Category Archives: contract management

… Don’t Forget the Contract, Part III

Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out in our first post, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

And good contracts are more than just specifications of product, price, and a few boiler plate T’s & C’s provided to you by legal. As we described in our first post, it’s understandable — by both parties, and, especially, by a party whose first language is not the contract language. Then, as we detailed yesterday, it clearly describes the need, which is first captured in a detailed statement of work that the contract will be created around.

But do you start writing the contract as soon as you have the Statement of Work drafted? Definitely not! Remember, there are two primary reasons you create a contract. One, to get what you want. Two, to mitigate risks associated with getting what you want. So, the next thing you have to do is:

Define the Risks
… and how they are dealt with

What are the risks? Start with the product. What are the risks in quality? In transportation? In import/export? In use? In recovery? Then move on to service. What are the risks in performance? In delivery? In quality or acceptance criteria? Then to the supplier? Will they be around? Are they financially stable? Are they sustainable? Are they located in a relatively risk free zone or risky zone?

Then, assess what are the impacts if a risk situation comes to pass. Additional Costs? Customer dissatisfaction? Brand damage? Regulatory fines or injunctions? Do they need to be mitigated? By who? When? Is there a penalty if the impact of the risk is not mitigated and could have been? What risks are excluded from mitigation because they can’t be, the risk is too low, or the mitigation too costly?

Is Force Majeure allowed? When? How long can it be claimed for? What documentation or proof is required? What happens if one party tries to claim it for longer than is reasonable under the circumstances? (E.g. if a power outage shuts a factory down for two days and the average line restart time is one day, and the supplier is still trying to claim Force Majeure after 10 days, that’s not reasonable.) What is the recovery if the product or service must be obtained on a regular basis or within a certain timeframe but the supplier cannot provide during the Force Majeure period? Can the buyer use another source? For how long? Can the contract be cancelled if the supplier cannot recover within a certain time frame?

Remember, generally speaking, a contract is not needed when everything goes according to expectations. It’s needed when things go to hell in a hand-basket and one or more parties that need to take responsibility for their actions don’t want to and/or still demand payment for products not delivered or services not rendered.

If something goes wrong, you need to make sure that the responsibility for remediation, recovery, and restitution lies with the appropriate party and that if the responsible party doesn’t own up, you have other options. Being locked into a sole source contract when a supplier can’t deliver for three months when you only have two weeks of inventory left is not acceptable. Nor is the ability for a supplier’s lawyers to tie you up in court for months because responsibility was not clear, remediation or penalties were not clear, or vague terms were included.

So, just like it’s critically important to specify what you want before you start writing a contract, it’s also critically important to specify what the risks are and what will happen if, and when, they materialize. (And we say when because your chances of not being hit by a disruption in at least one important contract every year are less than 15%, and since you don’t know where that disruption will come from and which contracts will be affected, it’s just best to assume they all will be.)

So can you start writing your contract now? Stay tuned!


… Don’t Forget the Contract, Part II

As pointed out in yesterday’s post, Contract Lifecycle Management (CLM) — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. But, as we also pointed out yesterday, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage.

Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. To be more exact, they don’t even ensure that absence of a typo or careful insertion of a single word by a litigious lawyer that could negate and entire contract and make it totally useless.

So where do you start?

Define the need

What do you really need? (And what are the core requirements?) When? Where? How do you need it delivered? Who is responsible for the production, delivery, support, and return? Why does it need to be this way? What are the risks and how will they be mitigated? Split?

Create a Statement of Work

Clearly specify what is required, when, by who, in what quantity, how it is to be packaged, stored, delivered, supported, maintained, and recovered. Specify delivery dates for products if known or delivery timeframes if exact dates are not known but response or replenishment times are needed. If the contract revolves around the construction of a particular deliverable (system, machine, building, etc.) specify key milestones and acceptance criteria. If it revolves around ongoing services, specify delivery timeframes and required service levels. Specify as much detail as is known and where specifics can’t be specified up front, specify how the details will be worked out later and agreed to, as well as the procedure that will be followed in case of disagreement or conflict.

Make sure Milestones are Clearly Specified
… with Deliverables and Acceptance Criteria

Go so far as to explicitly number the milestones and make sure they are easy to index, track, and assign to buyers, supplier managers, and other organizational individuals who are affected by the contract. It should be easy for the CLM to auto-index these milestones and even auto-assign the milestones (and monitoring management responsibilities) to the most logical individuals in the organization (who can reassign if necessary).

Make sure the deliverables are clearly annotated, that precisely what they entail is defined, that the acceptance criteria that will be used are spelled out in sufficient detail to allow work products to be rejected if they are not up to requirements, and who has final determination of whether those criteria are met. Also, if there is a dispute, the process that will be used for resolution must be indicated.

Define the Payment Schedule
… and Tie it to the Milestones

Don’t just specify how much will be paid, but when it will be paid, and what the dependencies are on the milestones and deliverables. Also specify if there are any penalties for late or unsatisfactory delivery, precisely how they are calculated, and when the remaining payment(s) will be made. Also clearly specify how disputes will be filed, handled, and resolved and whether any payments will be made during the dispute, and in what amounts.

Define any SLAs and Warranties the Supplier Must Adhere to

Do so up front and in plain English. It’s critical that the supplier understand exactly what is being expected, how it will be measured, what guarantees the supplier is making, and what it will cost them if they are not adhered to. If the products are rejected, do they have to deliver replacements? Are they penalized? Is the contract terminated?

Then, and only then, start thinking about writing the contract. But don’t write it yet!

It’s Easy to Get Lost in CLM — But Don’t Forget the Contract! Part I

Contract Lifecycle Management — which includes contract creation, management, analytics, and renewal — is becoming big and will likely get bigger still as organizations rely more and more on contracts to control price and mitigate risks. And since no one can ever find a paper contract once it’s been sent to filing, the ability for anyone anywhere at anytime to access a relevant contract, compare deliverables and prices to negotiated deliverables and prices, track (evergreen) renewals, and determine which party is responsible for a loss is almost priceless.

That being said, a contract lifecycle management system is not only useless without contracts to manage, but is also useless without good contracts to manage. Poorly created contracts that don’t define anything more than a bulk price and a term don’t ensure defensible pricing, loss management, or risk control. Nor do they ensure termination, as evergreen status could be implied if orders are still made after termination and pricing is still honoured. Nor do they even imply that the supplier even has the right insurance or certifications to even produce or ship the products the supplier is selling to you.

In order to control risk, mitigate loss, and realize the expected benefits, a good contract is critical. This not only requires good negotiation, but good contract drafting that covers all of the necessary T’s and C’s, including those you never hope to need. All of them. And, more importantly, that spells out all of the requirements of both parties in terminology that cannot be easily misinterpreted or twisted by leeching litigious lawyers who will bleed both parties dry in legal fees before an agreement or decision is reached.

So how do you get a good contract? Well, as the legendary Dick Locke once wrote in our classic post on Blogging on International Contracting, not only should your contracts be in plain English, but they should be written with a high reading ease score (40 or more in Microsoft Word) and a grade level requirement of 11 or less. Especially since the contract is not likely to be in the supplier’s native language if the contract is with an international supplier.

After all, as Mr. Locke so keenly pointed out in a follow up piece on Simplified Contracts, Part 3, if you let a litigious lawyer write a contract from a supplier with a slimy sales team, he could easily insert just one word in a twenty page contract with an average sentence length of 73 words and paragraph length of half a page that negates the entire contract, and you’d never know.

So how do you write a good contract? We’ll explore that in this series.

Seal Software: Breaking the Seal to Identify Contract Value

Seal Software is a provider of contract discovery and contract analytics software that is different than your standard CLM (contract lifecycle management) module built into your e-Sourcing or e-Procurement suite (which is designed to negotiate and track contracts, awards, milestones, and related documents). And unlike many CLM providers that just focus on Procurement, Legal, or Sales, Seal Software is designed to support Legal, Procurement, Sales, M&A, and IT — making it a fuller enterprise CLM solution than many of its peers. In fact, in large organization with tens of thousands of contracts, Seal Software is often used in conjunction with a traditional CLM solution.

This is because Seal’s strengths of contract discovery and contract analytics are quite unique. Seal’s contract discovery capability can automatically locate existing contractual documents wherever they may reside, automatically extract key contractual terms and clauses, and automatically populate other corporate solutions including Customer Relationship Management (CRM) and Contract Lifecycle Management (CLM).

The discovery engine can handle multiple file format types (text, doc[x], PDF, jpg, etc.) and work across local hard drive, network drives, file shares, and even cloud-based repositories — anything with a UNC path or API is accessible. It then uses advanced semantics and machine learning to analyze the contracts and identify the clauses and critical information that the organization has deemed to be of interest.

It does this by comparing all files discovered to standard contract templates and identified organizational contracts to find contracts. It then determines the type, category, and whether or not it is a (potential) duplicate. Finally, it runs all (unique) contracts through descriptor templates that identify and extract the clauses, terms, and date elements of interest.

But the power of Seal only starts at discovery. Once the contracts and elements are identified, the analytics solution not only allows the user to access all contracts that meet a specification or search; filter down based on timeframe, search, or other elements of interest; and create reports, but to also identify all contracts that contain clauses or terms of interest that were not previously of interest. If all of a sudden a new regulation comes into effect and the organization now has to determine whether or not all of its contracts are compliant with a new privacy requirement or contain clauses to ensure compliance. All the organization has to do to find all contracts with a relevant clause, paragraph, etc. is find a few contracts with clauses and sentences of interest, define any additional phrases or terminology of interest, and tell the system to re-process all contracts and it will find all contracts, structured or otherwise, that contain associated phraseology. The semantic engine can learn from examples and key-phrase definitions.

And the analytics can be used during negotiation and review too. The platform allows for the definition of policies that will auto-detect clauses and phrases in suggested revisions that can alter the intended meaning of the actual contract and bring them to the attention of the reviewers. It can also highlight contract areas using non-standard language or language identified by legal to be (high) risk. And this review can be done in the contract creation platform of choice. Seal’s newly released Analyze this Now capability allows links to be embedded that send the contract to seal which sends back a marked-up highlighted docx file that highlights everything of interest and concern. (In Microsoft Word, it’s a simple plug-in.)

It’s a very powerful solution for large (global) organizations that often have well over 10,000 or even 100,000 contracts that need to be tracked, analyzed, maintained, and negotiated in accordance with a plethora of business rules and industry (and government) regulations. When you consider that even enterprises with revenues below $250M have an average of 8,000 Procurement contracts (as per Aberdeen Group), most of which are not in the e-Procurement system (and not effectively managed and tracked), the importance of discovery and analytics cannot be underestimated.

For a deeper dive on Seal Software, and its capabilities, see the recent Pro series by the doctor and the prophet over on Spend Matters (Part I, Part II, and Part III) [membership required].

Agiloft — For those with Lofty Ambitions for Contract Management Agility

Agiloft is another rare breed in the Supply Management space. It’s ancient (as it was founded in 1991, only a year after the first web browser was invented), it was founded to be a back-office B2B enterprise application (and their main offerings are service desk, workflow & business process management, and contract management), it’s debt-free, it has a large network of resellers, it has multiple global hosting locations (to support local privacy laws or government & military security requirements), and you can have it anyway you want: pure (low-cost) multi-tenant SaaS, classic ASP, or even on-premise with your choice of two different platforms (Windows or Linux). [Hint, choose the 2nd.]

Obviously, in this post we are going to focus on the contract management solution, as that is the most relevant to Supply Management, and the related BPM and Workflow elements they have in their Workflow and BPM solution to support it as well as their Asset Management capabilities. While the ability to use a single vendor for multiple “back office” B2B applications might be attractive to some organizations, our specialty here at Sourcing Innovation is Supply Management and Supply Technology Innovation, and that’s what we will cover.

The contract management solution supports contract creation, negotiation, approval and renewal. It contains a searchable central repository with double-byte language support and automatic audit trail for regulatory compliance, clause libraries, Word templates, and Word integration. In addition to Word integration, it also provides a complete API and and bi-directional pre-built integration with systems such as AD, SAML, Oauth, SSO, SalesForce, MS Exchange, DocuSign, QuickBooks, and Xero.

The contract creation is not only flexible, but so is the complex review and approval routings that can contain a combination of sequential, parallel, and conditional approvals. Agiloft’s ability to create and support complex, customizeable, business processes and workflows make complex creation and approval processes a snap. Furthermore, in addition to complete version history (and automatic redlining), it also supports a complete audit trail of those changes, built in OCR that can process attached image files, and fine-grained security that can control access by user group down to individual fields in a contract record.

It can easily be configured to support any industry and regulatory requirements that the organization has to support (or wants to support) by way of additional data capture, workflow modifications, mandatory checks and required approvals by appropriate risk management personnel. It can also be integrated tightly with asset management and each asset affected by the contract can be correlated with the contract, and each contract that references an asset can be correlated with the asset. This last point is particularly relevant as some assets can be shared across contract if they are only needed for short periods of time (such as excavators on construction projects).

However, as of now, any organization that has regulatory or compliance needs, requirements to track additional types of compliance, insurance, or audit documents has to define the requirements, create tables to track the necessary data and documents, define the relationships, create the monitoring tasks, create the notification templates, hook the notifications up to email, and so on. The wheel has to be re-created in each and every organization that needs to track a specific requirement. The platform needs the ability to capture and store common tasks, workflows, and components in a repository that can be accessed by any and all customers and included in individual instances as needed. Agiloft plans to release a community next year that will allow customers, consultancies, and anyone on the platform to export and share custom capabilities that they have created, and this is a good start, but it would really quicken start up time if this functionality was there.

That being said, the configurability of the solution (and the speed at which it can be configured by their services team) should not be overlooked. Consider the example of Enki(.co). Enki is a cloud services provider that was founded by the former NetSuite CIO and Director of Engineering. They spent 6 man-months customizing NetSuite for contract management, sales, and support, but never realized their vision. They eventually replaced NetSuite with Agiloft, and managed to customize it to their needs in 10 days, going live a week after that. In other words, the platform can be customized to the needs of most organization’s in a matter of weeks, but only by an experienced configurator. (However, once someone in the organization goes through about a week of training with Agiloft, they will learn to maintain and customize the platform at close to the same speed going forward.)

Agiloft is a great fit for those organizations that have some supply management capability (in front end strategic sourcing or back end procurement / procure to pay) but do not have good contract management and need a good CLM tool to serve as a foundation for their Supply Management processes. The ability to define the required contract lifecycle and sync with other platforms makes it a great central system for any organization that does not have, or cannot acquire, a fully integrated source to pay suite (as it can manage workflow across applications).