Finance

Contract clarity

Governance | 1 Sep 2007

Terry Wilcox argues that contract visibility is the lynchpin of financial sustainability.

The Charity Finance Directors’ Group (CFDG)’s recent report Know Your Cost Base, Know Your Charity, flags the critical importance of the cost base and its implications for both funding and broader financial management. According to Chris Harris, director of finance and resources at Action for Blind People and chair of the working group which developed the report, “the charities sector is growing and becoming increasingly professional in many areas of activity. Those responsible for financial matters have to keep pace and make sure their charity stays successful and sustainable.”

A large proportion of a charity’s cost base is made up of what’s known as indirect spend on items such as stationery, IT equipment, heating and lighting, pensions and insurance. Some charities and not-for-profit organisations, including NSPCC, are already taking steps to establish control over this category of spend, with the help of purchase-to-pay and spend analysis tools.

However, a significant proportion of any organisation’s indirect cost base derives from the multiple contracts into which it is tied. When you consider that each of these contracts can be worth hundreds, thousands, or millions of pounds, the importance of ensuring that a charity’s spend control system provides visibility of these contracts, their value and their expiry dates, becomes clear. Otherwise, how can an organisation truly understand its spending commitments for the coming years and allocate budgets appropriately? Perhaps more importantly, how can a charity be transparent and accountable to funders and other trustees if its own finance team doesn’t have ready access to this information?

A central repository, through which all contracts can be viewed and managed, will not only deliver benefits in terms of budgeting, financial planning and corporate governance, but it could also help to eliminate two very common scenarios that will ultimately help to reduce a charity’s overheads, with obvious benefits for the cause the charity was founded to serve.

Automatic renewals and penalty clauses

More and more contracts are subject to automatic renewal. This means that, unless a contract is actively cancelled within an agreed time before the end of the defined contract period, the contract will continue or a penalty clause for termination will apply. A centralised management system can be designed to flag up upcoming renewal dates, giving relevant parties the opportunity to determine whether or not the company still requires the same goods or services and to ensure that, if the contract is to be renewed, the cost has been accounted for.

Duplicate contracts and missed economies of scale

When it comes to indirect spend, the different departments of an organisation tend to need very similar goods and services. But if information relating to contracts is held in separate silos across an organisation, then it’s easy to see how the organisation may inadvertently enter into duplicate contracts. A centralised contract management repository can enable a department head that needs to enter into a contract for the supply of key publications, for example, to check quickly and easily whether or not another department has already entered into a similar contract. Negotiations to extend the contract to multiple departments can then be initiated and managed. This not only saves time and money in terms of contract management, but also ensures that opportunities for economies of scale are never missed.

It’s clear that the biggest challenge of establishing contract visibility arises when different departments within a business take responsibility for managing the contracts for the different goods and services they need. One solution is to ensure that procurement is handled centrally, but there are many arguments in favour of devolving purchasing capabilities to the individuals who require the goods and services in question, leaving procurement professionals to carry out more strategic, value-added activity.

What’s needed, therefore, is a central contract system which is controlled by the purchasing team but can be easily managed and accessed by anyone within the business who may enter into a contract on its behalf, and shared with anyone who may need a view of its financial commitments, not just finance staff but also trustees, chief executives, managers and others with responsibility for a charity’s finances.

It’s all comes down to the relationship between financial visibility and financial sustainability. A large contract which slips under the radar will not only cause pain for boards of directors striving to prove best practice corporate governance, accountability and traceability, but could also be the difference between meeting or missing financial targets. 

Terry Wilcox is commercial director at Proactis

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Directory: Action for Blind People | Charity Finance Directors' Group (CFDG) | National Society for the Prevention of Cruelty to Children (NSPCC) | Proactis