Published on February 17, 2014
The Why, What & How of Contract Management
The Why, What & How of Contract Management Part 2 of the Procurement Performance Elevation Series Why is contract management gaining focus? Even as the global economy is struggling to recover from the 2008 recession, we are now struggling to ﬁght yet another battle: To manage spends and control costs as that gets more difﬁcult in such a business environment. Even so, there are many things that procurement can do to help them meet their savings expectations, such as Contract Management. When sourcing ends – contract management begins. It guides procurement through purchasing of the commodities and/or services at the negotiated prices, agreed upon service levels, and any concession or commitments made by the supplier. With multiple contracts at different locations, technology helps procurement manage contracts effectively. Combined with in-depth analysis and reporting capabilities, contracting technology can deliver real value to the organization by ensuring better contract compliance. Best-in-class organizations, that leverage contract life-cycle management solutions, identify opportunities for savings and prevent inefﬁciencies. As per an Aberdeen Group 2011 study, three performance criteria used to distinguish top performers in this benchmark were: 79% have their spend under management (compared to 45% for laggards) 17% average contract savings realized (compared to 4% for laggards) 8 days average cycle time for contract review and approval (compared to 47 days for laggards) So what are the driving forces for automating contract management? Here are some interesting facts pointed out by the Aberdeen 2011 study. Large enterprises (those with $2.5bn or more in top line revenue) averaged having around 13,000 procurement contracts in use Medium enterprises (those with $250mn to $2.5bn) averaged having 8,200 procurement contracts in use Small enterprises (those with $250mn or less in top line revenue) averaged having 4000 procurement contracts in use These are enough contracts to get lost in, let alone track and manage contract compliance. As the organization expands, so do the number of transactions, making contract management even more complex.
Manual ways of managing contracts lead to Lack of visibility Organization becoming vulnerable to missed cost savings, poor compliance Organization ﬂouting regulatory norms Error-prone contracts Lack of knowledge of approval hierarchy Majority of the execs are unaware of the contract owner Increase in the contract cycle time, etc. Let's have a look at what procurement executives consider to be top pressures for managing contracts. Figure I : Top Pressure for managing Procurement Contracts Source: Aberdeen Group, November 2011 66% Establish better control of enterprise spend Poor visibility into contractual agreements / commitments 44% 40% Pressure to reduce supply and supplier risk Need to improve supplier compliance to contracts 37% Poor visibility into supplier performance on contracts 34% 0% 10% 20% 30% 40% 50% 60% 70% Percentage of Respondents, n=131 The above ﬁgure highlights that lack of visibility and exposure to supply chain and supplier risk are some of the biggest concerns of procurement. Automating contract management helps procurement tackle the concerns, as highlighted in the study, and thus generates better savings and attains the maximum value out of suppliers.
The spoke in the contract management wheel Problem Solution Until the advent of suitable technology to manage contracts, organizations often used Word and its features, like track changes, to write and review contracts. Contract locations were fragmented, sometimes with scanned copies of contracts which are not searchable. The biggest challenge organizations face while transitioning to a contract management technology is the loading of historical data into the new system. For the new system to be able to handle different types of historical contracts, it needs to have different Meta data. Procurement executives may fear conﬁdential contracts being accessible to all with centralized contract repository. Thus they may opt out of the technology and choose to save the contract on their system. The contracting technology should have a strong security feature that keeps conﬁdential contracts secured from unauthorized use. This can be done by incorporating user or folderbased access. Different users, like legal, procurement, business etc., have different needs. For instance, legal may need to check if the new contract has any legal ramiﬁcations, or senior management needs to check IT contracts utilization reports. If the technology is unable to provide users what they need, then the adoption is bound to decline. Technology should be able to cater to the needs of different users. For instance, senior management would like to get a top view of the contract performance and not get into the nittygritty. For such users the technology should be able to provide access only to the relevant reports and dashboard. Difﬁcult user interface scares away users who then eventually opt out of the contract technology. The user interface of the solution should be easy and smooth so that users require minimal training on “How to use”. It should be modeled after eportal websites that have amazing interfaces.
Beneﬁts of contract management automation 1 2 3 Reduced cycle time Reduction in the contract cycle time by comparing two different version of contracts side-by-side, automating approval work ﬂow and signature process with eSignatures. An Aberdeen 2010 study identiﬁed a decrease in time to process a single requisition to order cycle from 6.3 to 5.0 days. Standardizing the contracting process by use of templates also helps cut down on the cycle time Reduced maverick spend Reductions in maverick spend. As per the Aberdeen study, organizations using contract management systems reduced maverick spend from 22% to 19% Risk minimization Reduced exposure to risk and assured commitments from suppliers is met, thus facilitating better supplier management. If the supplier has agreed to a price reduction when the volume increases, then the contract management system will trigger an alert to make it happen 4 Cost beneﬁts Provides cost beneﬁts by asking the suppliers to make price adjustment when the market price/inﬂation goes down 5 Higher visibility Improved visibility into contract utilization by tracking the usage of contract terms and conditions 6 Centralized data The chances of lost contracts are reduced drastically as they would be located in a repository which is centrally accessible 7 Improved security Better security in case of conﬁdential contracts through user/folder-based access
Best practices for contract management implementation Clear beneﬁts of Contract management technology should be highlighted to all the users Ensuring that Objectives and Key Result are well deﬁned, especially KRA 's should be quantiﬁable All the metadata ﬁelds should be considered for conﬁguration, based on the objectives. Errors in metadata upload lead the tool to return improper results Creating an incentive plan for individuals who embrace the Contract Management process and deliver ROI Documenting best practices and demonstrating how they can be facilitated by use of a Contract Management Tool Continuous Training till adoption is close to 100% and in-house trainers have been certiﬁed Celebrating Success and ensuring it is replicated at every Procurement Group Sign-off from Key stake holders is key to avoid costly re-work
Let us understand the signiﬁcance of contract management with the help of a success story A leading global manufacturing giant with revenues exceeding $10bn, headquartered in the U.S. faced the following challenges managing contracts: Rock bottom usage - attributed primarily to the complex user interface, rudimentary search functionality of the incumbent contract technology Lack of stakeholder-based access control exposed them to data security risks The organization tried to confront these issues by leveraging advanced technology for contract management. This offered them a host of beneﬁts, such as: Stakeholder-based access control for enhanced security to conﬁdential contracts Responsiveness and ﬂexibility to accommodate user needs Superior search functionality along with the ability of side-by-side comparison and review of multilingual contracts Conclusion With increasing complexity in the business environment, procurement is looking to expand the use of technology for managing contracts. Automating the contracting process helps procurement attain maximum value out of the contract with less effort, compared to manual methods of managing contracts. Adopting advanced technology solutions seems to become the norm for larger procurement organizations.
About Zycus At Zycus we are 100% dedicated to positioning procurement at the heart of business performance. With our spirit of innovation and a passion to help procurement create even greater business advantages, we have evolved our portfolio to a full suite of Procurement Performance Solutions - Spend Analysis, eSourcing, Contract Management, Supplier Management, Financial Savings Management, and Procure-to-Pay. We believe our deep, detailed procurement expertise and a sharp focus on being responsive to our customers has reflected in us being positioned as a 'Leader' in the '2013 Gartner Magic Quadrant' for Strategic Sourcing Application Suites. We continue to see each customer as a partner in innovation and no client is too small to deserve our attention. We are a 600+ company with a physical presence in virtually every major region of the globe. With more than 200 solution deployments among Global 1000 clients, we search the world continually for procurement practices proven to drive competitive business performance. We incorporate these practices into easy-to-use solutions that give procurement teams the power to get moving quickly - from any point of departure - and to continue innovating and pushing business and procurement performance to new heights. NORTH Princeton: 103 Carnegie Center, Suite 201 Princeton, NJ 08540 Ph: 609-799-5664 AMERICA Chicago: 5600 N River Road, Suite 800 Rosemont, IL 60018 Ph: 847-993-3180 Atlanta: 555 North Point Center East; 4th Floor, Alpharetta, GA 30022 Ph: 678-366-5000 EUROPE London: Office No 335,400 Thames Valley Park Drive, Thames Valley Park, Reading, Berkshire, RG6 1PT Ph: +44 (0) 1189 637 493 ASIA Mumbai: Plot No. GJ – 07, Seepz++, Seepz SEZ, Andheri (East), Mumbai - 400 096 Ph: +91-22-66407676
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