In Part 21 we noted that after Supplier Management came Contract Management because the only way to lock in the opportunity was to get a contract signed on the bottom line. However, like Supplier Management, Contract Management isn’t consistent across vendors because each has a different idea on what Contract Management actually is … and sometimes isn’t. (And most vendors are jumping on the AI bandwagon faster than fleas on the only stray dog in town, but that’s a rant for another day, or week — there’s so much absurdity here.)
However, as noted in our last post, Part 22, most of the definitions, and the implemented capabilities, tend to fall into three categories: Negotiation, Analytics, and Governance. Yesterday we started by breaking down negotiation and today we’ll continue with analytics.
Before we begin, we should point out that contract analytics is not contract spend analytics, which in many platforms is merely a summary of spend under contract, but an analysis of the contractual documents of the organization. We will also remind you that this is not meant to be an exhaustive list of capabilities you may find, or need, but a starting list of capabilities that should be present in any tool you are considering.
Clause, obligation, term, deliverable, etc. identification and extraction
The foundation for contract, not contract spend, analytics is the ability to semantically analyze, parse, and extract key pieces of data and metadata on a contract on which to do contract, and contract pool, analysis. An organization wants to know more than just how much contracts contribute to spend under management, but how they contribute to risk mitigation (by ensuring the supplier is responsible to adhering to key governmental requirements), policy compliance (by ensuring there are clauses for mandated diversity programs or industry certifications), insurance, privacy, and other business factors in addition to providing the contracted product (using only approved parts and/or raw materials) or service (using only certified personnel).
While an advanced Negotiation offering will include some of this semantic capability, it may not support anything beyond basic clause identification and not support the necessary meta-data extraction and enrichment necessary for the analytics the organization wants to perform. Significant up-front research and live confirmation of capability (against organizational paper, not demo documents in a vendor system) may be required to verify this.
Search by clause type, obligation type, payment terms, deliverables, etc.
In addition to being able to parse a contract for key meta-data necessary for contract (pool) analysis, the platform must also support extensive search and filter capability on this meta-data. Knowing that 20% of your contracts do not address privacy in a country where a new privacy regulation has just been approved is good, but being able to quickly identify all of the active contracts is better. When an organization needs to assess readiness for a regulation or a risk or revisit their payment policies, they need to be able to quickly figure out what the precise impacts will be, and this will require advanced contract search and filter capability.
Analytics on document/clause/obligation/payment term/deliverable types
As indicated above, its more than just analytics on spend, but analytics on how many different contract types are used in an organization, how common/prevalent a clause is or isn’t, how often a variation is used, the average number of obligations, the OTD (on-time delivery) of those obligations, standard and variant payment terms, the direct and indirect cost of those payment terms and potential cost avoidance from changes to those terms, typical deliverable categories, and how these metrics change over time from one-period to the next. Also, average contract lifespan, renewal rates, decreases in evergreen renewals over time (as these are typically bad — out of sight, out of mind, out of control), and shifts in contracted supply base, geographies, etc. are as important as the spend the contracts control.
Process / state analytics
An organization also needs to understand its overall process and its state of affairs relative to contracts at any time. It’s not just how many contracts are active, but how many are now expired and how many are in process for signing/renewal. What’s the average time from award identification to signing, for implementation, and for conclusion. And how does it vary by category, geography, and supplier and how does that change over time?
It must also allow for the construction of custom summaries (views, widgets, etc.) of any and all analysis each role and stakeholder wants to see when they sign into the system, and must support full drill-down and filter to individual contracts, clauses, and terms as required.
equal support for buy-side and sell-side
Why should you have one system for analyzing buy-side contracts and another for sell side? It’s just as critical to understand revenue, margin, profit, risk, obligation, etc. on the sell-side contracts as well!
Contract Component based spend / supply / supplier analytics
A great contract analytics solution will not only support best-in-class spend analytics capability, but also allow all of the contract meta data to be defined as cube dimensions and used in formulas, filters, and metrics and allow spend to be sliced and diced by contract dimensions — to find out how much spend is covered by an appropriate risk mitigation clause, and how much is not; how much spend is adequately insured and how much is not; how much is tied to performance and may be recoverable as damages for late delivery/project completion; and so on.
Performance analytics & benchmarks
In addition to process/state analytics, the platform should also support performance analytics with respect to overall contract execution and completion timeframes; performance against obligations, payment terms, agreed upon rates and costs; expected demand and utilization; spend to budget; and so on. It should also support the creation of internal benchmarks by year, category, geography, etc. for judging contract performance (over time), and support the importation of external price / rate benchmarks and standard public contracts for relative analysis of organizational performance to the extent possible.
Duplicate / redundant clause analysis and suggested standardization
If you don’t have a contract negotiation platform and all contracts have been created free-form by the legal team, chances are you have more variations of every “standard” clause than you have standard contracts. (Yes, you read that right. Remember, you have expired contracts too that you should be maintaining for 7 to 10 years to backup any spend that you made for financial purposes, as well as maintaining for the length of time any non-compete, warranty, or liability clauses remain valid — so you can easily have more clause variations than you have active contracts when every lawyer uses their own preferred wording of a clause).
Contract risk analysis based on key contract factors
We know that there are separate solutions for “risk” in our space, but most of those solutions are focussed on supplier/supply-chain risk and compute that risk based upon external factors. However, every contract you sign carries risks — risks defined by whatever the contract didn’t cover (and explicitly transfer liability to the supplier for if they violated a regulation or law) and what it does. Your contracts not only explicitly define the products and services you are buying, and the regulations you are subjected to, but your sell-side contracts also define the associated liabilities you are assuming! And a good CLM should support all of your contracts, not just buy-side, even though chances are the sell-side will be initiated by the supplier (and negotiated in their system) and all your system will store is the final contract (which you also want to be able to analyze as well).
Next up: Governance in Part 24!