The State of Sales Contract Management. Sponsored by:

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1 The State of Sales Contract Management Sponsored by:

2 Contents The State of Sales Contract Management... 3 Executive Summary & Background... 4 Contract Management a core capability or a necessary evil?... 4 Introduction... 6 Why Sales Contracting Matters... 8 Prevailing Approaches and Issues... 9 Issue #1: A lack of consensus over what constitutes the contract Issue #2: No consistent definition of roles, responsibilities or accountability for contract creation or management Issue #3: A strongly transactional approach misses opportunities for increased efficiency and effectiveness especially where customer relationships are of high complexity or value A Route Map for Improvement Automation makes a substantial difference to performance and internal collaboration Conclusion IACCM All rights reserved Page 2

3 The State of Sales Contract Management The primary research and authoring for this report were undertaken independently by the International Association for Contract & Commercial Management, a not-for-profit association that is dedicated to improving the quality and performance of trading relationships. All findings and commentary have been free of influence by the research sponsors and reflect an objective assessment of the inputs provided by sales, contract management and legal professionals employed by many of the world s most respected corporations. IACCM All rights reserved Page 3

4 Executive Summary & Background Contract Management a core capability or a necessary evil? For many sales people, getting to yes with the customer is only half the battle. Coping with the inefficiencies of their own organization can be almost as challenging and this is frequently the case with the contracting process, where complicated rules and limited visibility can undermine Sales productivity and threaten business controls and financial performance. At a time of heightened market uncertainty and increased business complexity, the negotiation and management of contracts gains increased attention. This report offers an insight to the state of sales contracting, drawing from input by more than 250 large corporations to explain the issues and describe the benefits that flow from process improvement. While the study provides a holistic overview, it has also yielded the first authoritative, independent insight to the value of defining and automating the contract management process and integrating with the customer relationship management (CRM) environment. The independent research was led by the International Association for Contract and Commercial Management, with support from Selling Power, an association for sales and marketing professionals, and sponsorship by Ariba, the leading provider of collaborative business commerce solutions and salesforce.com, the foremost organization in enterprise cloud computing. Among the findings are: The rules and bureaucracy of the contracting process frequently present a barrier to closing business and weaknesses in on-going contract management are a source of lost revenue, missed opportunities and dissatisfied customers. Only one third of sales people feel that the contracting process is effective at maximizing value, minimizing risk and assisting in the formation of strategic customer relationships. For those charged with producing or managing contracts, Sales are poor at internal communication, lacking in relevant skills and guilty of setting unrealistic customer expectations, resulting in increased claims and eroding customer loyalty. Integrated sales process automation has a consistently beneficial effect on the quality and integrity of the process, yielding substantial increases in the satisfaction of all internal business groups. IACCM All rights reserved Page 4

5 Contract management and levels of integration with sales automation (Large & Medium Enterpises) Manual processes 1.87 Some automation, not integrated 2.12 High level of automation, partly integrated 2.55 High level of automation, highly integrated Poor Excellent Quality of Contract Management Figure 1: Contract management and levels of integration with sales automation (Large & Medium Enterpises) The top quartile companies out-perform the laggards by a substantial margin. This report points to the steps they have taken to establish this lead. IACCM All rights reserved Page 5

6 Introduction Few would argue that contracts are a core business asset. After all, how much would a business be worth if it had no contracts? Yet despite their critical nature, the process by which contracts are formed and managed is generally not well defined and this leads to widespread frustration by all those involved in their creation and management. For those in Sales, getting the contract negotiated and signed is fundamental to success; without it, they cannot count revenues or claim commissions. Yet from their perspective, the rules and bureaucracy of the contracting process frequently present a barrier to closing business and, once signed, weaknesses in on-going contract management are a source of lost revenue, missed opportunities and dissatisfied customers. 1 They depict the process as a source of delay, poor information flows and risk-averse, controlling behavior. The lawyers and the contracts or commercial professionals charged with ensuring contracts are in place agree that there is extensive room for improvement. Less than a quarter are confident that their company consistently fulfills its contract commitments and almost three quarters acknowledge that contracting practices may fail to generate a positive customer perception. However, for them, it is the cavalier attitudes and poor discipline of the Sales organization that are frequently a source of great concern and perceived business risk. In their view, Sales are poor at internal communication, lacking in relevant skills and guilty of setting unrealistic customer expectations. Sales identify opportunities for improvement Less than a quarter are confident that their company typically fulfills its contract commitments and almost three quarters acknowledge that their contracting practices may fail to generate a positive customer perception. Such contrasting attitudes frequently undermine internal cooperation, leading to poor communications and avoidable delays. It is therefore no surprise that a majority of survey respondents feel the contracting process is often failing in its efforts to maximize value, minimize risk and assist in the formation of strategic customer relationships. Figure 2: Sales identify opportunities for improvement 1 IACCM research suggests that organizations can on average achieve bottom-line improvements of 5 7% from a reengineered sales contracting process. IACCM All rights reserved Page 6

7 While this overall picture is not encouraging, the good news is that there is unanimity that the contracting process needs to be improved and some organizations have successfully taken steps to ensure that their contracts become strategic assets. They have done this through a holistic review of the process by which they are formed and managed. The leaders have explored the connections between customer relationship management (CRM) and contract lifecycle management (CLM). They have also developed approaches that build internal collaboration between functional groups, recognizing that without such an approach they cannot build successful long-term customer relationships. As a result, for these companies, contracting has become a source of competitive advantage, allowing differentiated terms and a more agile response to changing market conditions. This paper describes why contract management is becoming more important, provides research insights to prevailing approaches and issues, and suggests a route map for those who wish to improve. What is your primary frustration with your organization's legal / contract management process? Which of the following is your primary challenge in regards to sales contract management? Don't keep me updated on the status of negotiations 20% Other 15% Slow responsiven ess to my needs 25% Overly risk averse impeding would-be deals 40% Need better information for forecasting and rev rec 20% Renewal management inefficiencies 5% Other 15% Poor visibility into sales contracting process 15% Proper expectations not set during sales cycle 30% Poor visibility into contract and whether these are fulfilled 15% Figure 3: The sales view of a current process Figure 4: The legal/contract management view of a current process IACCM All rights reserved Page 7

8 Why Sales Contracting Matters There is unanimity in the view that contracts are a key tool in the management of business risk. And few would argue that today s volatile, international markets carry increased risks and uncertainties. Couple this with the growing emphasis on regulation, compliance and reputation management and it is not hard to see why the world of contracting has received more management attention and focus. Yet of course it is easy to have this attention translate into increased bureaucracy, perhaps even risk aversion. An overwhelming majority of business people see the primary objectives of their Legal and Contracts staff as being the management and mitigation of risk and ensuring business controls and compliance. Only around 10% see contracts as a potential source of competitive advantage, whereas more than 40% see them as a source of competitive disadvantage overly risk averse, impeding wouldbe deals. If this perception is true, then today s contracting practices are not only important for the management of risk, but have in fact become a source of risk, resulting in potential loss or delay of business. Such a finding would always be bad news, but in 21 st century markets it is especially so. Companies today face growing and often unexpected competition. They are confronted by aggressive price pressures, forcing them to regularly re-think their business offerings and structures. Many have sought to increase value through a move from product sales, into increased services or solutions. Such moves have fundamental impact on the role and importance of contracts. First, in a services world, the contract may be the only tangible evidence of the deal. Second, whereas products are generally judged at the point of acquisition, the performance of services and solutions is far more dependent on a future outcome. As a result, negotiations and subsequent disagreements are increasingly dependent on lengthy discussions over such issues as scope, acceptance criteria, performance undertakings and the management of change (see chart below, showing today s most frequent sources of claim and dispute). These are frequently complex issues on which future profitability depends. The right contract terms and wording can and does make all the difference between success and failure, margin improvement and margin erosion, customer satisfaction or customer dispute. Only around 10% see contracts as a potential source of competitive advantage, whereas more than 40% see them as a source of competitive disadvantage overly risk averse, impeding would-be deals. IACCM All rights reserved Page 8

9 During the post-award phase of contract performance which terms are the most frequent source of a claim or dispute? Delivery / Acceptance Price / Charge / Price Changes Change Management Invoices / Late Payment Performance / Guarantees / Undertakings Service Levels and Warranties Payment Responsibilities of the Parties Liquidated Damages Scope and Goals 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Figure 5: During the post-award phase of contract performance which terms are the most frequent source of a claim or dispute? Source: IACCM study of the Most Negotiated Terms (2011) Prevailing Approaches and Issues If automation were to be viewed as the benchmark for process quality, today s contracting practices would quickly be seen as failing the test. Only 6% of organizations have a contract management process and systems that is tightly coupled with their sales activity. This illustrates some of the core problems with today s approach to contracting. Among the most common weaknesses are: Many in Sales seek to delay the involvement of their (riskaverse) colleagues from Legal or Contract Management. 1. A lack of consensus over what constitutes the contract 2. No consistent definition of roles, responsibilities or accountability for contract creation or management 3. A strongly transactional approach which misses opportunities for increased efficiency and effectiveness especially in environments where customer relationships are of increasing complexity or high value Winning deals is seen as critically important yet for many, they win in spite of the contract. It is viewed as an unfortunate requirement of doing business and something that is almost inevitably adversarial and long-winded. As a result, many in Sales seek to delay the involvement of their (risk-averse) colleagues from Legal or Contract Management; indeed late involvement is the biggest single issue for these support groups. This breeds a lack of trust. Sales complain about a failure in responsiveness and contracts staff bemoan inadequate notice on upcoming activities and unrealistic expectation on turnround times. IACCM All rights reserved Page 9

10 In respect of contract management, to what extent are the following statements representative of your current situation? (Completely true is 5, Completely untrue is 1) Average Sales Poor internal collaboration between relevant but disconnected functional areas associated with sales process Long negotiations Failure to leverage due to legal repetitive language updates components of the and reviews contracting process Late involvement Difficulty gaining timely support from relevant experts Legal / Contract Management Figure 6: In respect of contract management, to what extent are the following statements representative of your current situation? Yet there are also unifying issues beneath the surface of discontent. Many of those affected by this process complain about the extent to which there are insufficient resources in the contracts area; they share frustration over the extent to which activities are manual; and they all see problems arising from inadequate skills and failure to follow established process. Issue #1: A lack of consensus over what constitutes the contract What does constitute the contract? It is remarkable how often there is debate over whether particular commitments or documents are contractual or non-contractual and our internet age and growing deal complexity has made this worse. In a way, there are two answers to this question. One is the formal legal response, another is the typical operational reality of today s networked business. When it comes to the law, a massive range of documents may be considered during any discovery or litigation proceedings including not just the documents designated contractual, but also related s, instant messages and notes or recordings. At an operational level, the indiscipline regarding what constitutes the contract can be quite remarkable. There are those who see it only as the core terms and conditions and somehow view specifications, scope of work, service levels or other business terms as somehow independent of the contracting process. When it comes to operational performance, the gaps become even larger. For example, invoices, performance reports and compliance notices will often be viewed as unconnected with the documents that specified their existence. IACCM All rights reserved Page 10

11 The typical length of contracts continues to increase. At the same time (and in part related to this), the informality of contract communication has grown. Internet-based correspondence has facilitated a mass of written communication that simply did not occur 20 years ago. It has expanded the number of people who can express and share views or documents, both internally and between the contracting parties. This has led to a growing confusion between the formality of contract and the informality of correspondence. Any contract can be divided between terms that are active and those that are passive. A passive term may be of great significance, but does not commit any specific process or resources; it is typically enacted only in the event something else happens or fails to happen. Examples might be the definition of the parties, the Limitation of Liabilities or Force Majeure. The majority of the passive clauses are seen as belonging to the Legal department, perhaps in conjunction with Finance. Active clauses are those that require process or resources and therefore represent the core business commitments. It is these where capabilities must be carefully reviewed, to ensure that promises will be fulfilled. And it is these terms that are frequently scattered across an array of documents and communications which may or may not be gathered together in one place to ensure holistic oversight and management. The resulting uncertainty creates a perception of risk and often results in actual performance failure due to a misalignment between commitments and capabilities, or a breakdown in communication between those who make the promises and those who must perform them. Issue #2: No consistent definition of roles, responsibilities or accountability for contract creation or management Given the frequent lack of clarity over what documents or commitments are contractual, it is perhaps unsurprising that the roles and responsibilities for its creation and management are confused. As mentioned above, most Legal groups would feel direct responsibility for the core terms and conditions, but whether or not they are engaged on many of the business terms is highly variable. Equally, they would not in general feel responsible for gauging the economic or business wisdom of specific commitments; their remit (at least traditionally) has been to make observations regarding legality and potential legal consequences. The focus of such a process gravitates towards the result of possible failure, rather than the probability of success. This difference of perspective goes far in explaining the natural tension between Sales and those who oversee contracts. The problem that arises when there is poor definition of roles, responsibilities and accountability is that the contention system through which decisions are made can rapidly become destructive rather than creative. The business decisions enshrined within a contract are often critically important. Healthy debate is therefore essential. A system that fails to generate this debate in a timely and creative manner will result in rushed or inadequate decisions and increase the chances of ailed performance. IACCM All rights reserved Page 11

12 Issue #3: A strongly transactional approach misses opportunities for increased efficiency and effectiveness especially where customer relationships are of high complexity or value Within most organizations, the lawyers and contracts professionals become involved only when there are exceptions being made to established contract terms. The problem comes when either there are no established standards or the frequency of exceptions increases. Exception processes tend to be poorly defined and are notoriously bad at spotting trends or patterns. They are by definition driven on a case-by-case basis. Therefore, as competitive pressures grow, or business strategies and offerings change, the contract terms often struggle to adjust. In companies where there is no defined accountability for contracting process, this results in growing frequency of transactional review and approval of contract terms and commitments by a series of operational staff groups, in turn prolonging customer negotiations. Ten Steps To World-Class Sales Contracting Establish sponsorship Define benefits Engage stakeholders Analyze market segments / needs and strategies Document process Establish review and approval principles (management system) Agree performance measurements Develop templates, guides Define skills and tools Invest in systems and people Perceptions of slow response times and increased risk aversion are supported by market reality. 2 Legal and contracts staff are frequently unable to find time to consider a more strategic approach. They lack the tools or systems to observe patterns and in general do not have access to market research data that might assist improved contract terms or practices. The result for many is an unending cycle of increased transactional review, or the imposition of rules and standards that make the Sales job far harder. Either way, business risk increases. An unresponsive process causes Sales or business unit management to cut corners, or to place pressure on decisionmakers by involving them late in the process. In consequence, poorly defined or ill-judged commitments become more frequent, placing pressure on downstream performance and longer-term customer relationships. This syndrome is most pronounced in companies or business units that are seeking to shift their market position. In particular, efforts to increase customer value typically require changes in the nature of the commitments being made and a shift in the allocation of risk. Yet these capabilities cannot be established at a transactional level and this is why contracting appears to become a barrier to business success. Sales dissatisfaction with contracting is most pronounced in companies that are expanding international operations, or 2 IACCM benchmark studies of more than 400 large and intermediate companies show that average cycle times for negotiated contracts have increased by almost 20% over the last 4 years and the extent of contention over risk allocation has grown by a similar percentage. IACCM All rights reserved Page 12

13 shifting towards services or solutions offerings, or which face intensifying competitive pressure. And it is here that we see the greatest contrast with those who have made the right technology investments, creating a level of transparency, rules, fallback language and proactive alerts that support faster, intelligent decisions. A Route Map for Improvement The greatest challenge to improving sales contract management is the need to engage a wide array of stakeholders. One of the reasons why this process is so poorly managed is because there are so many fingers in the pie. Most parts of the business have some stake in the contract terms and changes or improvements to them need their blessing. Successful improvement projects therefore require an executive sponsor someone who recognizes the pain, is motivated to eliminate it and grasps the business benefits that can be achieved. The drivers may be to raise competitiveness, improve the management of risk, reduce cycle times, increase productivity or margins. They may be the result of senior executive frustration over repetitive customer complaints or concerns about failed audits or compliance. Key to success is to move beyond finger-pointing regarding process or operational inadequacies and to focus on the factors that unite the various functions and stakeholders perceptions such as those mentioned earlier in this paper: Yet there are also unifying issues beneath the surface of discontent. Many of those affected by this process complain about the extent to which there are insufficient resources in the contracts area; they share frustration over the extent to which activities are manual; and they all see problems arising from inadequate skills and failure to follow established process. Improvement projects must start with a clear view of the benefits that are being sought and a focus on defining procedures that will deliver those benefits. For most organizations, the process must also take account of differing approaches for major market segments. For example, consumer or small business markets will typically be offered far more standardized terms than those for large accounts. An integrated solution or customized service will require higher levels of risk review and negotiation than the sale of standard products. The action of defining process forces greater understanding of review and approval requirements and leads to the development of appropriate contract standards and templates, including possible alternatives and fallback positions. Frequently, such projects also result in the creation of playbooks or contracting guides. Once the process is defined, it becomes possible to look at the investments needed for its execution. As previously mentioned, there is a wide perception that there are insufficient resources in contracting, inadequate skills and too much manual processing. Given this combination, it is not surprising that the research confirmed the major impact that automation can have in supporting improved performance. IACCM All rights reserved Page 13

14 Rating of the quality of performance in the following areas, based on an analysis of level and type of automation Manual / paperbased Timely request, opportunity management MS office tools Multiple automated Single CM application Single CM application with thirdparty software provider Excellent /good 46% 34% 51% 60% 76% Moderate / poor 54% 66% 49% 40% 24% Process delivers value, minimizes risks Excellent /good 41% 46% 47% 56% 82% Moderate / poor 59% 54% 53% 44% 18% Timely, accurate execution, security, audit Excellent /good 57% 47% 62% 74% 76% Moderate / poor 43% 53% 38% 26% 24% Post-award fulfillment, compliance with terms Excellent /good 38% 26% 53% 56% 65% Moderate / poor 62% 74% 47% 44% 35% Renewal management Excellent /good 22% 35% 47% 57% 71% Moderate / poor 78% 65% 53% 43% 29% Figure 7: Organization's capabilities and tools in achieving the various components of contract management Automation makes a substantial difference to performance and internal collaboration The chart reveals the extent to which decisions on automation impact the quality of the process and key interactions within it. There appear to be two aspects to this improvement. One is that those with a single enterprise application are most likely to have followed the steps required to reengineer their contract management process, whereas those using a variety of Office-based tools (Excel, Access, file servers etc.) are the least likely to have defined a coherent process with the result that companies following purely manual, paper-based approaches generally out-perform them. Taking the topic of automation one step further, when asked to assess their organizations efficiency and performance in terms of sales contract management, those who leverage an integrated holistic sales automation platform consisting of CRM and contract management consistently rated their capabilities higher than their counterparts who leverage stand-alone contract management automation solutions. The key observation from these results is that contract management automation that is fully integrated with broader sales automation tools allows superior levels of empowerment and visibility, removing many inter-functional frustrations and enabling the growth of collaboration between those on whom sales success depends. IACCM All rights reserved Page 14

15 Conclusion Contract management has become an increasingly important aspect of overall sales and business management. Complexity in trading relationships shows no sign of diminishing, due to the speed of change, market and competitive volatility and increased international operations. To support management of this complexity, contracts will evolve to offer greater focus on governance and performance management, dealing more with reducing the probability of risk rather than primarily its consequence. As contracts become more sophisticated business instruments, the involvement of Sales in their formation and execution will also increase. This demands greater collaboration between Sales and support organizations such as Legal, Finance and Contract Management. Organizations that have made the investment in improved definition of the sales contracting process are seeing significant benefits in terms of cycle times, Sales productivity, internal cooperation, the integrity of customer commitments and overall risk and financial performance. IACCM All rights reserved Page 15