Contract management is next step in smart supply strategy
It's time to better control purchase agreements
By Susan Avery -- Purchasing, 7/15/2004 2:00:00 AM
Effectively negotiating, executing and controlling agreements with suppliers is essential, yet many supply organizations do a poor job of managing contracts—and many purchasing applications fail to address the contract lifecycle. This failure leads to protracted contract development and negotiation cycles, improper contract approvals, limited contract visibility and control and an inability to ensure that suppliers comply with established contract terms. By some estimates, up to a third of the nation's leading sourcing operations are implementing or evaluating contract management software to address these challenges. According to industry analysts, the business case for implementing such software is clear: Contract management software provides visibility and control needed to create better contracts, to actively ensure that suppliers meet their contractual obligations and to manage and evaluate performance against contract terms.
Of course, improvements to business operations and supplier contracts carry down to the bottom line. Businesses lose billions of dollars each year due to sub-optimal contract terms, slow contract cycle times, renegade contracting processes and missed revenue and savings opportunities.
Researchers at Aberdeen Group estimate that a $1 billion company with annual purchases totaling $500 million, of which $400 million is under contract, loses $18 million every year due to lack of proper supplier contract management. A company with sub-optimal contracting processes will spend additional time, effort, and expense in manually managing their supplier contracts, costing another $12 million annually.
A foundation In addition to improving contracting companywide, contract management software delivers functionality and integration capabilities that elevate the value of existing procurement applications and operational systems. By relating formerly disparate applications and providing each of them with accurate contract information, the best contract management software can help maximize the effectiveness of existing applications.
Contract management software also helps accelerate cycle times from sourcing through contract approval by automatically triggering the creation of a contract following a sourcing event. By monitoring supplier compliance with contract terms throughout the contract lifecycle, contract management software also helps companies realize the savings they negotiate with sourcing applications. What's more, contract management applications ensure that procurement, supply chain and other transaction systems are synchronized with current, accurate contract information to minimize errors, reduce risk and enforce internal compliance with contract terms. In addition, the most advanced contract management software actively monitors and validates requisitions and POs against contract terms, totals and accumulators.
On the accounts payable front, these solutions enable AP applications to validate invoices against contract terms and confirm proper receipt of goods and services before permitting payments. In addition to increasing the efficacy of spend analysis applications as decision-making aids, the leading contract management software also provides powerful contract and purchasing operations analyses of their own.
Contract management software also enables companies to continually monitor compliance by alerting appropriate staff to any discrepancies between contracts and pending transactions. Achieving compliance Companies dedicate significant resources to forming supplier relationships and creating strong contracts, yet most are not able to actively drive supplier compliance with these agreements. Often companies are unable to evaluate individual and aggregated transactions in their ERP (enterprise resource planning) systems against their contracts. As a result, companies frequently lose earned discounts and rebates, and suffer severe consequences when their suppliers miss milestones and fail to meet their service level agreements.
Many contract management software applications seamlessly integrate with ERP systems to ensure that transactions are compliant with actual contract terms, thus allowing for management and monitoring of supplier compliance. As a result, supply operations can ensure they receive the rebates and discounts they have earned, validate payment schedules, and verify that vendor invoices reflect negotiated terms. They can also ensure that suppliers meet expected quality and delivery times outlined in agreements. Software tracks milestones and employs rule-based notifications to trigger alerts based on any criteria or business condition (e.g., upon receipt of contracted volume).Once a contract is executed, its terms can be automatically extracted into ERP, SCM (supply chain management), manufacturing and other systems. By activating these terms in transaction systems, companies can ensure that transactions involving their suppliers strictly conform to contract terms. Evaluating software There are certain criteria to keep in mind when evaluating software for contract management. Such software provides functionality across the contract management lifecycle, from contract creation and negotiation, to management of contract and supplier compliance as well as analysis and reporting tools. Mike Kaul, president and CEO, diCarta Inc., San Carlos, Calif., has come up with these considerations:
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Does the software work the way you work? The software should allow users to employ tools already familiar to them, such as Microsoft Word and common e-mail applications. This is not only for mere convenience, but to expedite and broaden adoption. The right software allows contracts to be edited both online and offline in Microsoft Word while preserving all controls over the business terms embedded in the document.
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Does the software capture the intelligence behind the contract? Key contract terms, including terms for payments, discounts, rebates, contingent obligations, and certification schedules, should be automatically captured as they are authored or amended. This avoids the re-keying of contract information into a structured database, which is time-consuming and frequently results in errors. When the contract is eventually signed, these key terms should be made actionable within other operational systems.
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How well does the software allow for managing compliance? To facilitate successful supplier management, contract management software should notify appropriate staff when milestones have been met or when non-compliant actions are taken. This is best achieved through integration with ERP and other systems.
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Does the provider offer packaged integration with ERP systems & other applications? To this end, companies are wise to evaluate whether a provider offers seamless integration with other enterprise systems. The greatest value is derived from contract management software with tight integration with operational systems.
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What is the depth of the software's reporting and analysis functionality? Good software will enable continual improvement in supplier contracts and supplier management by providing a complete view of contract processes and supplier performance against contract terms. Software should provide reporting across all phases of the contract lifecycle and across the organization. Goods software allows for the aggregation of information typically dispersed among multiple systems.
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What real-world success does the provider have? Assessing software functionality is, of course, the first order of business. However, an assessment of the provider's success is equally as important. It's a good idea to look for providers with deployments at leading companies and with broad adoption of their solution.
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