Internal Controls audits and Contract Management

February 3, 2011

Infraco, the South African government-owned Broadband and long distance telecommunications provider, has been cited in a recent Deloitte audit report for a failure in internal control processes in the company’s procurement and contract management environments.

“Although there are set policies, procedures, guidelines and processes to effectively effect the contract management process, we noted in many instances that these are not complied with, unintentionally or otherwise”, stated the Deloitte report.

An increasing number of companies all over the world are failing internal controls assessments conducted by independent auditors as auditors become increasingly concerned over the lack of visibility and control that many companies have over existing contracted commitments and overall contract management procedures.

The majority of companies put most of their effort in to the negotiation of contract terms and conditions, but do not dedicate the same level of attention and oversight post contract award.   This is largely because legal and business executives still do not consider contracts to be mission critical or strategic to their businesses.  For many, a contract is viewed as an insurance policy for when things go wrong.  Clearly auditors and industry observers, like the IACCM, see this as an outdated view and one that will only lead to increased scrutiny by auditors and regulators.

Contracts are strategic documents that outline how two parties are to collaborate with each other and the terms and conditions that govern that collaborative relationship.  For those companies that are able to manage and control their contracting processes efficiently, greater competitive advantage can be achieved through cost savings in the pre-award contracting process and better exploitation of contract terms, conditions and obligations in the post award process.

Dolphin Software would argue that the most effective way to bring about total control of the contract management process and ensure that contract obligations are properly complied with is to follow clearly defined contract management procedures, to appoint a senior executive to oversee contract management from a strategic position and to automate inefficient manual processes and control contract milestones and commitments more effectively with technology.

CFOs will rapidly understand the strategic importance of effecive contract management if their auditors refuse to sign off their accounts.

**24 February 2011 – update**

Broadband Infraco CEO and Non-Executive Director resign

Dave Smith, CEO of Broadband Infraco, the South African state owned entity tasked with bringing down the cost of broadband, and Non-Executive Director Tumi Magasa have resigned with immediate effect as a result of their recent contract management woes.

In October last year audit firm Deloitte was commissioned to conduct an urgent internal audit “to review the controls in relation to the contract management function, evaluate the adequacy and effectiveness of key operational and financial controls, and test compliance with the applicable legislation, policies and procedures”.

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Contract Management becomes top priority for the White House

December 13, 2010

Daniel Gordon, procurement policy administrator at the Office of Management and Budget

Dan Gordon, administrator of the Office of Federal Procurement Policy, has announced a range of initiatives to improve contract management practices between suppliers to the US Government and the way that Government Agencies administer and manage contract performance and obligations.

“Contract Management is front and center in our focus”, Gordon declared at a recent meeting on procurement reform.  Gordon and the Obama administration intend to root out negligent behavior in government acquisition by having agencies better manage the contracts they award.

“A company will no longer get a contract and then never again hear from the agency about the work”, Gordon said.  “Further the government won’t turn a blind eye toward schemes or well-known shady business partnerships”.

There are many examples of poor contract management practices in Government and organizations like the Project on Government Oversight (www.pogo.org) have made a significant impact in raising awareness of the need to not just negotiate contracts with third party suppliers, but also to track performance and monitor compliance to contracted obligations once the contract has been signed.

As contracting becomes more complex and more litigious (a recent study by Fulbright and Jaworski showed that the majority of corporate litigation matters now arise from contract-related disputes), it is crucial to keep track of what has been committed to in a contract.

The old world of throwing more resources at the problem of  contract oversight will not work anymore.  Qualified contract management resources are hard to find and manual tracking of contract milestones and obligations was too error-prone anyway.  What is required is a balance of technology solutions that support the contracting process and human oversight to enforce contracted terms and conditions.

Choosing the right technology solution is critical. Many Finance or ERP based contract database solutions fail to realise that government contracting demands automation and control at every stage of the contracting process from the creation of the contract, through to the tracking of obligations and the tracking of vendor performance. 

Some contract management software solutions, like Dolphin Contract Manager, automatically integrate with the Federal Acquisition Regulations (FAR/DFAR) list and allow government procurement managers to efficiently create contracts and ensure that commitments and obligations are effectively managed once the contract has been executed.

We believe that true transparency in government contracting can only be really achieved when you have total control over your contracts and obligations.  It is time for government agencies to embrace technology solutions to help them to achieve this.



Managing contract terms and commitments will be critical following the Government spending review

October 17, 2010

The United Kingdom, like many countries, is straddled with an unprecedented level of debt.  The UK’s debt currently stands at over £900 billion ($1.4 trillion), or £33,000 for every person in employment.  In an attempt to bring this national debt down to a manageable level, David Cameron’s government will publish the results of its long-awaited Spending Review on the 20th of October.

The Spending Review will highlight areas where costs can be saved in central government departments and local authorities.  The United Kingdom will join counties like France and Ireland and introduce draconian austerity policies to reduce the national debt.

Much has been reported about Government quangos being abolished, defence cuts that will deliver new aircraft carriers, but with no aircraft and a winter of discontent with public sector workers planning widespread strikes in a move to resist the cuts.

Sir Philip Green’s report that was published last week provides an insight in to some of the areas of government where significant cost can be saved, namely more effective procurement and supplier contract management.

There is no doubt that if you are a department head or a manager in a central government department, local authority, university or hospital, you will be under more pressure than ever before to reduce costs and expenditure.  It is likely that spending cuts will lead to more services being outsourced, which will only lead to greater pressure to manage external service providers even more closely.

Contract Management software solutions should be able to offer significant value here.  Not only do Contract Lifecycle Management solutions help to streamline and control the contracting process with external suppliers, they also provide invaluable tools to make contract oversight and performance something that can be controlled and measured. 

If an outsourcing agreement includes complex obligations and service level agreements (SLAs), these can often be missed or poorly managed.  Solutions, like Dolphin Contract Manager, have been designed to make contract obligations and commitments more visible and better controlled.  A National Audit Office report last year highlighted over £300 million in savings in central government IT contracts alone, through better contract management. 

The British government should absolutely look to cut unnecessary cost from budgets, but it should also look to use technology in a smart way to improve the efficiency and effectiveness of government procurement at the same time.


Sir Philip Green highlights UK government procurement and contract management inefficiencies

October 14, 2010

Sir Philip Green, the billionaire boss of UK retail group Arcadia and Top Shop, has this week announced the results of his study in to UK government procurement.  The conclusions, he says are shocking.   His main conclusion is that the UK government is failing to take advantage of its position as a strong buyer with a top notch credit rating.

Sir Philip said that no business could survive the level of money that was wasted from the GBP 191 billion (USD 305 billion) of spending he reviewed.

The report suggests that billions could be saved by doing simple things like managing supplier contracts and spending more diligently.  “The process is shocking; there is no reporting, there is no accountability”, says Sir Philip.

So is this an issue of better contract management or an issue of management and the fostering of a culture oversight?

In reality, a successful outcome will involve a bit of both.  Contract Management software solutions, like Dolphin Contract Manager, can help to provide greater control over contracted commitments and spending by allowing business managers and procurement professionals to keep track of terms and conditions that were negotiated and agreed in the contract and then capturing performance related data (like obligations tracking, KPI management as well as invoicing and deliverables tracking) against expected behaviour.


Metronet collapse blamed on poor contract management

March 2, 2010

The UK Department for Transport has come under heavy critisism recently following a Public Accounts Committee report that found that the  £410 million ($612 million) collapse of Metronet, an organisation established to oversee the renovation of London Underground’s tracks and stations, was largely due to ‘inadquate’ contract management.

The government entered into three 30-year contacts to improve the tube network in 2003.  But in 2007, two of the contractors – Metronet BCV and Metronet SSL – went into administration, resulting in delays to the renovation programme and losses of between £170m and £410m.

The Department for Transport was particularly singled out for its ‘hands off’ approach to contract management, despite official warnings from the National Audit Office in 2004 that it should manage the Metronet contract more closely.

The report also pointed out that London authorities were unable to provide adequate contract oversight because they did not have timely information about the performance of the Metronet contract.

This situation is likely to be played out more and more in the future as central and local government authorities look to external contractors to provide key services.  It is common for organisations to put all of their effort in to the contract drafting and negotiation stage of the contract process, but not in the proactive management of contract milestones, obligations and commitments after contracts have been agreed to.

Contract Management software solutions like Dolphin Contract Manager, allow key stakeholders to better manage contract milestones, obligations and commitments by providing key stakeholders with timely management information.

Contract Management systems should include the following common features:

  • automated contract authoring
  • legal clause libraries
  • central repository for contracts
  • electronic workflow for internal reviews and approvals
  • obligation and commitment management
  • external workspaces for external party negotiation
  • critial milestone alerts
  • management reports and dashboards

Better contract oversight cannot be achieved using manual means alone and equally, contract management software cannot replace the requirement for contract managers, but together, the discipline of contract management can be made more effective.


“Only 50% of contracts are counter-signed” …

January 26, 2010

This staggering claim was made by the General Counsel of a global Marketing Services agency that Dolphin Software met earlier this week and highlights the very real issue facing legal teams and contract managers around the world.

Perhaps this is a statistic that not many General Counsels will admit to, but it is a well known fact that, despite all of the time and effort that goes in to the drafting and internal approval process for contracts and agreements, once a contract is sent to a third party (customer, partner, supplier, etc) you lose almost all of the control that you had. 

For many companies, contracts are drafted manually in Microsoft Word, emailed as attachments to internal colleagues for reveiw and approval and then emailed to the external party.  This is where things can often go wrong.  The process is inherently inefficient.  By emailing contracts outside of your organisation, you are effectively giving up any hope of controlling the contracting process.  You are dependent on the external party following your guidance on timelines, information security and amending drafts – not to mind the administrative burden of having to deal with mutiple versions of draft contracts been sent back to you via email.  In fact, the external contract negotiation phase in the contacting process is one of the biggest causes of delay in contract cyle times.

Lets face it, it is inconvenient to print out contracts, sign them, and scan them.  Many signed paper contracts sit on the desks of managers for days, and in some cases, weeks before they are forwarded on in an email or uploaded in to a contract repository.  This is bad news for commercial contractors who are looking to conclude business and bad news for purchasers who are looking to bring a new supplier on board.

A new generation of contract management software solutions, like Dolphin Contract Manager, aim to make this process easier for contracting parties and more efficient.  Rather than attaching draft contracts to emails for internal approval, many contract management solutions facilitate this process through a managed approval workflow process, where managers access a single copy of the contract that is stored in a central repository; and rather than emailing external parties, secure external workspaces can be created so that contract documents can be uploaded and external parties can collaborate and negotiate amendments to contracts in a secure and time-controlled environment.

Digital Signature solutions, like CoSign from Arx, can also play a big part in reducing cycle time by allowing both internal staff and external parties to review contracts electronically and digitally sign them without having to print, scan and upload.

It is no wonder then, that contracts that are sent to third parties are often not counter-signed and returned.  The current way of doing things is just too inconvenient. 

Is this an issue for you too?  Take part in our poll below:


Contract obligation management

January 10, 2010

If you were to disect the contents of an average contract, you will likely find a mix of  legal clauses, terms and conditions … and obligations.  Obligations that either you want a supplier or vendor to comply to, or obligations that you commit to from a customer or other third party.

Why is it then that contract obligations get such poor air-time from legal departments and other stakeholders who are tasked with contract management activities.

From Dolphin Software’s experience, Microsoft Excel appears to be the de facto contract data repository for most in-house legal departments, where key contract milestone data is held in a spreadsheet in an attempt to provide more structure and control over the tracking of contract terms and conditions.  Spreadsheets become limited in their ability to manage contracts when the volume of contract data gets too much, when managers expect to be proactively rather than reactively alerted to a key contract event or when you need to find the original or electronic copy of the contract in a hurry.

So what about contract obligations data and information – are these held in these spreadsheets alongside contract milestone data, like key dates, contract parties, monetary values, etc.?  In most cases, the answer is no.  This is probably due to the fact that the owner of the spreasheet is rarely the same person who is personally responsible for executing or overseeing the process of contract obligation management.

Contract obligations can include anything from service level agreements and delivery times to customer service targets and can be directly linked to penalties for non-performance; or even bonus payments for achieving targets.  This is what NASA has to say about contract obligation management:

Unrecorded or inaccurate obligation record keeping can distort the accuracy of available appropriation balances.  Failure to record obligations and adjustments in a timely manner increases the risk of overobligation and the risk that program officials will not have accurate information to use in decision making.

A contract obligation may be identified by a legal specialist or a contract manager, but in most cases the responsibility for ensuring on-time delivery or vendor invoice accuracy is not that of the contract manager, but of other business colleagues. 

Effective contract management systems should be able to provide greater visibility and control over the contract process by not only providing a more logical environment to manage contract documents and milestone data, but also an environment where contract obligations can be tracked and adhered to.

Contract Management solutions, like Dolphin Contract Manager, allow obligations to be allocated to business users, who are then automatically alerted when a relevant obligation is due.  Best-practice procedures and KPIs can be linked to contract obligations and these should form part of a comprehensive programme of contract obligation management.