In contract management, businesses, government agencies and nonprofit organizations use contractors to deliver professional services to clients. Contract management is a cost-effective way to provide more services than the organization has the personnel to perform itself. A contract governs what services the contractor will provide and what compensation will be received for services rendered.
Loss of Control
A major disadvantage of contract management is that the organization gives up a considerable amount of control over the services that will be provided to customers. For example, when an IT firm contracts out the website support for its clients, its own employees will no longer provide day-to-day troubleshooting. This loss of control can result in the perception of a lower level of customer service among clients.
Another potential drawback of contract management is that the contractor might not be able to meet the deadlines spelled out in the contract. The business or organization depends on the contractor to provide important services. When established deadlines agreed on by both parties are not met, the contracting organization loses money and time. Some people would also call the time delay a hidden cost that is associated with the unpredictability of this type of business relationship.
Loss of Flexibility
Flexibility is an important part of doing business in a global economy. When the organization outsources work to third parties, the organization reduces its capacity to adapt its internal business processes to meet the needs of clients in a dynamic business environment. The most ideal contractual relationship is one in which the contractor can also be flexible in meeting the needs of the contracting organization it serves.
Loss of Quality
When a parent organization provides a certain level of quality in its products and services, the result is a professional reputation gained in the industry. If individuals in the contractor company are delivering products or services on behalf of their client, a loss of quality could have disastrous effects on the reputation of the client firm. Before using contract management, the firm should use a dependable request-for-proposal process to find the most reliable contractor with a demonstrated track record of quality performance.
Although a service contract between client and contractor is generally viewed as a legal agreement, the client can face huge legal costs to enforce this document in the courts. The contract should include teeth, or mechanisms for ensuring that the contractor will provide services as agreed. However, large firms should plan for unforeseen circumstances and legal costs for contractual relationships in which the contractor fails to deliver the agreed-upon products and services.