The Wikipedia definition is the management of contracts made with customers, vendors, partners or employees and the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk. In the wiki-paper on the e-Sourcing Wiki, I differentiated between basic and enterprise contract management, which I defined as the holistic view that is formed when one looks at the management of contracts from the enterprise perspective. This includes the legal perspective, which ensures that the corporation is using standard, the risk management perspective, which ensures that the procurement contract is addressing foreseeable risks, the financial perspective, which makes sure the payment terms are clearly and unambiguously defined, and the procurement perspective, which needs to ensure a continuity of supply.
Contract management is important to procurement and purchasing for a number of reasons. Not only does it insure that a business lives up to its obligations, which protects it from legal risks, but it brings with it a slew of operational and financial benefits that can drastically improve company productivity and profitability.
- Productivity Improvements
If purchasing contracts are centrally managed, and electronic versions always immediately accessible from a centralized repository, there will be no more wasted man-hours searching for, retrieving, and copying the original contract.
- Spend Visibility
Centralized management of contracts through an appropriate software solution gives an organization unprecedented visibility into the global supply base and global spend. It also allows an organization to automatically identify "evergreen" contracts (well) before they expire and determine whether or not the contract is still right for the business. It also enables a company to quickly identify contracts with suppliers in (new) "high risk" zones due to natural disasters, (rising) political unrest, or (geo)political uncertainty. Finally, it provides a solid foundation for spend analysis.
- Compliance Improvement
When contracts are tracked and monitored, purchases can be checked against the contracts for compliance, quickly and easily, and, if the solution is integrated with the purchasing system, automatically. This (dramatically) reduces maverick buying, allows rebates and discounts to be tracked and captured, and eliminates duplicate payments.
- Opportunity Identification
A full-fledged enterprise solution tracks all of your contracts with your suppliers and your customers. While supply contracts tend to focus on acquisition of raw materials to conduct your business, sell side contracts tend to focus on the provision of valuable goods and services to your customers which is based on your IP. A good enterprise solution with a centralized repository allows you to not only get a handle on your Intellectual Property (IP), but also determine which IP has the most value and which offerings, if actively developed, should be focussed on to maximize your ROI.
For more information, I recommend starting with the e-Sourcing Wiki paper and the following Sourcing Innovation posts: