Contractor management – the six most important steps

Ensuring that external suppliers, partners and contractors are managed confidently in a fair and consistent manner is one of the major challenges facing companies trying to increase performance and reduce costs. Here Dieter Körner, managing partner with TA Cook Consultants, explains how to control the many different factors and hence secure considerable improvement, in six steps.

Berlin – Triggered by rising competitive pressure and above all the goal to reduce costs, many companies in the have outsourced jobs in the areas of maintenance, engineering and production. Efficiently managing contractors requires particular skills on the side of the outsourcer as well as practical knowledge to determine what subject areas are to be dealt with and what prerequisites have to be met.

Only in this way can the full range of advantages from cost and quality benefits to service levels be achieved. Often in the process of outsourcing, it is exactly this knowledge that has been lost, resulting in a lack of necessary key competences in companies today.t

Our practical experience, gained from numerous projects optimising contract management, demonstrates that a 25% to 30% decrease in contractor costs, 15% to 20% improvement in performance and a 20 to 30 percent reduction in lead times is frequently possible. These opportunities can only be realised if a comprehensive contractor management approach is set up to tackle the areas of strategy, contracts, processes, structure, and control and if training is approached in a separate, individual basis.

The strategic framework

The strategic framework for outsourcing services can be established in just a few working sessions with management. The proportion of make-or-buy elements and the chosen model for cooperation (ranging from internal cost centres to independent service providers) form the basis of the outsourcing decision. Here, key competences that should remain within the company can be defined and support functions which are to be outsourced are detailed, understood and fully scoped. At this point decisions relating to procurement strategy, such as single or multi-sourcing also need to be taken, so that strong foundations can be laid for effective Service Level Agreements (SLAs) governing the quality and price of service contracts.

The contract

When drawing up the contract various questions arise – such as: which partnership model should be used? What kind of contract is the most advantageous? Should you opt for a contract based on time and effort, on performance with fixed price components, a lump sum contract or a mixture? Basically, each type of contract is valid in its own right. Choosing one depends largely on the selected procurement strategy, the scope of the service, the type of service and the client’s ability to describe accurately the required service in terms of type, scope and evaluation criteria. Independent of the type of contract, the client must be in the position to effectively manage the relationship with the contractor in accordance with specific performance criteria throughout the whole life of the contract. The competence to assess estimates thoroughly and to evaluate performance on the basis of, for example, given norms or standards, is often fundamentally lacking. This is certainly an area where many companies should target significant improvements.

Processes/structures

It is important that operational contractor management is underpinned by appropriate organisational structures and robust processes. Focus needs to be in several areas; the sourcing, selection, and commissioning of contractors; the definition of scope, service and cost and, finally, actual order processing. Effective contract life cycle management of a contract requires core functions such as designated Contractor Coordinators to be in place in Purchasing and also in local client Departments. This is so they can assess and manage both the commercial aspects and the technical quality of a contractor’s performance. Finally, in order to align supply and demand when commissioning and carrying out a service, the planning and scheduling function takes on a key role in preparation and control, thus ensuring an efficient use of resources while the service is being executed.

Evaluation/Control

How can you control contractors? In practice, one finds either highly complex control systems with an abundance of key data or unhelpful Key Performance Indicators. Both hinder rather than help the control of contractors. Effective management systems are up to date, easy to use, deploy norms and standards, are based on target/actual comparisons and enable managers to address the causes of deficits in performance with the right measures. A mix of a some process and performance data, e.g. contractor productivity (earned hours/used hours) and planning accuracy (actual hours/planned hours), mean times between failures, Right-First-Time performance or service levels as well as structured meetings at regular intervals are easy to manage and allow for proactive, real-time contractor management.

Training

In order to meet the increased demands of integrated processes and more sophisticated roles and responsibilities, staff and managers need to be trained in management skills, methods and specialised professional competences. Improvements can only be sustainable in practice when new processes, systems and behavioural patterns are learned through structured, systematic on and off the job training.

Conclusion

Companies that have already implemented the measures described above or plan to address them in the future will benefit from optimised contractor management. Experience shows that 25% to 30% cost savings can be achieved, so if you have not yet tackled the issue, now might be the time.