The Importance of Contract Reporting

Just about every organisation relies on contracts with third parties for almost everything it needs to exist and operate.

Premises, utilities, staff, the myriad bits of necessary physical and electronic assets, services and who knows what else are more than likely dealt with using contracts.

That can amount to a lot of contracts, especially for larger, diverse organisations and those that have been operating for some time.

Some contracts will be critical or need a lot of attention. Others will be real risk magnets. A few will be trouble with a capital ‘T’. The rest might just burble along, sleeping dogs lying there quietly getting the job done without any fuss.

An organisation really needs to know what’s what with its contracts. It needs to keep a virtual finger on their pulse, especially as the contract numbers grow. It goes without saying that there’s a lot riding on knowing this.

Operating without knowing how the land lies contract-wise is risky behaviour for an organisation, and it ought to know better. It will have way more than enough contract-related risk on its hands without being part of the problem.

Armed with the right knowledge, action plans can be developed in response, prioritised and implemented to deal with any current and likely contract risk.

This article discusses the key role that contract reporting plays in providing insights needed to fully understand what it’s actually or potentially facing with its contracts. It covers:

• General situational awareness
• Situational awareness in relation to contracts
• Reporting’s contribution to situational awareness
• What should be reported
• Extracting information from contract-related data.

General situational awareness 

Most often related to personal safety, situational awareness is the state of being mindful of your surroundings, at all times, in all places: at home, at work, at play; at rest and on the move.

Situational awareness requires continuous vigilance with respect to observation of the surroundings. It helps to detect any tendency to appear as a target or exhibit potential for unconscious bias, and enhances the ability to react to different scenarios.

Situational awareness allows:

• Recognition of abnormal or undesirable circumstances
• Anticipation of potential developments
• Assessment of effective reactions covering variations of flight to fight
• Selection of the safest strategy for dealing with situations whenever possible.

The payback can be immeasurable, up to and including life-saving.

Mindfulness of their surroundings is also needed by organisations. ‘Surroundings’ has a wide range of meanings in relation to the different things organisations do to operate, and the context that they do those things within.

It requires the collection and assessment of a lot of information. Sometimes this has to be done in a hurry on the fly, sometimes it will happen in a planned and structured way. It will quite often require working with incomplete or vague information, leading to a dependency on assumptions.

Early validation of assumptions is essential but often not achievable. Watching out for signs of wrong assumptions is crucial, because they will occur in confusing, stressful times.

Situational awareness is about finding the bigger picture to enhance decision-making. Intuition, past experience and attention to detail play a big part in this.

Absence of situational awareness is often considered a contributing factor to bad outcomes in all walks of life and endeavour.

Situational awareness in relation to contract reporting

An organisation’s contracts represent a wide range of latent risks, each triggerable at any time if all its necessary preconditions align. Documenting the details of the most concerning risks is a key activity in the lead-up to contract approval and execution.

Clearly, constant attention to present and evolving risk over a contract’s operational life will be required. This will be to a greater or lesser degree, depending on each individual contract’s purpose, risk profile and importance.

Due to the volume of contracts an organisation is likely to handle, those risk details might only be captured for the contracts that are most important to the organisation. Contract reporting should be dedicated to your most strategic vendors and agreements. 

Since triggering any particular contract risk depends on alignment in the occurrence of any number of conditions, situational awareness is a strong element of normal day-to-day contract risk management.

It can provide clues about the imminence or the occurrence of risk-triggering conditions or other operational concerns that warrant attention. Those clues might be pertinent to a specific contract or to many contracts.

In relation to contract reporting then, situational awareness is instrumental in error prevention, threat mitigation and performance improvement.

In-depth contract reporting is essential for on-the-spot decision-making, where immediate and informed action can be critical to the outcome of any situation.

It can be a great time-saver when predicted situations occur. It allows appropriate responses to be effectively pulled out of the drawer, in the here’s-one-we-prepared-earlier approach seen in TV cooking shows.

A comprehensive set of guidelines should be developed to facilitate evaluation of situations that are detected. This minimises the opportunity for invalid assumptions to send things off in the wrong direction.

Past experiences can inform most of these guidelines, and widespread canvassing of people involved in the operations and use of contracts can contribute useful ideas as general operating conditions change over time.

Keeping guidelines up-to-date and readily available will benefit less experienced people involved in the situational awareness process.

How contract reporting helps with situational awareness

A wide range of information, preferably all stored electronically, readily accessible and designed for the purpose, is needed to report on the organisation’s situational awareness with respect to its contracts.

The nature of the information to be reported must be sufficient to allow:

• Derivation of the current state. Understanding where certain things are in terms of delivery, completion, mitigation and other meaningful criteria is needed before understanding can be established about how well they’ve been or are being done.
• Comparison against the expected state. This checks the current state against what it was planned or agreed to be at the time. Positive and negative deviations should be expected as a general rule, owing to volatility, uncertainty, complexity and ambiguity influencing just about everything these days.
• Recognition of signs of danger or heightened concern. Negative-leaning deviations from expectation are usually the prime suspects when it comes to isolating concerns. Clearly that won’t always be the case, because too much of a good thing can also lead to problems, especially when unexpected or not catered for to the extent discovered. Care is needed to ensure all deviations are looked at with a critical eye to winkle out the real concerns. This is critical for understanding the spread of any particular concern.
• Drawing of inferences about causes. Understanding causation can provide hints about which concerns should or could be dealt with, who by, how and how readily. It can also highlight those thin-end-of-the-wedge situations that really require urgent attention.
• Prediction of what’s likely to happen next. There’s pretty much always going to be a delay between identifying concerns and their causes, and addressing them. Quick consideration of what might happen during that interval to exaggerate or moderate the concern if left unaddressed is crucial for establishing priorities for taking mitigating or remedial action. This step can help to limit the potential problem space to be dealt with, but expecting the unexpected will help promote creativity and readiness for the worst case.
• Development of appropriate action. Addressing areas of concern and their causes can take a bit of agility, fast thinking and confidence. Knowledge of what has been tried before, and whether or not it was successful, can point the way where variations on a theme could be viable, or highlight the fact that something new is required.

Contract Reporting Requirements

There’s likely to be a fairly typical group of things that are generally worth knowing about the organisation’s contracts, at several levels, including:

• Total number of active contracts, with a selectable choice of characteristics like importance level, annual spend level, applicable law, contract type, term, end date, owner, risk profile
• The level of individual contract performance achieved with respect to deliverables, in terms of correctness, completeness, timeliness, quality, cost and any other KPIs of interest
• The history of any situations that have affected contract performance in the past
• The level of compliance, by all concerned, with agreed process, contract and regulatory obligations, any applicable standards and so on
• The change in status of innate or assigned attributes like risk profile, pricing, delivery performance, user satisfaction, organisational and third-party strengths and weaknesses
• General trends in any of the above areas.

This information and anything else the organisation deems important for situational awareness might need to be derived from a range of sources.

Ideally, most of it will be maintained in a comprehensive Contract Lifecycle Management System (CLMS) with extensive reporting capabilities and integration with other systems containing useful details.

Realistically, other useful information is likely to be available outside the CLMS. Knowledge of what it is and where it is should be well publicised, and might reasonably be access-controlled.

Availability of all such information can help with identification of latent or emerging issues that matter before:

• Any negative consequences arise or get entrenched, providing maximum opportunity for mitigative actions
• Any positive consequences accelerate, allowing maximum time to steer the outcomes to fully capitalise on the opportunities presented.

How much should be reported is a matter for the organisation to decide. Regular snapshots covering just the key elements of the entire contract inventory can be useful, much like the periodic asset stocktake.

Extracting information from contract-related data

A lot of the details collected about contracts consist of numbers, typically monetary values and quantities. Such numbers are absolutes, and their scale is immediately apparent.

Some of these numbers are also meant to impart a value meaning in a relative sense. Here, where on a particular scale the value is located determines if it represents a good or a bad situation.

Sometimes though, that sense of good or bad needs to take account of the duration of the measurement period. Five late deliveries by a supplier over a year might be very good, the same in a month could be disastrous.

The context surrounding each piece of data must be readily available to ensure that the correct meaning of the data is used in assessing situational awareness.

Some elements of contract-related data are denoted and recorded using shorthand codes consisting of letters, numbers and special characters.

Usually translated into plain language for input, display and reporting purposes, the details of such codes and their full meanings should always be documented in the relevant user manuals of their associated systems.

This information will be necessary for the manual translation of any coded details extracted in the form of raw data directly from relevant systems.

The guidelines proposed above for assisting in obtaining situational awareness are a good place to document all the actions needed to extract information from contract-related data.

Wrap-up

Flying blind, at night, in clouds or for any other reason, requires pilots to rely totally on their instrument readings. While some might be fortunate enough to never or rarely find themselves having to do so, pilots constantly practise it to make it second-nature, to ensure that they can without a moment’s hesitation, if and when needed.

Sometimes, there’s just no time for hesitation, so situational awareness has to be a continuous part of flying.

It can be hard to justify not applying the same mindset to maintaining situational awareness in respect of the organisation’s contracts. That’s because everything is always in motion, and it can be hard to respond to indicators, patterns and trends if they’re hard to see.

The more active contracts an organisation has, the harder it is to keep up with what’s happening where and why. What’s really important is determining what to pay attention to.

It’s about trying to stay ahead of potential situations occurring by anticipating their likelihood. It’s about ensuring perceptions and expectations are based on current facts, not yesterday’s news.

Key to that is the use of comprehensive, effective and high-availability contract reporting. This allows the organisation to understand what normal contract activity generally looks like, and determine if current activity highlights any concerning deviations from the norm.

For sure, things are unlikely to be happening at the speed of flight in the world of contracts. But momentum is the hidden problem here. Once things start going downhill, redirecting attention from other matters and bringing things to a halt before reversing direction to get back on track can set off an avalanche of its own.

To mix a few metaphors, when it comes to understanding what’s been and is currently happening, and could possibly happen with an organisation’s contracts, it’s far, far better to keep your eyes on the road and an ear to the ground than to have your back to the wall.

Reporting on contracts provides the background intelligence needed and also has your back. The rest is up to you. No pressure.

If you would like more information about how to develop your approach to contract reporting, or how Gatekeeper can assist with that activity, then contact us today.