A company’s contracts represent its commercial relationships. Yet in many companies, they continue to be managed in a haphazard way across the enterprise.
The consequences can be costly. Procurement department leaders of several dozen companies recently reported that inefficient contracting processes waste 5 to 20 percent of total corporate spend, says Andrew Bartolini, managing partner and chief research officer of supply management analyst company Ardent Partners. The figures were based on either company internal audits or spend analysis.
Research by the Aberdeen Group in 2003 found that ineffective control and management of supplier contracts cost businesses $153 billion per year in missed savings opportunities.
On the procurement side, losses occur because a company cannot easily determine, for example, if it is receiving a preferred price from a vendor or if it is even using a preferred supplier across the entire enterprise, says Kevin Potts, vice president of marketing and product management for software vendor Emptoris. Companies also lose track of thresholds required to gain volume discounts and rebates, Bartolini adds.
On the sales side, opportunities for license increases or additional sales that are managed via spreadsheets or forgotten in a document management system can be lost altogether, Potts says.
As a result, use of contract lifecycle management (CLM) software is growing. Such software can help companies manage the contracting process from contract creation through execution of the contract to measurement of its performance.
Once a company’s contracts are in a central repository, CLM software automatically detects and notifies the appropriate business people on contract prices, pricing changes, deadlines and expiration dates, and other triggers requiring action.
But the reality in many companies is far different. It is not unusual for organizations to store contracts in multiple repositories, especially if business units have operated in autonomous silos or if the organization has grown through acquisitions, says Nancy Jessen, managing director at Huron Consulting. This can result in unnecessary duplication of effort and wasted resources.
Executed contracts are sometimes stored in scattered locations “from file cabinets in the legal department or worse, a sales person’s garage,” Jessen says.
An important first step in contract management is building a centralized data repository of all contracts. “When there is no global corporate view of the contractual obligations of the company, it becomes nearly impossible to develop meaningful performance metrics to proactively manage and optimize relationships with key vendors and customers,” Jessen adds.
If a question or dispute arises, contracts and related documents need to be easily accessible by the lawyers for review. “Without a central repository, critical time is lost searching for the appropriate documents, and it increases the potential for not meeting all performance obligations,” Jessen says.
Citing an example of what can go wrong without contract lifecycle management software, Potts referred to the 2009 bankruptcy of outsourcing giant Satyam Computer Services, which then suddenly announced it was closing its doors. Potts said one company that had not automated its contract processing with CLM technology needed four months to determine what IT projects it had ongoing with Satyam, a process that could have been completed in hours with a CLM system.
The legal department plays the key role in establishing and enforcing use of a centralized repository for contracts. Beyond that, the law department can help initiate and manage contract management controls and protocols, defining the standards for storage and access to the contract documents and data. “As a first step, by defining standard templates and a playbook of acceptable fall-back positions, a law department can drive more consistent contracts with acceptable levels of risk,” Jessen says.
The legal department can also develop escalation criteria to define what decisions can be made within a business unit and what decisions require involvement of other key stakeholders, including legal, finance, risk management and product groups.
“A company doing business for the first time in a country may require involvement of the legal department, whereas a similar contract in an established region would not,” Jessen says.
Other benefits of CLM systems include the ability to automatically generate renewal quotes for sales people and to require that internal parties regularly review the terms of the contract and identify missed revenue opportunities, according to Potts. Each contract portfolio can also be reviewed and amended globally, if necessary. Contract amendments can be linked to the appropriate original agreement and identify active, prevailing terms on the original.
A centralized online contract repository can also provide a benefit if a natural disaster strikes a region, Potts adds. All contracts for that region can be quickly reviewed for their force majeure and estimated potential risk, with proactive notifications quickly dispatched to ensure compliance.
A CLM system can also be integrated with other systems in the company. For example, integration with order management can tie product shipment releases to the contract terms; customer service applications can ensure compliance with support terms; and finance systems can ensure payment and track royalties.
CLM systems can also generate management reports to aid in the assessment of the financial and business benefits of a portfolio of contracts, a crucial step in making renewal decisions and evaluating vendor/client relationships, Jessen says. Management reports can provide the necessary information to determine appropriateness and use of terms, such as warranties, pricing, quality guarantees, service levels and return policy, she adds.
As a result of these and other efficiencies, implementation of CLM systems can in many cases offer a rich return on investment (ROI). The Aberdeen Group study found that the ROI from a CLM program for a company with $750 million in revenue and $200 million in annual spend was three times its cost in the first year. Potts says one of his Fortune 500 clients conducted an internal benchmark study and determined that it saved $5-7 million dollars annually after implementing a CLM system.