A Procurement Leader s Guide to Contract Management

A Procurement Leader s Guide to Contract Management Integrating Contact Management with Your Procurement Strategy June 2012 Iasta Global Headquarters +1-317-594-8600 Iasta European Headquarters +44(0) 124 970 0726 www.iasta.com

Recent trends in the evolution of procurement have resulted in greater opportunities for procurement to benefit from unobstructed access to comprehensive, up-to-date contract management data. Procurement Expands Influence and Gets More Strategic began promoting the role of procurement by establishing C-level procurement positions, Chief Procurement Officers (CPOs). CPOs are working to transform decision-making around the way their organizations spend company resources. One result of exerting greater influence on buy-side procurement processes has been to increase the percentage of total spend under management. Reap More Extensive Rewards from Spend Analysis with Contract Management Procurement processes and organizations have evolved by delivering value to increasing numbers of stakeholders in a widening variety of organizational groups across the breadth of the company. In the past ten years, it has become more common for procurement to work in conjunction with disciplines such as risk management, supplier management, quality, compliance, and perhaps most importantly, contract management. In 2009 and 2010, companies across the country struggled to survive the worst economic downturn since the Great Depression. Procurement organizations were able to step up and demonstrate how their knowledge and expertise could be used to preserve and enhance the notoriously slender profit margins of that time period. As CEOs recognized the impact of procurement s ability to manage cost efficiencies on top-line revenue, they The top goal for procurement teams is usually cost savings and procurement experts agree that the top metric for measuring procurement performance is tracking the percentage of spend under management. According to a 2011 study by Ardent Partners For every dollar/euro under management of the procurement department, the average enterprise sees a benefit of between 6% and 12%. In the same study, Ardent reported that Best in Class procurement organizations had an average of 88.1% of spend under management compared with 54.3% for other organizations. Spend Analysis provides a holistic view of company spend. Tracking spend enables procurement teams to manage company resources more efficiently by discovering opportunities for cost savings, cost avoidance, and process improvements. Without visibility to contract 2 P a g e

data that is relevant to spend data, procurement cannot effectively find many opportunities for cost savings and cost avoidance. For example, a contract can guarantee a tiered pricing structure, one price for the first 50,000 units purchased and a lower price for the second 50,000 units and so on. Contracts can also include details about transportation costs which can be invaluable to sourcing and procurement teams in comparing real costs from different suppliers. Contract information frequently provides information that is critical to determining who and how much business should be awarded to various suppliers. Bringing all the information together transforms spend data into sourcing intelligence that can be used to inform buyside procurement decisions. Combining contract and spend data is also important to determine timeframes for strategic sourcing activities, future contract negotiations, financial planning, and preparing budgets. New Generation of Analytics Technologies Make Blended Views of Data Possible Dramatic improvements in analytics and collaboration features in software tools are creating new opportunities for synergies between procurement and contract management. Forrester introduced and defined the concept of Smart Computing as the next cycle of technology innovation and growth. They defined Smart Computing as a new generation of integrated hardware, software, and network technologies that provide IT systems with real-time awareness of the real world and advanced analytics to help people make more intelligent decisions about alternatives and actions that will optimize business processes and business balance sheet results. In their Market Overview from 2011, Forrester predicted that Smart Computing would appear in a new generation of applications with embedded analytics to help teams collaborate more effectively. Contract management and procurement applications have fulfilled Forrester s prediction. More and more contract management and procurement solutions include dashboards and reporting features which offer advanced analytics with rich charts, graphs, and diagrams that can be personalized to show meaningful information for different types of users with different sets of responsibilities. The proliferation of data that used to be classified as a type of Business Intelligence has spawned its own term and has come to be known as sourcing intelligence. Centralized Procurement Integrates Contract Data for Strategic Purchasing Organized efforts to put more spend under management has naturally led to a shift towards centralized procurement services. Centralization makes it easier for a greater number of groups and subgroups within an organization to get direct access to the extensive sourcing expertise and best practices of dedicated procurement teams. By integrating contract management data, procurement can deliver enhanced spend 3 P a g e

intelligence. A blended view of sourcing, spend and contract data provides a 360 degree view for stakeholders needing detailed information about historical and projected spend to make strategic buying decisions. Global Supply Chains Need Contract Management to Monitor Supplier Risk negotiations and carefully documented financial penalties but the ultimate risk lies upstream with the buyer. Supply chain risks and their mitigation strategies increase the complexity of drafting, approving and enforcing buy-side contracts. This increased complexity makes it more difficult to ensure that all negotiated savings are documented and realized. It raises the importance of maintaining high levels of visibility to contract data which extends the overall benefits of procurement working closely with contract management. More Reasons For Executives to Support Contract Management Another reason for the growth of procurement is the globalization of the supply chain. Off-shore sourcing has enabled companies to realize sizeable cost savings by purchasing from countries where goods or services are manufactured at higher quality levels or available at more competitive price points. With these benefits, come risks. Globalization has introduced or increased supply chain risks such as: socio-political instability environmental compliance natural disasters human rights/labor issues heightened energy costs causing dramatic fluctuations in freight and other transportation costs Some of these risks can be mitigated or transferred to suppliers via skillful We have covered many ways that contract management can benefit procurement teams, specifically how changes in the evolution of procurement teams and their new, more strategic position in the overall organization have created new opportunities to benefit from access to contract management data. There are however a host of standard, non-procurement-related reasons to implement contract management. Fully understanding the benefits of contract management makes it easier to justify investing the time and resources to develop and maintain good practices. The contract management process is growing in importance as outsourcing continues to increase and suppliers become virtual extensions of an organization s value chain. Many organizations do not recognize the contracting process as a core competency with a significant impact to topline revenue and bottom-line savings. By ignoring the fact that good contracts result from a good contract creation and management process, organizations are 4 P a g e

losing out on a competitive advantage. These companies experience protracted contract-creation and approval timelines, irregular and unauthorized contract approvals, limited contract visibility, and are unable to enforce supplier compliance with contract terms. If you can answer yes to more than one of the following questions, your organization probably isn t putting adequate resources towards contract management: 1. Do unapproved terms get into agreements or do you have contracts being signed by unauthorized personnel? 2. Do you have agreements that were allowed to lapse or were unintentionally auto-renewed? 3. Is off-contract purchasing an issue? 4. Does accounting ever bill based on incorrect payment terms? 5. Are stakeholders ever surprised to find out there is already a contract in place for a good or service? 6. Can all stakeholders access information about delivery schedules or performance and quality requirements? Are they notified when there are changes? 7. Are mistakes made because people refer to or make assumptions based on an outdated version of a contract? 8. Do contracts linger in the drafting or approval process for so long that internal stakeholders either miss deadlines or are force to procure without a contract? 9. Is contract review overly long or complicated due to a lack of standard or re-usable contract language? 10. Are final contract negotiations timeconsuming and difficult to manage? The internal costs of these and other issues caused by poor or non-existence contract management practices can be difficult to quantify, but keeping a detailed log of problematic events related to contracts and any related time or financial repercussions can be a good way to construct a detailed history and ultimately provide evidence to gain executive support for a contract management initiative. There are many tools and standardized best practices that can be used to implement or improve your contract management process. A stable contract management process provides the following overall benefits: Reduced Litigation: The external involvement of suppliers and the ability to collaborate and resolve issues quickly are critical to contract management processes. According to the Fullbright & Jarowski 2010 Annual litigation survey, 60% of corporate litigations are related to contract disputes. The processes for resolving these disputes are key to minimizing the time and legal costs involved. Effective contract management processes help provide an environment and process for collaborating and resolving formal disputes with suppliers. Standardized Processes and Procedures: Decrease maverick buying and supply risk while increasing spend leverage. The net effect is that purchases as a whole become less costly and more valuable and a much greater percentage of negotiated savings are captured by the business. Reduces Time to Process Requisitions: Not only do standardized processes make sure best practices are 5 P a g e

always performed they also provide a known process that empowers employees at all levels to move projects forward in a standard process flow. Aberdeen identified a decreased time to process a single requisition to order cycle from 6.3 to 5.0 days. Reduced Cost to Process Requisitions: Standardization of processes also results in cost efficiencies. Aberdeen identified savings of $4.00 per requisition. Know which Suppliers are Under Contract and Ensure Compliance to Contractual Terms: According to research by Aberdeen, compliance management is improved 55% with a contract management system. Solid Foundation for Spend and Performance Analysis: With all of the contract conditions and negotiated prices and fees in a central location, it s a lot easier to compare actual purchases against contracted buys. This allows policy or regulation violations to be caught and dealt with immediately and ensures that all spend is known and available for leveraging in sourcing projects. Rebate Management: Contract Management systems make it easy to track rebates so all savings negotiated in a sourcing cycle are captured. Reduced Maverick Spending: With a contract management system, a buyer can immediately determine if a contract exists, who the contracted suppliers are, and what the contracted prices are. Thus eliminating I didn t know we had a contract or I didn t know I wasn t supposed to do that as a valid excuse! Evergreen Contract Elimination: Without a contract management system to automatically alert a buyer of contracts coming up for automatic renewal, many auto-renewing contracts are likely to go unnoticed and automatically renew, locking the buyer in for another buying cycle. With a good contract management system in place, buyers are alerted weeks or months in advance, depending on how long a sourcing cycle normally takes for that commodity or service, and prompted to take appropriate action. Key Contract Management Features and Functions Contract Management Systems vary depending upon the size of the organization, the number of stakeholders involved in the contract management process, and the volume and complexity of the contracts being managed but best practices demand the following features and functions from any contract management system: Managing metadata as well as the actual contract documents Centralized repository Searchable contracts 6 P a g e

Collaborative capabilities and basic workflow Monitors and alerts Dashboards, reporting, and analytics Import / export capabilities and fixed point integration Roles, permissions, and security Contract authoring templates Searchable Contracts Managing Metadata as well as the Actual Contract Documents There are two sets of data related to a contract: the metadata (information about the contract) and the contract itself. A good contract management system can collect, store and report on metadata. Metadata is also useful for tagging and organizing large volumes of contract data with custom fields that are specific to your business, e.g. category names, contract types, risk level, etc. Centralized Repository Scattered collections of contracts with some in the legal department, some in purchasing, and others in engineering or finance make it difficult for multiple stakeholders from across the company to find and use contract data when they need it. Non-centralized-contract storage breeds practices that rely on error-prone, manual notifications of contract status and hinders compliance tracking and performance analysis. Keeping contracts and data stored in a common repository where all authorized stakeholders can find, monitor, and update contracts and contract metadata is the most important feature offered by contract management systems. The number one way to get people to incorporate critical contract data into the procurement processes is to make the information easy to find. Users must be able to find individual contracts or sets of contracts based on customized criteria. Search features need to allow searching by keywords and key fields (such as effectivity date, expiration date, or custom categories). The repository should support searching of contract metadata. Finally, both simple and complex searches should be easy to construct, run, and re-use. If the search process is difficult to learn or use, users will avoid using it and the organization won t benefit from the higher level of informed decision-making that contract management data could provide. Collaborative and Basic Workflow The contract management system should allow multiple users to create, update, track, and, perhaps most importantly, view contracts and the metadata that is associated with purchases. It should track the status of a contract at any point in time, allow users to mark contracts as proposed, modified, or accepted, define tasks (accept, review, reject, etc.) related to the contract approval 7 P a g e

process, associate users, and indicate whether the contract is current, expired, or pending. Monitors and Alerts It s important for users to be able to define monitors and automatic alerts to indicate upcoming contract expirations, automatic renewals, required approvals, and detected deviations. It should also support automated alerts for pending tasks, incomplete information, payments, and new routings. Dashboards, Reporting, and Analytics A good contract management solution should come with significant built-in reporting and analytical capabilities that allow users to retrieve the number of contracts in the system that are active, pending, expired, about to expire in the next 30 days, and so on. Users should also be able to run flexible, ad-hoc queries to find information such as, how many suppliers are in a particular region, how many suppliers have not agreed to confidentiality agreements, how many suppliers are associated with a category, and so on. This level of reporting is useful for identifying savings, risk reduction, and supply-base-consolidation opportunities as well as for the support of compliance and spend analysis initiatives. Import / Export and Fixed Point Integration A contract management system is worthless without data, or in this case, contracts. Import capabilities are critical because no one wants to incur the labor costs of manually entering hundreds or thousands of currently active contracts. Also, since a good contract is a managed contract, the award particulars of a finalized contract need to be available to purchasing and / or inventory tracking systems to ensure contract terms are met. Export functions are also required to support fixed point integration points to standard ERP and / or inventory systems as well as into spend analysis or compliance tracking systems. If many contracts in your organization are currently in paper format, you will want the contract repository to accept, index, search, and convert standard OCR output formats. Roles, Permissions, and Security Contracts and their metadata must be accessible and usable by everyone in the organization who depends on contract information to do their job. Not everyone should be able to create, alter, or approve contracts and, obviously, no one should have the right to change a contract that s been signed and finalized. Furthermore, only authorized employees and contractors should have access to the system. Security permissions should enable organizations to assign different levels of access (e.g. view, 8 P a g e

edit, delete, etc.) to different users on each contract. To achieve exceptional security levels you need the ability to define roles, assign them to users, and override default permissions on a user-by-user basis. Contract Authoring Templates Incorporating common contract templates is an important knowledge management capability. It encourages the use of standardized contract language which accelerates the contract creation and review processes. Libraries of re-usable clauses provide a more granular level of control and can provide needed flexibility for more complex and varied contract types. Templates simplify contract creation. Contract templates and standard clauses that can be re-used in multiple contracts enables users without extensive legal or contract experience to create initial drafts of contracts. In some cases, a user might be able to select a standard contract type and simply fill in quantities, delivery times, and shipping terms. For a new or custom commodity or service, users might be able to construct the contract by assembling content from a library of standard clauses. Having non-legal personnel author initial contracts and using the legal department to review and approve the contract before releasing it can eliminate roadblocks, save time, and minimize the overall cost of creating, managing, and enforcing individual contracts. Sources Hype Cycle for Procurement, 2011, by Gartner, November 2011 Procurement Contract Lifecycle Management: Assessing the Value of Contract Automation: by Aberdeen Group, January 2012 CPO Rising 2011: Innovative Ideas for the Decade Ahead, by Ardent Partners, July 2011 Market Overview: epurchasing And Contract Life-Cycle Management In 2011 to 2012, Forrester, 2011 Smart Computing Drives the New Era of IT Growth, by Forrester, December 2009. Effective eprocurement: Assessing Options for the New Economic Normal by Aberdeen in November 2010 Practical Approaches to Contract Management Deployment, by Aberdeen November 2005 About Iasta Iasta, fiercely dedicated to esourcing and spend management, maximizes bottom-line value through our strategic client partnerships. Our flagship software products, Iasta SmartSource and Iasta SmartAnalytics, combine spend visibility and analysis with deep sourcing functionality to refine costs, mitigate risks and encourage collaboration, among other goals. Clients also use the Iasta Executive Analytics Suite to improve overall sourcing intelligence while tracking team performance and adoption. Additionally, procurement teams can amplify or even offload their efforts to make a greater impact within their companies by using Iasta's training and augmented services. For larger, strategic Procurement Transformation engagements, clients working with the Iasta Consulting Group often realize an ROI of 15:1 or greater. www.iasta.com info@iasta.com 9 P a g e