April 1, 2025
2 mins read
Getting Past Contract Complexity
The thing I’ve found most helpful in understanding value leakage is finding a way to get past the complexity of contracts and purchase orders and everything that goes into them.
And there’s a lot of complexity.
In large organisations, contracts are complex because they are the result of multiple business functions working together—legal, procurement, supply chain, finance, and operations—each with its own slightly different worldview, goals, priorities, and requirements.
That complexity gets magnified when there’s a large volume of contracts to manage across suppliers and customers because you end up with a lot of unique terms, many compliance requirements, performance metrics, and financial structures.
But actually, in a company of any size, for contracts to work effectively, a large number of details—pricing structures, service levels, regulatory requirements, risk factors, and performance metrics—need to align across suppliers, customers, and the internal team.
The Value of Keeping it Simple
Given that complexity, I’ve found the best way to think about value leakage and address it effectively is to keep things simple.
In part one of this two-part article, we are going to apply that approach to the causes of value leakage. Then, in part two, we’ll examine how to look at the opportunities and risks that arise from those causes.
Three Causes of Value Leakage
So, let’s get into the causes of value leakage. I see three principal causes. You can break those down into many subdivisions, but essentially, I see just three.
First, the problem is built in from the start. That is, it is built into the Contract (or the Contract Process).
This occurs when stakeholders bypass procurement processes, choose non-preferred suppliers, or negotiate terms outside of corporate policy. This means that non-standard contract terms have been applied, which can put the company at risk financially, operationally, or legally. This is also known as Non-Compliance with Contract Policy and ‘Rogue (or maverick) Buying’.
The second cause is what I call ‘Contract Drift’. In this case, the contract may have started out “fit for purpose”, but something material has changed, and the contract hasn’t kept up – it has remained static.
The changes could be internal changes, such as unexpected expansion in volume procured or scope creep, or external changes in the market, including technology advances, significant pricing changes, etc.
The third cause of value leakage is Non-Performance, which I think of as ‘Contract Failure’. This means obligations and service-level agreements (SLAs) have not been met. This could be because they were not monitored and enforced, because they were unmeasurable, or, in some cases, they were just plain unrealistic.
Given the number of scenarios where value leakage can occur, you could paint a much more complicated picture of the causes, but my preference is to keep it simple. I’ve found this really helps me keep the problem in perspective and also helps me prioritise and formulate an action plan.
To summarise, I see three main causes for value leakage – the problem is built into the contract (or the process), contract drift has changed the intent, or the contract is subject to non-performance.
In Part II of this article, we’ll look at the opportunities and risks that arise from the three causes discussed here. We’ll examine those opportunities and risks through four lenses: financial, operational, risk/compliance and strategic.
