Various entities within an organization need to have access to the information contained in the contracts. The legal department needs to know the terms and conditions of the contract in the case of litigation or potential litigation. Without
access to the contracts the legal department cannot effectively address vendor disputes. Contracts also contain the prices and quantities of goods and services to be purchased. Organizational accountants need access to this information to make projections for future budgets. Senior executives may also need to consider indemnification clauses and contract durations to understand the organization’s long-term obligations or obligations in different situations.
Decentralized contract management makes this information difficult to access.
If each project manager independently maintains these records, then it requires multiple points of contact to retrieve the information. Moreover, each project manager may have a different method of recording and accessing the contracts so that there is no standard way to retrieve desired information, and no guarantee that the information will be in the same format. It is not uncommon for a project manager, who has only one or two contracts to manage, to have no system whatsoever for recording and accessing contracts. In other words, the contract may be lying in someone’s drawer. Further, because project managers are mobile, it is unlikely that a new project manager will even be able to locate a contract.
A centralized IT contract management office solves these problems by relegat-ing the storage and retrieval of contract information to a persistent entity rather than an individual. Centralized contract management provides a single point of contact for the legal department, accounting department, and senior managers to access all information about all contracts.
Motivation
Motivational issues arise when one person is given multiple tasks, each with their own reward structure. The person must then choose how much effort to dedicate to each task. If the tasks are rewarded equally, then effort will be distributed equally. However, if tasks are rewarded differently, then differential effort will be exerted. This is referred to as the multitask problem (Holmstrom & Milgrom, 1991). Project managers are rewarded for being on time and on budget. These two outcomes are easy to verify and because of this, a project manager should, and does, work very hard to bring the project in on time and on budget.
Unfortunately, contract negotiation does not have such a clear-cut outcome. It is certainly easy to judge the final price paid, but it is nearly impossible to judge whether the price is reasonable. Software vendors have something called list price, which is the price they will quote, if pushed. However, list price for software is something like sticker price for an automobile — no one should pay it. In fact, list price is far more variable. The actual price paid may be anywhere
from 5% to more than 100% of the list price. It is clear that the people who pay more than list price are doing a poor job of negotiating contracts, but what about the people who pay 50% of list? Is 30% of list with vendor A better or worse than 40% of list with vendor B? It is not obvious when a negotiation is done well.
On top of this, contracts contain terms that are much harder to evaluate than prices. How much is it worth to have an international enterprise license rather than a nationwide enterprise license? It can be very valuable if the company expands internationally. However, at the time the contract is negotiated it is not clear which terms will be invoked. Each term has some option value, but it is difficult to gage that value at the time the contacts are written; hence it is difficult to reward an individual for negotiating a contract.
In the absence of centralized IT procurement, the project manager is faced with three tasks — bringing the project in on time, bringing the project in on budget, and negotiating contracts. The time to complete the project is easy to observe, and thus, the project manager is sure of his reward for speed. The project expenditures are easy to observe, and thus, the project manager is sure of his reward for budget. The quality of the contract is difficult to observe, and thus, the project manager is uncertain of his reward for good contract negotiation. It is only reasonable that the project manager focuses his or her efforts on the first two tasks and largely ignores the last.
This discussion, of course, begs the question of how to compensate contract managers for negotiating contracts. Clearly, project managers have other tasks that tend to take precedence over contracting because contracting is hard to observe. But what about those people who have only the task of contracting?
They still need to be motivated and rewarded for a job well done, or they will not do a good job.
The contract negotiator must be judged on subjective criteria. This requires that a judge, with the tacit knowledge of contracting, offer good subjective evalua-tions. Luckily, by its very existence, centralized IT procurement generates a group of such people. Having centralized IT contract management in place, with dedicated contract managers who negotiate contracts on a full-time basis, results in a group of people who have the knowledge necessary to offer high-quality subjective evaluations of contract negotiators’ performances. Thus, centralized IT contracting not only removes the conflicting motivations due to poor measures of contract negotiation performance, but it also improves the measurability of the contract negotiation process.
Conclusion
As organizations grow ever-larger portfolios of IT contracts, the potential gains (or losses) from managing that portfolio appropriately grow. Although IT personnel may be very gifted in certain areas, in general, they are not talented at negotiating, enforcing, and managing contracts. In fact, contract management is antithetical to IT personnel’s training. Contract management is adversarial, while IT personnel are accustomed to working in cooperative environments.
Contract management is about limiting options, while IT is about expanding options. Contract management is focused on legal aspects of interorganizational relationships, while IT is focused on intraorganizational technical aspects. This results in an opportunity for cost savings when the burden of contract manage-ment is placed with a group of nontraditional IT personnel, rather than forced upon the project managers who are ill equipped by training and disposition to deal with it.
One particularly effective tool for managing a large portfolio of IT contracts is to create a centralized contracting office. Such an office creates a group of negotiation specialists, who can serve as a single point of contact for IT outsourcing needs of the entire organization. The centralized office has the high-level view, the appropriate skills, and the proper motivation to handle contract negotiation and management more efficiently than decentralized project manag-ers.
Given that contracting for IT services is a large budget component in any modern corporation, it makes sense to look for efficiencies in the process. In a large organization, a centralized office that has the skills, the motivations, and the perspective to manage the process can most effectively do this. Centralized IT contract management offers that kind of centralized procurement and has the potential to generate drastic savings for an organization. This is because as the portfolio of outsourced resources grows, problems develop in the decentralized approach. At the same time gains from specialization and scale accrue to a centralized approach. Therefore, for large organizations, or small organizations with a large portfolio of IT outsourcing, it can be theorized that centralized procurement is superior.
Overall, it is hoped that this chapter sheds additional light on the benefits associated with the centralization of IT contract management. It is also hoped that this chapter will serve as the basis for additional research regarding the benefits of centralized IT contract management.
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