention policies. A good risk and compliance function or quality assurance team can carry out regular sample testing to provide any necessary assurance.
In larger businesses, having decentralised contract management is usually a poor use of resource. Investing in a good workflow management system whose process is managed by a contract manager will ensure that all offices are following the same processes, the organisation is using its human resources in the right way, and that there is a level of compliance which management can rely on. Differences in offices can be escalated as they happen with approval to changes in contracts reviewed by the right departments (legal, or more senior management where scopes change).
Senior leaders must remember that they will be held responsible for contracts approved incorrectly or contrary to the direction they want to take the business; therefore, it is important to be able to see contracts even if they do not wish to look at them.
Chayim Messer Consulting can review your contract management process and help your business set policies and procedures which are right for your level of business. Company designs vary; therefore, decisions to manage contracts will vary with it. Having a thorough review and mapping of your business will give you the change to see where you can save and make your business easier to run. Contact us today for a free consultation.