Supply Chain Experience Sharing Programme. Delivering Value from Contracts Management Systems

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1 Supply Chain Experience Sharing Programme Best practice guideline Delivering Value from Contracts Management Systems Full version: May 2007 This issues paper is available on the BuyIT website: The materials may be adapted freely and used for your own e-business strategy development, but may not be re-used or sold for direct commercial gain. The information in this document is given in good faith but IT World Limited cannot accept any liability consequent on reliance upon the information contained in this document IT World Ltd Page 1 of 18 ep-14 Contract management systems May 2007

2 Forewords Procurement Transformation is the agenda of the moment. One part of this transformation is better contracts management which can be introduced to great effect in most organisations. Strategic and operational benefits come from designing and implementing systems that match people, process, structure and technology to the ambition for change. I have been delighted to lead the development of this guideline working closely with BuyIT members who have accrued a wealth of experience in this field. The guideline encapsulates that experience and provides an overview of the key issues that senior audiences on both the buy and supply side need to address. Veera Johnson, Chief Executive, ProcServe a PA Group Company Successful implementation of a contracts management system can deliver a substantial reduction in annual spend and support better relationship management with the supply market through the better management of contract information. This guideline, developed through experience sharing with BuyIT Transformation Network Members, shows that successful implementation is possible, that a business-led approach is pivotal and that success or failure hinges on the quality of change management in implementation. The guideline covers the key executive-level issues and will prove invaluable in helping organisations to deliver the undoubted value that contracts management systems can unlock. Frits Janssen, Chief Executive, BuyIT Transformation Network Quotes & benefits "Good contract management promotes both good procurement practice and professionalism. Contracts are managed most effectively through multi-disciplinary teams and contract management systems provide a veiled policing of procedures, guiding compliance and promoting the preservation of ownership." Emma Brooks, Senior Procurement Specialist, CIPS not be re-used or sold for direct commercial gain. Page 2 of 18

3 Good practice guidance on Delivering Value from Contracts Management Systems 1. Introducing the business opportunities that can be created through better access to contract knowledge Contractual agreements govern most business transactions. These are routinely documented within a physical contract. Examples include software licences, employment agreements, trademarks, patents and sales agreements. Each contract creates rights and imposes obligations on your organisation. Many such contracts are managed in paper-only formats, often buried away in filing cabinets within departmental business units across the organisation. This creates a lack of visibility and control, leading to increased business risk and cost for the organisation. For example, neglecting the details in a contract makes the likelihood of a contractual dispute and subsequent legal action more probable. Similarly, the lack of awareness during contractual renewal weakens the negotiating position of the organisation. It increases the possibility of a rushed renewal, which can mean extra costs for both sides to the contract. Worse still organisations frequently waste millions of pounds by being unable to consolidate services provided through such contracts. In response to this business issue, a number of vendors are offering software-based contract management systems. These vendors come from a number of different backgrounds ranging from document management providers through to the ERP vendors. The document management vendors provide systems with deep functionality relating to the management, workflow and control of contractual documentation during its creation and sign off. Given their background, ERP type vendors tend to provide systems that focus upon the management of contracts once they are in inception and link closely with the contractual invoicing and payment milestones relating to contracts. Historically, ERP systems have been integrated with document management systems to provide a full set of functionality to manage contracts. There has also been in recent years the emergence of specialist contract management system solutions. For example, the Anaqua system, which was created from a joint initiative between Ford and British American Tobacco, to provide contract management systems to manage their global trademark portfolio. Recently, there has been some consolidation within the document management arena, with companies such as OpenText acquiring Hummingbird and between ERP vendors and document management vendors, with Oracle acquiring Stellant. There will likely be further consolidation and it is important to consider this closely when looking at potential suppliers and during licence negotiation. Appendix A lists the typical types of functionality that contract management systems provide. not be re-used or sold for direct commercial gain. Page 3 of 18

4 Contract management systems offer effective solutions that not only enable compliance with good practice for the creation and renewal of contracts, but also help identify greater value that can be leveraged from existing and new contracts. However, technology alone is not the answer. Leading organisations holistically implement new contract management systems in a business-led approach covering three key steps related to vision, case for change and implementation. Organisations can leverage increased value from their contracts through holistically implementing contract management systems in three steps: 1. Develop the vision and scope for contract management - identify the current processes, issues and associated costs; and develop a vision of the future for contract management across the organisation 2. Create the compelling case for change create and sign-off the business case in conjunction with all senior stakeholders from the business and corporate functions (such as operations, finance and legal) 3. Design and implement the project to deliver the change the change project must address the appropriate people, process, technology, structure and policy aspects. Implementing IT systems to manage contracts can deliver significant benefits The benefits of deploying contract management systems that allow an organisation to better manage contracts can be significant. Savings in the region of 10% to 25% of annual spend can be claimed, although the scale and range of benefits will vary for each organisation. There are typically a number of strategic and operational benefits: Strategic benefits The ability to capture and influence a broader spectrum of spend, to identify and categorise services and products from existing contracts leading to better aggregation and negotiation of improved deals for the organisation. A major oil and energy company implemented a system to consolidate all procurement data relating to its contracts. It is estimated that the system delivered $100M a year on an annual spend of $15Bn, simply through smarter sharing of procurement knowledge and information. The ability to manage contracts ahead of time so that appropriate action can be taken to renew or re-negotiate contractual terms. A recent report found that organisations that use a contract management system achieve a contractual renewal rate of 90%, compared with an average of 60% 1 Better relationship management, meaningful risk management, improved service level performance and better linkage to the service credit regime due to visibility of the contracted performance levels being shared across business units and the supply chain. Only 48% of buying organisations believe their current suppliers deliver value 1 Report by Aberdeen Group Contract Management Benchmark Report Page 2, April 2006] not be re-used or sold for direct commercial gain. Page 4 of 18

5 for money. Further 45% of buying organisations believe they underestimate the effort required to manage relationships 2 The ability to access and use good practice standard contractual terms when creating new contracts, avoiding the need to draft from scratch new contracts. eg several government departments and professional associations provide flexible access to over 1,000 different flavours of their standard contract The ability to ensure improved availability of contractual documentation through publishing it securely online, instead of within physical paper-based archives. Empirical evidence shows that the implementation of contract management systems processes can yield internal savings of up to 50% Operational benefits Increased compliance with organisational standards for contract management and reduced administrative overhead through the ability to automate and step through the creation of contracts. The new systems provide a veiled policing of procedures, and guiding compliance (which will also aid buy-in and up-take) A reduction in physical storage space requirements, by eliminating the need for physical storage of paper-based contractual documentation (for signed documentation that is scanned into a contract management system, there needs to be adherence to international standards which ensure legal admissibility of signed documentation). For example, organisations can avoid the need to acquire additional office space through scanning contracts into a contracts management system. A reduction in administrative overhead by centralising and in some cases outsourcing the management of contracts. Organisations who use a contract management system achieve a contractual cycle time of 8 days, compared with an average of 25 days 3 2. Technology solutions alone will not overcome the barriers to implementation as many organisations find out late in the day Despite the number of software solutions available, a significant number of organisations fall short of achieving full benefits or worse still experience a failed implementation. The most common root-cause of failure is trying to implement a technology solution in isolation case studies show that technology alone will not deliver the benefits. 2 International Outsourcing Survey by PA Consulting 2006 Understanding Misunderstanding page 35 3 Report by Aberdeen Group Contract Management Benchmark Report, Page 2, April 2006 not be re-used or sold for direct commercial gain. Page 5 of 18

6 While the implementation of the technology is relatively straightforward, the associated business change is the key issue that needs to be addressed to deliver the full benefits. The business change needs to focus on how organisations will improve management of contracts in practice. In ascending order of sophistication, organisations can: Gain better controlled access to contract information which resides within the organisation Standardise the contract management lifecycle in line with contract size, complexity and requirement type (including requirements definition, tendering, evaluation, negotiation, award and implementation) Ensure service performance can be consistently monitored and managed (such as milestones, events, service levels, key performance indicators, payments and contract changes) Mine strategic information from multiple contracts and supply chains to better manage supplier relationships and develop better sourcing strategies (including collating and analysing partnering capabilities, customer/user satisfaction, rates, terms, volumes, amalgamated historical spend and total planned spend). Organisations will increase their ability to achieve benefits from IT contract management systems by addressing the business change critical success factors, which include: Gaining senior management awareness and buy-in (so that when issues arise they are prepared to support the implementation to maximise the benefits available) Ensuring end-user engagement (including understanding who has least to gain in the organisation and outlining the benefits delivery routemap and ownership) Discovering the contract management information (including locating existing contracts, establishing consistent ownership of the contracts and relationships; classifying and naming standardisation across several thousand contracts and suppliers) Understanding and accounting for costs (including cost to suppliers, cost barriers (in the short term), budgets (with departments), software costs, training costs and ongoing management costs) Engaging early with suppliers to ensure that they understand the need and nature of the change Understanding any potential system and software issues, particularly compliance with IT standards and policy. The above critical success factors cover aspects of people, process and technology; importantly, they are an acknowledgement that contract management systems are rarely a quick fix. The technology is merely the enabler that facilitates the business (and individuals) to change and manage the contracts more effectively. not be re-used or sold for direct commercial gain. Page 6 of 18

7 3. A business-led approach maximise the benefits from a contract management system A business-led approach requires the leaders of the relevant business departments to take accountability for and manage the delivery of a new contract management system. This is different to the traditional approach where the IT department often lead the development and roll-out of a new system. With a business-led approach, there is still input from the IT department, but as a facilitator and member of the project team delivering the new system. By taking a business led approach, there is greater emphasis on ensuring that a contracts management system is aligned to the strategic objectives of the organisation overall. There are three key steps to designing a good practice holistic business-led approach that optimises the benefits from a successful contract management system implementation: 1. Develop the vision and scope for contract management 2. Create the compelling case for change 3. Design and implement the project to deliver change Leading organisations that implement these three steps will gain increased assurance that they will achieve the full benefits from implementing a contract management system. Leading organisations will holistically implement contract management systems with a business-led approach in three steps: 1 Develop the vision and scope for contract management 1.1 Gather evidence on the scale of the issues 1.2 Understand the art of the possible 1.3 Deal with the legacy 1.4 Gain buy-in to change 2 Create the compelling case for change 2.1 Justify costs and benefits 2.2 Engage stakeholders 2.3 Address technical issues 2.4 Design the procurement strategy 2.5 Endorse the business case 3 Design and implement the project to deliver the change 3.1 Define the requirement 3.2 Design the solution implementation 3.3 Establish the roll-out team 3.4 Prepare the business for change 3.5 Drive out the benefits not be re-used or sold for direct commercial gain. Page 7 of 18

8 3.1 Develop the vision and scope for contract management Understanding the current situation allows organisations to more clearly establish the desired direction and future state. Improving awareness of the existing contract management procedures is best achieved through a mix of workshops and interviews with representatives from the business and relevant support functions (including legal, commercial and procurement). Gather evidence on the scale of the issues The current state and existing processes should be documented to an appropriate level of detail (balancing between spending too much time diving into detail against missing important areas). One way to achieve a good balance of detail is to quantify at a high level the cost to the business of the existing process issues. It is useful to capture examples of where, because of the problems with the existing process, contractual issues have arisen that have resulted in the organisation experiencing financial loss. Understand the art of the possible It is important to match the art of the possible in terms of the technology vendor solutions with an agreed level of ambition for change from senior stakeholders, in line with the present realistic organisational maturity. The level of investment and acceptable pace of change should be explicitly agreed and matched to the ambition for benefit. It is useful to create a scenario or set of scenarios of how the future could look. These scenarios should cover new ways of managing contracts (from people, process, integration and technology perspectives) and link them to the potential benefits that could be achieved. It is necessary to articulate the trade-off in terms of the level of benefit, scope and savings profile, against the cost and level of change that will be necessary. An incremental approach is often the best route for an organisation, with a sequence of roll-out waves across key business areas to deliver the optimum savings. Figure 1 demonstrates a typical trade off. Resources needed for change (cost, time, effort) Fully integrated contract management with SRM strategy Automation of process and/or reduced legal involvement OCR of scanned docs Simple document assembly Rules-based document assembly Workflow driven contract management Standardisation of business process Paper Based Only Scanned and indexed docs Electronic index of paper Searching for existing contracts Increasing technical sophistication and business change not be re-used or sold for direct commercial gain. Page 8 of 18

9 Figure 1: Example of trading off level of scope against cost The vision should cover the extent to which collaborative working will be enabled and the complexity of the contracts. Some organisations are embedding self-service for suppliers, third party catalogue administration and management of supply chain connectivity, whilst their IT systems permit sharing by suppliers of contract management information so that collaborative working can be more easily accomplished. Clearly all contracts need to be documented. However, the level of sophistication required will be dependent of the complexity of the contract and its nature. Deal with the legacy The extent to which legacy and current contracts should be migrated to a new system and the associated level of validation that may be required is a key part of determining the scope. It is often fundamental to the business case that current contracts are migrated. However, there will be missing data or information associated with these contracts and therefore a level of clean up and validation will be required. It is crucial to perform some form of sampling exercise at business case stage to understand the potential scale of the problem in order to set the expectations of senior stakeholders. Aiming too high too early can easily sow the seeds of failure that will lead to an underestimate of the time and effort required to achieve the benefits. Gain buy-in to change Buy-in can be achieved through a series of meetings or better workshops with the key stakeholders from across the organisation (including from business units, legal and procurement). The meeting objectives for such an approach are to confirm the current state, to agree to a vision and scope for the future management of contracts and to outline the scale of potential benefits over time from the change. The current state will include consideration of the number and type of contracts, the dis-benefits of the present systems, desired changes to existing process and the outline costs. Once there is buy-in at this stage from senior stakeholders, the next step is to initiate a project structure. This project structure should include the appointment of a project board, senior responsible officer and a project manager. To ensure on-going buy-in from the business, the project board must include representation from senior leaders and users from the business units. Even small implementations will benefit from the formality of setting up this project structure. In the long term, the implementation will require less resource and will give greater assurance of benefit delivery. not be re-used or sold for direct commercial gain. Page 9 of 18

10 3.2 Create the compelling case for change The second step is focused upon producing an adequately detailed business case and procurement strategy for the new contract management system. Justify costs and benefits In justifying costs and benefits, care must be taken to ensure that they are realisable. For example, contract management systems enable the aggregation of services provided through existing contracts. This information can be used to re-negotiate more cost effective global frameworks for the provision of such services. However, the savings will not be instant, because it will require all existing contracts to reach some form of breakpoint (some of which may incur a financial penalty) for the full savings to be realised, often over many years. By way of a further example, a contract management system may save administration time, but if that time is spread across a number of employees as a percentage of their daily working activity, then the benefit is simply the ability to re-direct their time to other tasks. Engage stakeholders In order to ensure that the business units within the organisation are committed to delivering the benefits, the senior stakeholders from the business should be consulted in the generation of the benefits. They should formally agree with the project board that they believe the benefits are realistically achievable and that they personally willing to commit to delivering the benefits. Address technical issues The case for change needs to address specifically all potential blockers, including the impact on the technical infrastructure. The ability to access electronic copies of contracts, especially if they are scanned copies, will potentially require increased network bandwidth and desktop specification. If this is not dealt with prior to implementation, then there is the danger that the system will not perform in a timely manner. Similarly if, as a consequence of the system, the administration of contracts is outsourced to third parties, then the third parties will require that the system, in terms of the server availability, resilience and security, provides an agreed service level of performance. Design the procurement strategy A procurement strategy should be documented for the provision of the system and the necessary technical and business implementation resources that will be required. The contract management system market is relatively mature, with many vendors, and therefore a COTS (Commercial Off The Shelf Solution) should be considered as the primary option (as opposed to creating a bespoke system). Endorse the business case not be re-used or sold for direct commercial gain. Page 10 of 18

11 The business case can be reinforced using metrics and benchmarks from other contract management system implementations. This will reinforce the validity of the business case and add to its robustness. As part of the final task in this step the project board needs to sign off the business case and procurement strategy, and to provide the agreement to move to design and implementation. 3.3 Design and implement the project to deliver the change Even in small implementations, there will be distinct roles for project management, commercial management, technical architecture design, business design/change, communications and implementation experts. Of course there may be overlaps and individuals can fill several roles. However, it is unlikely that any individual will be able to cover all of the required areas. Successful implementations are those that estimate resources required and allocate sufficient time to the implementation, commensurate with the business case, pace of change and benefits to be delivered. Define the requirements The business requirements for the contract management system must be clearly identified/articulated. This is best done with knowledge of the features that contract management systems provide, and through consultation with the potential users of the system, to ensure consideration of their needs. Requirements can be redrafted from standard sets to provide a rapid start. Over-statement of requirements and performance is common place, as people inadvertently ask for features that they are unlikely to use, or which cost more to implement than they are worth. The previously signed-off requirements are therefore a starting point, which may be amended in subsequent discussion with the vendor solution provider. Once the requirements have been established, then a long list of potential contract management system vendors can be identified and a full procurement exercise undertaken to select and purchase the best solution. Design the solution implementation Implementation should commence immediately after finalising the contract with the vendor. The vendor should carry out detailed implementation planning and technical solution finalising. Technically, it is likely that some form of configuration and interfacing (e.g. with ERP systems) will be required from the software solution. Some vendors provide professional services resource to undertake this, while others partner with systems integrators. Whichever is the chosen route, empirical experience has shown that an early proof of concept within one area of the business is important in order to demonstrate that the not be re-used or sold for direct commercial gain. Page 11 of 18

12 technology can work within the business; this also means you will gain some early lessons learnt which can be used to help inform a wider roll-out. Existing contracts (which are typically dispersed across the organisation) can be migrated to the new system in order for it to deliver early benefits. This is typically undertaken by back scanning and indexing the physical paper-based contract documents. Validation can take a considerable amount of time and should be planned in advance of any implementation. Prepare the business for the change Working in parallel, concerted effort is required to prepare for the business change. This aspect above all others is the key to the successful adoption of a contract management system. With the implementation of the system, there will be changes to the existing ways of managing contracts and all staff will have a reaction to these new changes. The reason for change must have been communicated to staff from their senior managers and those staff directly impacted by the change consulted on the design of the new processes so that they can feel more ownership of any new re-designed process. In order to help describe how the change will impact existing ways of working, a future operating model should be defined, documented and agreed with the business areas. Using this future operating model, the changes to processes and organisational structure can be communicated and planned. Detailed process descriptions (ideally mapped in a graphical manner) and the associated documented procedures need to be written and agreed. Establish a roll-out team Once all of the above activities have been completed, the system should be ready for roll-out across the organisation. A dedicated roll-out team should be established that consists of both a technical lead to deal with technical issues and a business lead to deal with business process and procedural issues. As the system is rolled out and proven to be working, the old ways of working and associated systems need to be decommissioned. In order to ensure that staff adhere to the new ways of working, the appropriate reward and recognition metrics need to be implemented, from the head of the business unit through the more junior staff who are impacted by the new system. Drive out the benefits Once the system is fully operational it is important to report and deliver the benefits that were originally promised. Therefore, benefit owners from the business (ideally business unit heads and senior managers) should be confirmed and a benefit measurement process agreed. Measuring the benefits delivered by individuals and teams can trigger reward mechanisms associated with delivering to plan (some organisations use publicity and public congratulations as an incentive whilst others link bonus and/or career progression to the benefit delivery). not be re-used or sold for direct commercial gain. Page 12 of 18

13 The contract management system implementation is likely to progress in several phases as incremental improvements are introduced (as shown in Figure 2 earlier) The duration of implementation will vary, but there should always be a clear hand over to business as usual at the end of each implementation phase. not be re-used or sold for direct commercial gain. Page 13 of 18

14 4. Conclusion and Summary There is a developing and growing market for contract management systems. Most organisations could achieve more benefit from better business usage of contract information. There are many examples of companies that have successfully delivered significant benefits. However, there are many examples of those who have not. The key predictor of success in maximising benefit from contract management systems is the extent to which the implementation of the technology has been holistic and led by the business, rather than the technical requirements. Technology is merely the enabler that facilitates the business (and individuals) to change and manage contracts more effectively. Many existing contracts are managed through different ways of working across different business units. Changing the way a business unit operates will generate resistance at a business unit level particularly where the benefits are delivered in other parts of the organisation. Therefore, the implementation of a new contract management system needs to be agreed across all business units and be based on identifiable business benefits. The numbers relating to benefits need to be believable and achievable in order to create a compelling case for change. Experience shows that medium to large organisations can achieve benefits of between 10% to 25% of annual costs with an investment payback period of under two years. However organisations need to design a solution appropriate to their needs and match the investment to their requirements. The main benefits are: Capturing and influencing a broader spectrum of spend; Managing contracts ahead of time Better risk management, improved service level performance and better linkage to the service credit regime Better access to good practice standard contractual terms Improving availability of contractual documentation Once there is agreement to deliver the change, a multi-disciplined project should be set-up to deliver people, process and structural change as well as to implement the technical solution. The project should complete its work, by handing over the delivery of benefits to a business as usual operations team. Organisations can leverage increased value from their contracts through holistically implementing contract management systems in three steps: 1. Develop the vision and scope for contract management - identify the current processes, issues and associated costs; and develop a vision of the future for contract management across the organisation not be re-used or sold for direct commercial gain. Page 14 of 18

15 2. Create the compelling case for change create and sign-off the business case in conjunction with all senior stakeholders from the business and corporate functions (such as operations, finance and legal) 3. Design and implement the project to deliver the change the change project must address the appropriate people, process, technology, structure and policy aspects. Jonathan Evans and Elliot Rose April 2007 not be re-used or sold for direct commercial gain. Page 15 of 18

16 APPENDIX A: CONTRACT MANAGEMENT SYSTEMS Contract management systems provide a wide range of functionality that typically could include: Electronic capture (either through scanning paper-based versions or through integration with word processing applications) Rendering of documents to neutral file formats (e.g. PDF) so that their formatting can be retained and accessed over a period of many years Indexing of contracts through user-allocated metadata (e.g. date of contract, parties etc.) Searching for contracts using metadata or the full text indexing of the content of the contract Management information and alert reporting (e.g. automatic notification of approaching key contractual milestones) Web enabled online access to contracts to third parties outside of the organisation Version control of contracts Security and access control of contracts Document assembly using standard contractual clauses Integration with Supplier Relationship Management Integration with electronic marketplaces that have rich supplier catalogue content Workflow of the contract management process Configuration management for standardisation of contract clauses, schedules and supporting documents Configuration management for standard procurement documentation and evaluation tools Analysis of contract data and links to spend data analysis not be re-used or sold for direct commercial gain. Page 16 of 18

17 APPENDIX B: IMPLEMENTATION COSTS The cost to implement a contracts management system can be divided into one-off implementation costs and recurring operational costs. In terms of one-off costs, these include: Implementation, such as project management, business analysis, system selection, system and process design, system configuration and integration, migration/clean-up, testing and system training The design and implementation of new processes and procedures. For example, if paper-based contracts are electronically captured through a scanning process, then it will be important to implement new processes and procedures which ensure legal admissibility of the electronic version in the future Organisational re-design, for example where the new contract management system administration is centralised, as opposed to being spread across individual business units within the organisation Software and hardware. In terms of on-going costs, these include: New processes and procedures System administration Technology infrastructure (hosting, network and desktop) Software maintenance and support. not be re-used or sold for direct commercial gain. Page 17 of 18

18 The development of this BuyIT Guideline was led by: Primary Contributors: Secondary Contributors: The BuyIT Experience Sharing Networks BuyIT is the UK s leading experience sharing Best Practice Network. BuyIT manages structured experience sharing programmes which uniquely enable senior executives to exploit the experience of transformation. Best Practice Networks leverage the combined knowledge of public and private sector users, global service providers and leading professional bodies. The knowledge capture and sharing process helps members to make better decisions, spend their money more wisely and deliver a better bottom line. Frits Janssen, Chief Executive BuyIT manages: Thought Leadership Forums - members work together to identify key strategies and issues in business transformation through facilitated dialogue and informed debate. Experience Sharing Networks - leading early adopters share practical experience and emerging best practice. Members also participate in a programme of structured events that support these learnings. Publication of Best Practice Guidelines - members, users and service providers collaborate to develop and publish BuyIT Guidelines on key Board-level issues in business transformation. For a full list of members and access to all the published guidelines, please visit our website: The BuyIT Experience Sharing Network is managed by IT World Limited. For more information contact Matthew Wolstenholme, Director, Supply Chain Programmes at matthew.wolstenholme@itworld.co.uk 18 Buckingham Gate SW1E 6LB Tel: Fax: Web: not be re-used or sold for direct commercial gain. Page 18 of 18