Taking control

Captain Chesley Sullenberger is an American hero after he coolly landed US Airways Flight 1549 on the Hudson River a few weeks ago. It might have been a catastrophe had not Sullenburger and his co-pilot executed the emergency engine-failure and water-ditching checklists to the letter.

According to cognitive psychologists, such lists are vital to those who make critical decisions under pressure. Lists of repetitive, yet critical, steps in stressful situations are commonly used in dangerous occupations. However, managers in sectors that are under financial pressure, complex or at risk can benefit from using simple lists of tried and tested checks and steps.

Managing contracts may seem like a daunting task for any organisation, since contracts are often housed in many departments, and getting control over the environment may seem virtually impossible.

But here is a list of five practical steps that a contract manager can take today, that have been tried and tested and will provide immediate benefits. They may seem patently obvious, but when a situation resembles a tangle of spaghetti it helps to apply the Rule of Parsimony and not complicate the situation more with more hypotheses and theories.

Simply follow the five steps to begin the process of sorting out the contracting environment and centralising the contract database.

Some things are as obvious as the nose on your face. But remember, just finding and getting copies of all contracts can be the most time-consuming aspect of contract management.

Gaining access to these documents may also be a challenging exercise as people are often protective over “their” contracts. Persuading others to give up this control may involve some sleuthing and diplomacy, depending on the company structure and ethos. Initially companies should try convincing people to allow the company to copy the contract, rather than remove it completely from their control.

Successfully collecting copies of all the contracts in a single location is a significant success and the first step towards gaining control.

Once the contracts have been successfully found, the next step is to create some sort of order out of the chaos. Group the contracts into categories that make sense for the company's needs. Sort them by:

* Contract type
* Contract value
* Project
* Contract owner
* Contractor

Just finding and getting copies of all contracts can be the most time-consuming aspect of contract management.

Paul Maddison is MD of Realyst Software

Irrespective of the choice of criteria, the aim would be to divide the piles of paper collected in step one into smaller groups that are easier to manage.

If a company is considering automating its contract management using software tools at some point, grouping contracts according to their contract type would be best. This choice would allow the company to group property leases, IT service contracts, transport agreements or any other type of contract together, allowing for easier analysis.

Once the documents have been grouped, generate a contract cover sheet for each document so the company knows what it is dealing with. Then managers can see at a glance what the most critical information within the many pages of the document is.

Suggested headings for the cover sheets are:

* Contracting parties
* Expiry/Renewal dates
* Escalations
* Contract owners

The cover sheet forms the new first page of the contract and should be filed with the document. Now the nature of the beast being dealt with is known.

Next, number the contracts. Why? Because each contact will have a unique identifier, a number is easier to spot than a long title, which will be seen immediately if there is a number missing, and companies will be able to continue with the string of numbers indefinitely once they start a filing system for the contracts.

Add the number to the contract cover sheets. In the filing system or index, the number should stay linked to the contract. The most popular numbering system uses alphanumeric codes, combined with at least one contract attribute, such as the contracting party. The numeric portion can then be made sequential to ensure individuality. For example, a contract with “Jones Widgets” could be numbered “001ajwidgets”.

Once each contract has been numbered and filed, the content should be reviewed for legal, financial and operational risk. The Law of Unintended Consequences very often applies to contract management - and what is not known can seriously harm a business. A contract review can uncover many areas of concern, including financial leakage, legal issues or problems with the actual document. The contract review is potentially the most valuable stage of this process as the issues highlighted can be used as a motivation to take a more formal approach to contract management in the organisation.

A contract review can be an extensive and time-consuming exercise. Due consideration should be given to the complexity of contracts, and this is an exercise best undertaken as a dedicated task by a specialist contract management vendor. But if push comes to shove, just looking at the contracts and using common sense will allow managers to pick up the most obvious risks.

And so, in five steps, companies have gained some control over their contracting environments, and the understanding that it is probably a job best left to the experts.

* Paul Maddison is MD of Realyst Software