Improve Contract Manageability
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The power of a standard quantitative contract assessment

 

The Sociale Verzekeringsbank (SVB) is the organization that implements national insurance schemes in the Netherlands. They make sure that you, your children or your parents receive child benefit, AOW pension or Anw surviving relatives’ benefit correctly and on time. By order of the government SVB has been doing this for more than a century, serving over 5 million clients.

 

The Challenge

Reliable and efficient IT are critical to the success of SVB. To optimize its IT capabilities SVB sources a number of IT services from external service providers, for which they have entered into outsourcing arrangements. After a number of years in one of their deals, SVB felt the need to perform an independent assessment on the extent the contract still supported its objectives. As an independent expert in the field of sourcing governance, Leadmark was asked to perform the contract review. The core question was: can the contract (still) be considered as a strong instrument to underpin current and future sourcing objectives? To answer this question SVB wanted to move beyond traditional subjective reviews or limit itself to just a review of KPIs or pricing benchmark. SVB chose Leadmark to run the assessment based on its standard Contract Manageability Rating approach. An approach that yields a detailed insight in how the contract terms and structure support or undermine realization of business value. The outcome also provides clear actionable recommendations to get organizations back on track with their sourcing partner.

 

The approach

A good contract is a fundamental building block of every sourcing relationship. It is the representation of intents, objectives and agreements between parties. Strong relationships and good governance are also key, but without an underpinning contract, sourcing deals will invariably disappoint as expectations, incentives and risk allocation diverge over time.

Leadmark has developed a standard way to evaluate the effectiveness of a sourcing contract resulting in a Contract Manageability Rating (CMR). An effective contract gives an organization the ability to realize its sourcing objectives at the lowest possible costs and at the lowest possible risks. Leadmarks CMR provides a structured and fact based approach to review the quality of a contract as a management instrument that allows effective steering to realize sourcing objectives.

Leadmarks CMR is the result of a structured and quantified analysis on key elements of the contract. Specifically, the assessment covers:

1. Focus of the contract. To what degree do the contracted terms and obligations underpin the desired deal objectives and business outcomes. Are there critical gaps in the contracted scope? Is there too great an emphasis on one service area at the expense of another?

2. Alignment of the contracted services with the financial model and commercial incentives. Are there clear commercial steering mechanisms to drive supplier performance? Does the financial model make it clear what services and outcomes result from which payments? Are the risks on cost drivers appropriately shared?

3. Control balance in the contract. Which services and obligations are being clearly controlled via metrics, check points, audits, etc…? Do these controls cover all high risk outcomes? Is there too much focus on process control at the expense of results?

4. Readability of the contract. Is the contract structured and written in a way that makes the document maintainable and easily used by stakeholders?

The Result

Leadmark delivered a comprehensive set of findings and recommendations to SVB that gave them a clear and evidence based direction for improving their sourcing relationship and outcomes. The volume of controls they needed to track and administer reduced without any negative impact on services. The dialogue with the supplier became more clearly focussed on outcomes and business objectives, improving the relationship and driving important changes to meet stakeholder expectations. In addition to these immediate improvements, the recommendations gave them a solid framework for their future sourcing strategies. It took just a few weeks and only 2 meetings with SVB to complete the assessment and get them moving in a meaningful and productive direction with their supplier and internal stakeholders.