Category Archives: contract management

The Purpose of a Contract is Easy to Define

A recent post over on Contracting Excellence on “the purpose of contracts” indicated that it can be difficult to describe the “purpose” of a contract. I have to disagree. While the definition may vary slightly depending upon the role contracts play in your business and the importance placed upon them by your personnel, the fundamental purposes is unwavering: the purpose of a contract is to define both parties’ responsibilities with respect to a desired scenario outcome to the level of detail necessary to make both parties comfortable with respect to the relationship.

Now, while this may seem like a bit of a cop-out because “responsibilities”, “level of detail”, and “comfortable” are open to debate, this is the slight variance I mentioned. The fundamental, unwavering, purpose is the definition of the desired scenario outcome. This, of course, means that before you start contract negotiations you need to not only have your goals for the negotiation defined, but your goals for the relationship. Do you just want 10,000 units delivered to your warehouse in Omaha in 10 equal shipments on the 21st of every month? Or are you looking for a limited type of partnership where your supplier will partner in research initiatives to replace harmful chemicals with environmentally friendly substitutes in your product designs, to reduce packaging requirements, and to reduce the number of SKUs you need to deliver your products?

If you haven’t defined your desired end-state for the length of the relationship, then you haven’t defined the true purpose of what you want the contract to help you achieve, which means you can’t define the purpose of the contract and what you’ll end up with is a bunch of ‘legally acceptable’ words on paper that don’t please anyone, even if you manage to bring it down to an acceptable reading level.

If you figure out what you want, and get your supplier on the same page, I’m sure that you’ll find the contract will fall into place quite nicely and that you’ll have no problem achieving plain english, which is the best policy.

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The Real Reason No One’s Buying Contract Management Software

Over on Commitment Matters, Tim Cummins authored a post on The Guilty Secret of Contract Management Software where he attempted to explain the disappointing uptake in contract management software. It was pretty good, and he was right in that the uptake is not simply down to a reluctance to buy and due to a failure to achieve widespread internal adoption within many organizations that have bought. But he missed the real reason why.

According to Tim, the problem is that contract management continues to be a football, today owned by one function, tomorrow another; today centralized, tomorrow decentralized; at one moment an instrument for compliance, at the next a source of empowerment. Basically, the activities that lead to [contract] creation and management are generally fragmented. Finance, Legal, HR, Product Management, Marketing, Procurement, business unit management, Sales — all of them have an interest, yet none feels responsible.

While Tim’s observations are correct, it’s not a problem of “the buck doesn’t stop here”, it’s a problem of “where is the buck“? Even if a company appointed a head of contracts with ultimate responsibility for all contracts (which should reside in the Procurement or Supply Management department), such as a VP of contracts, you’d still have an uptake problem. Why? Because contract management systems, on their own, don’t offer much in the way of value.

But they centralize all of my contracts. So does a shared directory on the central file server. Heck, so does a filing cabinet and a little bit of diligence.

But they provide me dozens of useful contract templates. So does the CD I picked up for $5 ten years ago.

But they allow for automatic contract generation from standard clause template libraries. So does Microsoft Word.

But they allow me to query my contracts and create custom queries. So does an Access database and a high school programmer.

The simple fact of the matter is that most of what the contract management vendors sell is hot air. The real value of a contract management system materializes when you integrate it with your e-Procurement, EIPP, and/or P2P system and use it to automatically check all invoices against your contracts to make sure that

  • no off-contract purchases are accepted without appropriate management approvals, and only with good reason and
  • all charges are at contracted rates.

Then you stop maverick spending and overcharges dead in their tracks, which collectively account for the 40% to 60% of negotiated savings that are never realized in your average Procurement department. Otherwise, you’re just buying an over-priced content management system with word processing capabilities — and you might as well use Open Office and a centralized shared directory with naming conventions as the uptake will be about the same unless you can demonstrate how the software is going to result in real hard dollar savings.

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Reduce, Reuse, Recycle: Not Just for Document Management

A recent article in Integrated Solutions noted that “the time has come to apply reduce, reuse, and recycle thinking to electronic business information” because embracing a more strategic, “green” approach to information management will deliver a number of benefits, not the least of which is a dramatic reduction in the cost of storage. These days, there are a number of technology offerings that can reduce storage demands and improve real-time access to business-critical information. For example, on-demand conversion of print-stream to PDF eliminates the unnecessary storage of large-format documents and lessens internal network congestion during the retrieval process.

To demonstrate the efficiencies achievable with smart application of modern technology, the article provided a brief case study of a financial services institution that recently upgraded its customer service technology infrastructure to provide its 2.5 Million online customers with easy access to their statements.

  • Reduce
    On demand statement generation and conversion reduced the storage footprint 97% from 12.5 TB of storage a month to 375 GB.
  • Reuse
    A smart infrastructure allows the same information to be retrieved through a portal, e-mail, or traditional mail.
  • Recycle
    The provider is “recycling” content data to personalize cross-sell offers to the right customer at the right time.

However, the mantra is particularly pertinent to Contract Management. With a good contract management solution that includes authoring and archival capabilities, you get the following:

  • Reduce
    You can collaboratively edit contracts on-line in the application, which greatly reduces the amount of paper you waste and e-copies of the contract-in-progress that float around in each contributor’s storage account.
  • Reuse
    Common clauses can be applied across contracts, saving the need for the recreation (and the associated legal [review] fees).
  • Recycle
    Contracts can be templated so that all that needs to change on the next award is the recipient, pricing, term, and conditions.

For a list of contract management solution providers, start with the resource site.

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7 Sourcing Secrets More Than 2 People Should Know

A recent article over on Cracked listed “7 Secrets Only Two Living People Know” (for some reason … that the doctor must admit he doesn’t understand in a few of the cases). While entertaining, it did cause me to ask why there are so many truths in sourcing that most people still don’t seem to get. Since some days I feel like only 2 people know the following, I decided I should do my own post on 7 sourcing secrets more than 2 people should know. Because you really, really, really should know the following sourcing “secrets”. After all, they’re truths, even if no one’s bothering to tell you. So without further ado, here they are:

1. Spend Analysis is flexible Data Analysis, not canned reports on a data warehouse populated via automated classification

Real spend analysis is the ability to dive into your data and find out not just where your true spend is higher than it should be, but why. This requires you to have the ability to slice, dice, and cube your data on any dimension you can think of, because you’re never going to know where the losses are until you find them. (After all, if you knew where your holes were, wouldn’t you have plugged them already?) Canned reports on a static data warehouse can only tell you how fixes you’ve already implemented are working, not where the holes are. Furthermore, “automated classification” just doesn’t work. Any good consultant worth his salt can load your data into a real data analysis product and find two dozen mistakes in twelve minutes. You need the ability to define and redefine mapping rules on the fly as all automated classification can do is fix previously identified mistakes. It can’t identify new ones. Software isn’t intelligent. People are.

2. e-RFX is electronic support for the full information and quote gathering cycle, not just bid collection

If all your e-RFX does is allow you to collect bids, it’s not e-RFX. It’s e-RFQ, and a poor e-RFQ at that. It should allow you to create questionnaires, surveys, and entire RFX packages with closed and open-ended questions, allow you to compare responses side by side, and allow you to collect not only all of the pricing, but all of the discounts, rebates, and promotions the supplier offers. It should help you manage the process, guide you through it, and support data import and export in open formats so that you can also use analysis, optimization, and contract management tools.

3. A Reverse Auction is simply an online auction event, it’s not a substitute for proper sourcing project management

I follow the space closely and not a month goes by where I don’t see an article on how Company XYZ is now refusing to participate in online auctions. When you dig down, this is because they had a horrible experience. When you dig deeper still, you find out it is typically either because Company ABC simply threw an auction tool at the supplier and told they had to bid through the tool or lose all their business or Company ABC threw up an auction tool and said they’d award to the lowest bidder but ended up going with a different supplier, usually the incumbent, after the auction closed.

I find this appalling, because e-Auctions, like e-RFX, are not only a great time saver, but a great way to bring parties together from around the globe and allow them to participate in an e-Sourcing event that, when run right, is more transparent, educational, and profitable for all parties concerned than traditional methods of sourcing where you get bids by phone and fax until you find three bids you like and then meet in a room to “negotiate” until a deal is struck with a winner. (And I use the term “negotiate” loosely because old style purchasing methods usually boil down to the party with the most leverage beating up the party with the least leverage.) But this is only true if the event is run right. This takes proper project planning and management. Tools can facilitate the process, but they can’t replace it.

4. Decision Optimization is for everyone, not just for math geeks

I’ll admit this is my own personal bandwagon, but having seen savings of over 40% and ROIs of over 400 on a number of projects, and average savings in the 10% to 20% range and average ROIs of 5X to 10X or more, I think I have a good reason for riding it. Despite the fact that true self-service decision optimization for sourcing has now been around for almost a decade, it’s still the “black sheep” that almost no one uses — and it’s a real shame because now is the time you need it most. Furthermore, the new tools coming out of the leading providers are a lot more usable than the first generation tools and can be easily used by any college graduate who can build a cost model and specify some business constraints. In other words, if you have the pre-requisites for strategic sourcing, you can use these tools to save time, to save money, and make better, more informed, decisions.

5. Contract Management is just a new name for document management with integrated monitoring, it’s not a replacement for contract managers

Lately I’ve noticed how contract management is coming into vogue. And while that’s a good thing, it’s important to understand what contract management is and isn’t because it seems that some vendors, and some publications, are promoting the new offerings as the latest and greatest tools to solve all your contract woes when the reality is that these tools are nothing more than document management tools with monitors and alerts. I won’t deny the importance of having a good contract management tool that can monitor expiration dates, contract pricing, and, most importantly, invoiced pricing against contracted rates, but these tools, even if they contain sophisticated contract creation capabilities, can’t replace a contract expert, a master negotiator, or a good spend analysis tool that can uncover devious work-arounds by less-than-reputable vendors looking for a way to make back that buck they gave up in negotiations. (For example, I’ve talked to a number of consultants who told me how they found that some office supply management vendors regularly changed SKUs to bill you twice as much for that pen as it’s really worth.)

6. e-Procurement is tactical, and not a substitute for e-Sourcing

There’s still a lot of confusion in the marketplace between what is e-Procurement (and how it relates to P2P, EIPP, and the other new acronyms old players are coining to differentiate their new, streamlined, offering) and what is e-Sourcing, even though it should be fairly clear cut (as I attempted to outline in this post on why it’s sourcing and procurement). A few of the e-Procurement vendors are even claiming that you don’t need sourcing at all if you use the wisdom of crowds (which is not the case because there’s a big difference between a great deal on a commodity office supply and a great deal on raw cocoa or custom circuit boards, which are not commodities). Sourcing is the strategic part of the purchasing cycle, procurement is the tactical. You need both, and one is not a substitute for the other.

7. It’s not what you know, it’s what you can learn

Plain and simple,

  • it doesn’t matter if you’ve been doing it that way for 20 years if it’s not optimal,
  • shift happens, and
  • whatever happens, the world of tomorrow will not be the world of today.

You have to keep learning. That’s why this blog is here.

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Vinnie Mirchandani on “The Costs of Software Renewal”

Today’s guest post is from Vinnie Mirchandani of Deal Architect and New Florence. New Renaissance. Vinnie, a founding member of the Enterprise Advocates, is a tireless advocate of trends and technologies that can help buyers get more for less.

Ray Wang gives us a timely reminder that “Labor Day (US & Canadian Holiday) traditionally marks the end of summer BBQ’s, the beginning of the fall conference season, and yes, the time to begin a review of your software maintenance contacts that expire at the end of the year.”

I would say start with that — and then keep going. Take a look at all of your contracts that renew through the end of 2010.

Several good reasons to this include:

  • Establishment of a savings target on the total maintenance spend for 2010.
    Have your staff focus on every software contract, especially those that have been “auto-renewed” for years now because they were “small” and fell under attention thresholds. If you make the overall target part of a compensation plan for key IT and procurement staff, you’ll quickly find that Thar’s gold in them yellowing software contract files.
  • Multi-year maintenance deals which looked good when signed may now be overpriced.
    Current market trends are driving the cost of maintenance down, especially through third party services. Don’t assume they cannot be re-opened. (See Marc Freeman’s tips for “renegotiating with integrity”.)
  • If you don’t start now, you might not finish the renegotiations in time.
    Don’t overestimate the ability of your team to get organized — or underestimate the ability of the vendor team to stall — beyond the end of the year. If maintenance expires, and something goes wrong, you could be at the vendor’s mercy in renegotiations. Formally document your new process and let the vendor know next year will be different. Furthermore, be sure to allow 6 months for the renewal negotiation next year.
  • Even if you are looking to migrate, you will still need incumbent vendor support until the cut-over occurs.
    This holds true whether you are looking to migrate away from the incumbent vendor to SaaS, or to third party maintenance, or to do-it-yourself support (and readers of Deal Architect will know I am a broken record on the subject of considering all of these options). This will likely push you into 2010 planning and funding.

So, use Ray’s call for intensity over the next 3 months and build momentum for another 12 months. The payback will be huge — software maintenance continues to be one of the items on the IT menu with the most “empty calories“.

Thanks, Vinnie!

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