The Rewards of Best-in-Class Contract Management. Underwritten by:

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1 The Rewards of Best-in-Class Contract Management Underwritten by: Christopher J. Dwyer, Research Director Matthew York, Editor and Social Media Manager Ardent Partners February, 2015

2 REPORT SPONSORSHIP 1 The views and opinions in this report represent those of Ardent Partners at the time of publication. Sponsoring companies have had no measurable influence on the content and research in this report. The contents of this research report are the exclusive property of Ardent Partners. Please direct any comments or questions regarding our research sponsorship policy to Ardent s Chief Research Officer, Andrew Bartolini, at abartolini@ardentpartners.com and/or Sponsor: Ariba is the world s business commerce network. Ariba combines industry-leading cloud-based applications with the world s largest web-based trading community to help companies discover and collaborate with a global network of partners. Using the Ariba Network, businesses of all sizes can connect to their trading partners anywhere, at any time, from any application or device to buy, sell, and manage their cash more efficiently and effectively than ever before. Companies around the world use the Ariba Network to simplify inter-enterprise commerce and enhance the results that they deliver. Join them at: Contact: Lynnette Kimmel Director, Audience Marketing, Procurement Line of Business Ariba / SAP lynnette.kimmel@sap.com

3 2 There are several key components to the modern procurement function that are unheralded in nature and often considered to be more tactical than strategic. However, in the greater purview of the total impact of procurement, attributes such as contract management sit inside a territory of processes that, when mismanaged, can wreak financial havoc within the average enterprise. Those enterprises that deem contract management a critical component of their overall procurement programs are the ones that avoid savings leakage, maintain legal and financial visibility, and ultimately drive more value to the greater organization. The Significance of Contract Management in Today s Procurement Function Ardent Partners research consistently illustrates the value and necessity of leveraging effective people, processes, and technologies to drive the modern procurement organization. One such process, Contract Management, resides at the intersection of procurement officers leveraging supply management solutions to purchase the optimal mix of goods and services for the enterprise while driving greater value throughout the process. Contracts are the glue that binds transactions between buyers and suppliers, ensuring that buyers maximize the value that procurement negotiated during the sourcing process and that suppliers deliver on the value that they promised to provide. Without the visibility and control that contract management provides, procurement departments expose themselves to greater internal and external risk in the form of savings leakage and contract non-compliance. For the modern enterprise trying to cut costs and increase savings wherever and whenever it can, contract management is a veritable linchpin to success. Contract management is perhaps one of the more valuable business processes within the greater organization, such that a robust series of capabilities in this area will provide critical insights at both the tactical, line-of-business level and the strategic, executive level. At the tactical level, buyers need to be aware of existing contracts and have access to central contract repositories to facilitate greater on-contract spend and limit maverick spend. Furthermore, a strategic viewpoint of this series of processes will guard against the constant risk of savings leakage. Drip, Drip, Drip: Curing the Leakage Problem Savings leakage is defined as the gap between identified (or negotiated) savings and realized (or implemented) savings due to poor contract management, flawed supplier on-boarding, and other sourcing weaknesses. While the average company loses 22% of its cost savings to savings leakage every year, closing the process gap by connecting sourcing and contracts can reduce leakage by

4 almost 40%. Thus, executives value contract management for its ability to link the source-to-settle process, guard against savings leakage, and realize the savings that procurement identified and negotiated at the time of contract award. 3 The Visibility Factor Best-in-Class procurement teams differentiate themselves from their peers, in part, by having greater visibility into contract negotiation and execution metrics, like identified savings and compliance rates (see Figure 1). At the front end, these top-performing organizations understand that visibility into only specific areas does not make for an effective procurement program; thus, it is important to note that Best-in-Class enterprises, in the pursuit of contract compliance and the avoidance of savings leakage, are more apt to hold the necessary visibility into the critical areas that matter when it comes to the source-to-settle process. Figure 1: The Visibility Factor, Best-in-Class vs. All Others Visibility into identified or negotiated savings 39% 56% Visibility into booked savings 34% 54% Visibility into implemented savings 41% 35% Visibility into contract compliance rates 21% 35% Best-in-Class All Others Ardent Partners Best-in-Class organizations appear to be generally more accountable to their core goals and objectives. While savings leakage plagues even the most effective procurement operations, those organizations in the Best-in-Class group strive for greater accountability than the competition, as they are more likely than other enterprises to hold the necessary visibility into the myriad phases of savings (identified, negotiated, booked, and realized / implemented) that they can be proactive and pinpoint the gaps that may cause leakage. Contract compliance is one level of foundation in regards to combating the savings leakage problem. That is, Best-in-Class procurement departments hold a higher level of visibility into current contract compliance rates than other groups, holding the ability to understand the true impact of supplier agreements and how the execution (no matter how correct or poor) currently supports savings targets and other objectives.

5 Best-in-Class Procurement and Contract Management Performance 4 In regards to procurement and contract management performance, Best-in-Class organizations are heralded for their ability to ensure that spend is in accordance with supplier and service agreements and execute procurement transactions that are compliant with contracts. Also, these top-performing organizations are also more likely than their peers to have a centralized, searchable source for the majority of their procurement contractors, which contributes to enhanced visibility into current and future enterprise spend. Table 1: Performance Metrics, Best-in-Class vs. All Others Performance Metrics Best-in- All Others Class On-contract spend 74.2% 54.9% Transactions that are compliant with contracts 76.6% 66.6% Contracts stored in a central, searchable repository 69.7% 63.2% As we will discuss in the next section, this level of contract and procurement performance is dependent on a series of capabilities, competencies, and technologies that are actively driving enhanced visibility into contracts and agreements, along with the ability to take action against compliance and savings gaps. The Best-in-Class Contract Management Program The Best-in-Class contract management approach is multi-tiered, relying on an interconnected series of capabilities that ultimately drive visibility and insights and are founded on repeatable principles via automation of key processes within the greater strategic sourcing process. As Figure 2 details, top-performing enterprises are more likely than their peers to leverage this mix of standardization and automation. Figure 2: Sourcing and Contract Management Capabilities, Best-in-Class vs. All Others esourcing automation 39% 68% Standardized sourcing processes 48% 67% Standardized contracting processes 49% 62% Tight linkage between sourcing and contracting 29% 53% Automated contract management 27% 45% Best-in-Class All Others Ardent Partners

6 5 esourcing automation ensures that supplier bids, information, and negotiated prices and terms are saved in a central, digital repository that can be carried over to the contracting process. It also helps contracting officers link the sourcing, negotiation, contract creation, and contract execution phases of each sourcing event. As a result, automating esourcing helps to fill gaps between sourcing and contracting, foster visibility into both processes, and in turn prevent savings leakage. Best-in-Class organizations are nearly 43% more likely than all others to have this level of automation in place. The Best-in-Class are also nearly 30% more likely than rival groups to standardize their sourcing processes, thereby leveraging common sourcing language, templates, terms, and conditions for easy reuse during the contracting phase. There is no need to reinvent the sourcing wheel for every supplier, category, or sourcing event; standardization simplifies the process and makes it easier for teams to reuse applicable documents and establish best practices. Not surprisingly, Best-in-Class procurement teams are also 21% more likely than "All Other" teams to standardize their contracting processes. With common formats, templates, and language, contracting officers can convert information from supplier bids into contractual documents and reduce the likelihood of inaccuracies or omissions between the two contractual phases. This ultimately ensures that, when executed properly, the groups will drive a desirable (and correct!) level of cost savings across enterprise spend. The biggest gap between Best-in-Class and rival procurement teams lies in their linkage of sourcing and contracting. Not surprisingly, the Best-in-Class are 45% more likely than their peers to report tight linkage between these areas, enabling them to more quickly leverage sourcing and supplier information into contractual documents for quick, easy, accurate, and compliant execution. In the business world, time is money, errors are costly, and non-compliance can ruin businesses or relationships. As the stakes get higher, fewer procurement and executive leaders can tolerate inefficient, costly, or risky processes. Contract management automation is a multi-faceted series of technology-driven processes that can drive real efficiencies across the entirety of the contract management function. Best-in-Class enterprises are 40% more likely than their peers to leverage this automation, which actively closes the loop between sourcing and contracting, mitigates both internal and external legal risks, and also supports a wide range of repeatable processes that can be utilized for different sourcing events and initiatives. Contract management automation can also enable access to central repositories and standardized SLAs to ensure that suppliers perform against the negotiated terms and conditions. In the quest to reduce maverick spending, curb savings leakage and identify compliance gaps, contract management automation may be the most critical capability of all. Recommendations Contract management is the supporting foundation for any greater procurement program, as contracts serve as the lifeblood of sourcing efforts across the enterprise. Thus, it is critical for

7 enterprises, especially those with inefficiencies within their contracting lifecycle, to follow the recommendations below as they seek to improve and enhance all facets of their sourcing initiatives: 6 Standardize contract management processes to ensure compliance further down the line. Tightly link sourcing and contracting processes for maximum realization of cost savings and cost reductions. Look to automation across the contract management spectrum to develop repeatable, dependable processes and create a centralized repository of agreements and contract management-related intelligence. Conclusion Contract management may be more of a traditional procurement function; however, there is no question as to its continued and critical impact on enterprise spend management. Those enterprises that place emphasis on contract management processes and capabilities actively drive visibility into corporate spend and maintain a vivid picture of how supplier agreements influence the bottom line. Procurement leaders cannot lose sight of the crucial elements of contract management and its link with sourcing, as gaps within this function can and will erase the ultimate gains of procurement-driven savings.

8 ABOUT ARDENT PARTNERS APPENDIX 7 Ardent Partners is a Boston-based research and advisory firm focused on defining and advancing the supply management strategies, processes, and technologies that drive business value and accelerate organizational transformation within the enterprise. Ardent also publishes the CPO Rising and Payables Place websites. Register for exclusive access (and discounts) to Ardent Partners research at ardentpartners.com/newsletter-registration/ or join its LinkedIn Group. ABOUT THE AUTHORS Christopher J. Dwyer, Research Director and VP of Operations, Ardent Partners Christopher J. Dwyer is considered a premier thought leader in the world of supply management and a renowned expert in contingent workforce management, travel and expense management, and meetings/events management. He evangelizes the evolution of complex spend management and has written hundreds of research reports and interviewed, advised, and benchmarked thousands of end-user professionals and executives in regards to their complex spend management operations over the last eight years. Christopher joins Ardent from the Aberdeen Group, where he spent more than seven years tracking the progression of complex category spend management strategies and solutions while helping to educate the global market. At Aberdeen, Christopher led Aberdeen s Global Supply Management practice and oversaw and contributed to the company s coverage of procurement, strategic sourcing, spend analysis, epayables (accounts payable automation), and supplier management. Christopher was recently named an Analyst Superstar by HRO Today magazine for his work in the contingent workforce management industry, and was also recognized by Supply and Demand Chain Executive Magazine as a Pro to Know. Christopher leads Ardent s coverage of complex spend management, including the evolution of contingent workforce management, T&E expense management, and all other complex categories of spend and provides research and advice so that end-user organizations can enhance their capabilities and competencies and make the smart decisions that will ultimately improve their performance. He welcomes your comments at cdwyer@ardentpartners.com, on LinkedIn ( or Twitter (@cjd_ardent).

9 Matthew York, Editor & Manager of Social Media / Community Development, Ardent Partners 8 Matthew York is a research and analytic professional with ten years of experience working in academia, government, and industry. His primary areas of research include supply risk management, including supply chain, reputational, and political risk. Matthew comes to Ardent Partners from the Aberdeen Group, where he conducted survey research and data analysis for multiple research practices, including the Global Supply Management, Supply Chain Management, and Business Intelligence practices. Prior to joining Aberdeen, Matthew served for three and a half years in the U.S. Intelligence Community as both a Human Capital Management analyst and an intelligence analyst. He earned a B.A. in Political Science from Stonehill College and an M.A. in Political Science from the University of New Hampshire. Matthew welcomes your comments at myork@ardentpartners.com.

10 RESEARCH METHODOLOGY 9 Ardent Partners follows a rigorous research process developed over years spent researching the supply management market. The research in this report represents the web-based survey responses of 273 CPOs and other procurement and business leaders captured in January, 2014 as well as direct interviews with 24 CPOs and procurement leaders (20 of whom took the survey). These 273 participants shared their strategies and intentions, as well as their operational and performance results to help us define Best-in-Class procurement performance and understand what levers the leading groups pull to obtain their advantage. Roughly two-thirds of the total participants shared some personal insight and commentary to help provide greater context to the results. This primary research effort was also informed by the experience and analysis of the report author and the entire Ardent Partners research team. Complete respondent demographics are included below. To purchase reprints of this report, please research@ardentpartners.com. For more information on this and similar topics, please visit and the research library at REPORT DEMOGRAPHICS The research in this report is drawn from respondents representing the following demographics: Job Function: 87% procurement; 5% finance; 4% supply chain; 4% other Job Role: 42% VP-level or higher; 30% director-level; 23% manager-level; 5% staff-level Company Revenue: 64% Large (revenue > $1 billion); 17% Mid-market (revenue between $250 million and $1 billion); 19% Small (revenue < $250 million) Region: 69% North America; 21% EMEA; 10% Asia-Pacific Industry: More than 25 distinct industries are represented. Public Sector, Health Care, Financial Services, High-tech, and Manufacturing are the largest industries in the survey pool; no industry represents more than 12% of the overall survey respondents. Industry Standard Fine Print: The information contained herein has been obtained from sources believed to be reliable. Ardent Partners, Ltd. disclaims all warranties as to the accuracy, completeness, or adequacy of such information. Ardent Partners, Ltd. shall have no liability for errors, omissions, or inadequacies in the information contained herein or for interpretations thereof. The contents expressed herein represent Ardent Partners best analysis at the time and are subject to change without notice Ardent Partners, Ltd. All rights reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. Solution providers and consultancies should take special note that Ardent Partners reserves the right to seek legal remedies including injunctions, impoundment, destruction, damages, and fees for any copyright infringement (which includes but is not limited to usage of any Ardent Partners content in company collateral, presentations, and websites) in accordance with the laws of the Commonwealth of Massachusetts and the United States.