Protecting the Single Source of Truth: Effective Contract Management as a Core Business Strategy

Protecting the Single Source of Truth: Effective Contract Management as a Core Business Strategy

The source of truth for all critical financial and operational corporate data can be found within the underlying instrument documenting the transaction. In other words: When in doubt, look in the contract. Yet despite the obvious importance of this data, and the need for careful management of contracts, contract management processes with many organizations are often inconsistent, inefficient, and ineffective occasionally with disastrous results. As such, key C level decision makers, from the CPO to the CLO, recognize the essential need for robust contract management solutions. According to the recent report The Contract Management Selection Report by the Aberdeen Group, effective contract management yields: 25 percent improvement in timely contract renewals important to sales organizations 25 to 30 percent improvement in realizing rebates and discounts important to supply management organizations Up to a 50 percent reduction in contract negotiation cycle time cutting transactional expenses and speeding up sales One to two percent increase in revenues through process standardization and better visibility 25 to 30 percent reduction in administrative costs related to contract creation and negotiation 55 percent additional spend brought into compliance Reductions in automatically renewing contracts thereby minimizing the unintended continuation of undesirable contract terms Senior-level leaders share many overlapping areas of concern regarding increasing EBIT, compliance, risk sensitivity, and achieving global data visibility. But when companies have no standard contract management system of record, how can they manage contract related obligations and entitlements with any degree of reliability? Major Issues Faced by Companies Needing Contract Management Effective contract management becomes a particularly challenging problem for large companies. Without clear contract management processes, managers across a global enterprise can over time develop their own sets of rules with respect to contract creation and management. In addition, different divisions of an enterprise have diffuse goals in mind with respect to contract management, further muddying the waters. The corporate legal and contracts departments, for example, might view contract management as a means to standard contact drafting processes to reduce risk, as well as to create a contract repository for management of existing transactions and the risks associated therewith. Corporate legal and contracts teams typically have limited resources, and a lack of standardization in negotiating contracts can create risk and inconsistent business practices. 21

Procurement, on the other hand, sees contract management as an element of the sourcing process, with the end result being greater cost reductions and better compliance with existing contracts. On the other hand, sales and sales operations departments want visibility into existing contracts to better mine for new and renewal revenue. Both teams want to improve the efficiency and speed of contract negotiations. Finance benefits from contract management too, particularly when it comes to processes affecting compliance matters and visibility into contract data. Oftentimes, financial systems do not track or contain all the information needed to provide accurate financial and compliance reporting. Accordingly, a well-run contract management environment can help drive internal compliance by providing effective, reliable controls and systems on key financial processes. Companies overall face a wide range of issues that an effective contract management program addresses, such as: Multiple decentralized business units with lack of centralized visibility to contract information Challenges managing contract expirations and workload Limiting duplication or contradictory contracts Lack of standard clause library Difficulty collaborating on contract authoring and review Manual process for creating contracts Highly complex and global contracts Maintaining standalone solutions without integration to procurement or sourcing process Inability of accounts payable to properly reconcile invoices against negotiated contracted terms Dissatisfaction with current internally developed or third-party solution Policies and procedures not enforced and difficult to monitor No central storage for company contracts Business units failing to comply with corporate negotiated contracts Internal organizations resisting implementation of methods or procedures, and the use of standard language Lack of common systems across the company The IACCM Market Sizing Study for CM Software (March/April 2007) validated the need for contract management solutions. It stated that the top reason for implementing a contract management system is to support a standardizing process, to increase organizational efficiency and reduce cycle time, manage m contract performance and compliance, and, ensure compliance with laws and regulations. Diversified Manufacturer Leveraging On-Demand Contract Management Solution Due to regulatory compliance issues with their procurement procedures and a need to increase supply chain efficiency, a leading diversified manufacturer saw a need to automate their contract management processes to improve efficiency and bring more spend under contract. However, they were not interested in an IT project with high TCO, long deployment timelines, and a risky return on investment. As a result, the company implemented Ariba Contract Management Professional and were deployed in a matter of weeks versus months or even years, and has now been able to enhance their contracting process by extending their capability beyond document storage and into true contract management. The company has benefitted in many areas, including: A full view of the contract management lifecycle from supplier identification through contract management execution A seamless handoff from their sourcing to contracting processes All contract-related documents are stored in a central location Defined workflow and approvals Reporting capabilities including customizable dashboards, a large, reportable contract database and a 360-degree view of their supplier relationships 2

Documenting Employee Immigrant Status at Leading Retailer As part of an ISO project, a leading retailer was told by the federal government that it had two years to implement a system proving that all of its suppliers and contractors had a system in place to track the legal status of immigrants. After an attempt by its internal IT Department to address the issue stalled, the company engaged Ariba to design a contract management solution. Working with the company s Legal Department and 180 different employers feeding into the company system, contract language was standardized using software to ensure compliance across the system and among roughly 30,000 separate suppliers. Having once operated by manually creating more than a thousand contracts every week, the company now had an automated system that used the same language in all contracts, and created reports that could withstand auditing and government scrutiny. Today, more than a dozen companies with multinational networks want to be the next to incorporate this contract management system that has proven to be so successful at this leading organization. An event that pushes companies to recognize their need to improve their contract management systems oftentimes comes when they simply can t find existing contracts, leading to significant financial ramifications. In one example, a major big-box retailer spent $400,000 to put a roof on a building it later realized it didn t even own.** In another instance, a global energy company spent hundreds of thousands of dollars tracking down and updating scores of contracts to deal with clauses related to Avian bird flu, when it could have easily been done all at once electronically by transferring a similar clause on malaria through a contract management system. Defining Contract Management Contract management is defined as coordinated, centralized processes and systems linking all aspects of contract data management, creation, negotiation, and storage. Contract management helps the enterprise achieve better compliance with internal processes and external contract obligations and rights. With an effective contract management solution in place, corporate leaders can sleep better at night. Without it, the uncontrolled variables set loose across an enterprise can be numerous and costly. If the need for contract management is so clear, what keeps companies from rushing to implement it? The IACCM Member Survey from May 2007 offers some insight. It states that the two top inhibitors to implementing contract management are gaining an executive-level sponsor, and establishing and verifying a credible return on the investment. The survey suggests that to introduce successful contract management processes into an enterprise, executive-level support can be garnished by demonstrating how contract management improves strategic issues such as ease of doing business, customer satisfaction, streamlining the sales process, revenue growth, and globalization. Second, establishing credible ROI means providing data that demonstrates how contract management generates tangible returns through time savings, spend savings, revenue/profit increases, sales cycle decreases, cost overrun avoidance, reductions in missed commitments and subsequent legal liability, and a better record of contract renewals. 43

All companies should ask themselves these direct questions: Can you search all the data in your contracts electronically and create reports on this data? Can you find your contracts at any time? Do you know which version is the final in your file? Do you have all approvals of a contract fully documented and reportable? If someone needed a report to find out how many non-standard clauses are contained in a certain type of contract over a certain time period, could you get this data without manually reviewing each and every contract? To what source of truth would you point Sarbanes-Oxley or compliance auditors? How much did you spend against any specific contract last year? Do you know all the options contained in your sales contracts, and when they expire? Is creation of contracts draining legal resources? Were your contractual SLAs with vendors effectively met? Do you have full visibility into the service levels you've agreed to with your customers? Is it easy to make bulk changes to standard clauses/language across all of your contracts? What are the latest templates and clauses approved by Legal? How often are standard clauses reviewed and vetted for best-in-class quality? How quickly can you draft and contract, fully negotiate it and introduce it into your contract management system? Are you endlessly making copies of contracts and pulling contract data for internal requestors? Are suppliers invoicing you accurately based on contracted pricing? Do you have an opportunity to get more of your spend under contract? Do you frequently hear complaints about the lack of speed, efficiency and visibility into the contract process within your company? Organizations are run by individuals and, as such, organizations sometimes go through denial, sadness, anger, and finally acceptance when it comes to facing the hard truth of what can happen without an effective contract management system in place. Once that occurs, though, the good news is that it can be much easier than anticipated to ease the pain. Implementing an effective contract management solution may take time and is usually done in phases, rolling across different elements of a company according to need and budget. But once word gets around about the many benefits provided by an effective contract management system, demand from business units to get in on the action picks up briskly. Ensuring Global Sourcing Consistency at Global Auto Manufacturer A global auto manufacturer faced logistics issues in moving parts among locations all over the world. Multi-modal transportation systems made it difficult to track parts and ensure the best cost controls, compounded by inconsistencies in its contracts regarding rates, language, and liability exposure. The price to move a part from point A to point B differed greatly. It became difficult to negotiate optimal savings and suppliers without reliable and workable information. A global approach was implemented by Ariba to customize a contract management system for the company. With complete contract visibility, anyone can now see language, clauses, and pricing parameters anywhere in the world. The process ensures consistent data and total visibility. The contract management system worked so well that the organization extended it to its external suppliers too, creating transportation contracts for transportation, rail carriers, and shipping companies. Technical people at the company like the new approach, but corporate executives are most pleased of all because this solves a very pressing problem for them. 4

Complete Contract Management Advantage Effective contract management unlocks the value of a company s enterprise by seamlessly embedding contract language, terms, and management processes into the front lines of everyday contract creation and management activities, ideally through a four-pronged approach based on: Speed shortening cycle times for authoring, searching, and performance tracking; and accelerating time-to-availability for greater corporate revenue and negotiated procurement discounts and contract benefits Coverage bringing all internal stakeholders into the contract assembly and approval process; and delivering out-of-box integration for procurement compliance Sustainability standardizing best practices contract templates, clauses, and processes across the enterprise; and centralizing management of contract data, commitments, and performance for better regulatory compliance Flexibility beginning contract management discipline with any of the solution components and expanding as desired; utilizing any of the technology delivery models; and working to support solution development Effective contract management solutions encompass the comprehensive enterprise contract system, including buy-side, sell-side, IP, marketing, HR, and many other written instruments to organize, report on, and use contract data, streamline and standardize contract authoring and management, and improve and track corporate compliance. Besides software, an effective contract management system also has process and people in place, whether internal or provided as part of the solution, to perform the system implementation and management, perform contract negotiations, and maintain the overall system, including process modifications, clause library management and data entry. Lastly, contract management should be easily and seamlessly integrated with other financial, CRM, and spend management applications, such as sourcing, where suppliers can be turned into contract workspaces. Measuring Successful Contract Management Successful contract management yields some important and measurable results. It improves the enterprise-wide management of all contract functions. It improves negotiation effectiveness, identifies revenue opportunities and prevents revenue leakage. Negotiated cost savings can be better realized, administrative and legal costs can be reduced, as can operating and regulatory risks, through standardized contract processes and approvals. A centralized contract repository helps eliminate maverick and redundant contracts, avoid missed deliverables and milestones, and improve customer and supplier performance. Moreover, IACCM Benchmarking Studies from 65

2002-06 show that electronic contracting reduces workload approximately 20 percent, while increasing the rate of risk management approximately 15 percent and innovation approximately 20 percent. When designing a contract management solution, measuring these results is critical to determining the success of the solution. Even for those companies that have been actively practicing contract management for some time, it is difficult to ever declare total victory. They may achieve many strategic victories along the way, but dealing with different global and internal cultures, and different and shifting standards, make the goal of complete contract management a long-range undertaking. It s a journey that must begin, however, and there s no time like the present. The source of truth in any enterprise data remains the underlying contract. But the contract is not just a document. It is a work space, documenting and guiding the contractual relationship between two or more parties who want to do business with each other. It includes the electronic documentation of the who, where, and how elements of this relationship, not just the what. While some approach contract management from a puredocument management perspective and history, the more effective stance takes an holistic approach. All of which generates the typical reaction from clients after they have experienced the Ariba contract management solution: How could we ever go back to how it was before? Capturing Discounts across Multiple Channels at Motorola Motorola sources thousands of manufactured pieces for its cell phones and other products involving multiple suppliers. Discounts are negotiated based on quantities purchased, but that information had become difficult to document and track because of the number of players involved. Motorola needed to automate savings because important discounts were being lost, as 26 separate ERP systems worldwide were used to process the information. The solution as recommended and implemented by Ariba established standard contracts so that as a sourcing event took place, the price was negotiated and pushed immediately and simultaneously out to the entire global system. The contract management system created controls with all discount and pricing information, and issued purchase orders. This way, the contract became the critical document to be matched against receipts. Motorola could now easily track quantities to match discount triggers, so that anyone anywhere with a purchase order could capture the new price. This approach closed the loop and generated meaningful savings that otherwise would have been lost. 6