The 3 Biggest Statement of Work Risks – and How to Manage Them
If you’re tired of your business stakeholders not using your statement of work contracts, you need to ensure your contract management is at its A-game. Mick Feild explains the importance of levelling up your SOWs for services procurement.
Whenever we see a surge in popularity for a certain way of doing things, the thoughts of advisors like me turn to risk. And by thoughts, I mean worries. Because a sudden increase in adoption often goes hand in hand with a sudden rise in non-compliance.
With risk in mind, we need to talk about statement of work.
Statement of work (SOW) is booming, as businesses all over the world eschew time and materials contracts in favour of the increased visibility and control that comes with SOW engagements. But if these engagements aren’t managed carefully and consistently, the use of SOW can create more problems than it solves.
Here are the three biggest risks of uncontrolled SOW services procurement – and how to mitigate them.
1. Incorrect channel buys and resource classification
Being able to monitor and improve buying behaviour is a key benefit of statement of work services procurement. But while SOW engagements are a great alternative to time and materials contracts in many instances, they’re not the right option every time.
Procurement leaders can’t allow an increased use of SOW to justify poor buying behaviour.
If hiring managers are allowed to engage suppliers without proper process and oversight, resources that should be classified one way get classified in another – opening up the business to the risk of costly penalties from regulators (UK readers, see IR35).What your hiring managers buy should always determine how they buy it. With SOW contracts, as with any other purchasing decision, managers must follow the same rigorous steps to ensure that a milestone-based engagement with an external provider is actually the right solution.
2. Inconsistent agreements and lax on/off-boarding
Getting visibility over buying behaviour doesn’t just help to reduce the risk of poor decision-making; it also helps to reveal exactly where value is – and isn’t – being achieved from your suppliers. Crucially, too, it tells you whether suppliers are being on- and off-boarded from your business with the proper checks and balances.
Inconsistency of terms is a major problem for organisations that don’t operate a centralised SOW model. Engagements end up being driven by existing relationships between hiring managers and their favourite suppliers. This makes it hard to know whether suppliers are being re-engaged because of strong performance and competitive rates, or simply because of cosy relationships.
The other obvious worry with this approach is security. At the beginning of an assignment, who takes responsibility for ensuring that any access to premises or systems is subject to strict security controls? At the end of a project, who’s responsible for revoking that access and ensuring that any physical assets are returned?
Without a formal process for these checks and balances, they can become as inconsistent as the terms of engagement.
3. Poorly defined milestones and outcomes
For many businesses, one of the key drivers for moving away from time and materials engagements is cost control. At a time when procurement leaders are under more pressure than ever to keep costs down and get real value for money, many are looking for alternatives to expensive contractors.
Statement of work, with its emphasis on outcomes and milestone payments, provides the level of control they need.
By making up-front agreements about exactly what will be delivered and for how much, businesses can avoid the costly overruns and scope-creep associated with day-rate retainers.
But that’s only the case when SOW is used properly.
Too often, the actual statement of work – the document that details the scope of the work and the milestones that will trigger payment – is poorly defined and open to interpretation. This ambiguity means the switch to SOW ends up realising none of the cost benefits it was intended to provide, as services providers essentially become additional day-rate resources.
Another risk here is poor contract enforcement by hiring managers, who can often be reluctant to hold providers accountable for delivering what was agreed – whether that be through delayed payment, penalties, or loss of future work. Writing a sound agreement is a great start, but it must be backed by strong enforcement.
The solution? Standardise and centralise
By putting formal, standardised SOW buying procedures in place, and by bringing all SOW services procurement into a centralised system, businesses can ensure that the right decisions are being made – and approved by the right people – at all times.
A modern vendor management system (VMS) allows you to define your project, distribute it to suppliers, select a vendor, agree milestones and payments, and manage approvals throughout the project – all in one transparent, online system. If a supplier wants to extend scope or cost, it’s done within the system and only approved subject to your review.
This centralisation is how you start to get a complete view of which managers are buying which services, what they’re paying for them, and where more favourable terms – or better-performing providers – need to be sought. And this is how you achieve true SOW value for money, with minimal risk.
Want to know more about the Statement of work transformation and how you can improve your contract management? Procurious is kicking off our Level Up series with the ultimate white paper and webcast package, Level Up: Your Statement of Work. Join the Level Up Your Procurement Group now to be the first to gain access to these fantastic resources.
