Category Archives: contract management

the doctor Exposes The Elephants In The Room

This is a continuation of the doctor wonders why the elephants in the room are often so hard to see where I expose the elephants hiding behind the couch, the lamp, and the projection screen. In my last post, I exposed you to the optimization elephants, the EIPP elephants, and the spend analysis elephants that were hiding behind the blinds. In this post I’m going to expose you to the supplier enablement elephants, the contract management elephants, and the hidden cost elephants.

The supplier enablement elephants are “catalog management”, (traditional) “supplier network”, “e-Document Management”, and “supplier portal”. Despite grandiose claims, not one of these solutions is the be-all end-all supplier enablement cure … and not one is even guaranteed to “enable” your supplier at all! One definition of “enable” is “to make able”. Another is “to make possible”. My favorite is “to make easy”.

Just because you’re giving your supplier a way to interact with you, doesn’t mean you’re “enabling” them. They already have a way to interact with you – it’s called old-fashioned telephone and old-fashioned fax machine. What they need is a better way to interact with you – that works for them. A catalog management solution isn’t enabling them if they have to send all their data to a third party and then double check that the third party actually entered all the data correctly. A supplier network isn’t enabling them if it isn’t compatible with their systems. e-Document management solutions aren’t worth a can of beans if they can only be used by a few individuals or if document location and access takes just as much work as it does to walk down the hall to the filing cabinet or get a clerk to get the document for you. And “portals” aren’t very helpful if it forces the supplier to re-key in a 100 line invoice. The fact of the matter is that most of the “supplier enablement” solutions out there today are not enabling your suppliers at all – they’re enabling you. That’s a big difference between what’s promised and what’s delivered. If that’s all you care about, then go buy whatever solution tickles your fancy. Just be clear on what you’re buying!

The big contract management elephants are called “repository” and “compliance”. Simply having all of your contracts in one place is not as great as it sounds. You can do that today without a contract management system at all – it’s called “central filing”. Simply enforce that every time a contract is signed the person responsible immediately sends a copy to central filing that files it, in duplicate, on-site and off-site and you have a contract management solution that requires zero investment in software. (How do you enforce this? It’s called the “three strikes and you’re fired” policy. After every contract is signed, you call central filing three days later. If they haven’t received a copy, the employee responsible for filing gets a strike. After the third strike, they get fired. It will be surprisingly effective after a senior employee gets fired.) Of course, you could have to wait a few days every time you need to reference a contract.

A “contract management” solution with a central contract repository will thus only be useful if its accessible by everyone (and you definitely don’t want to pay by the seat) and easily searchable (with indexes on meta-data and the contracts in their entirety) – otherwise, it’s not much better than “central filing”. Furthermore, contracts are only valuable if purchases are made against them at the negotiated rates. Thus, not only should it be easy to determine if a contract exists for a specific item, but it should be easy to determine the agreed upon rate for that item, extract it, and get it into your e-Procurement system.

The hidden cost elephants come in many varieties, such as “required upgrade”, “service fees”, and “implementation consulting”, but the most dreadful is “too-good-to-be-true discount”, as he’s always accompanied by a few, close friends. There’s no such thing as a 50% + discount in enterprise software, and any vendor that comes back and says they can give you a discount of 75% off of the original quote is making the old “we’ll gouge them later” play. They know that once you’ve spent many times your initial investment getting the software installed and configured, and your user base trained, it’ll be too late to turn back and that’s when you start getting hit with “service fees” and “maintenance fees” and “upgrade fees” because you bought the starter edition, but the features and functions you really need to be efficient are in the “regular edition”. It should be obvious that this is not a vendor you want to deal with, because if the vendor really could afford to sell at a 75% discount and remain profitable, then they were trying to screw you up front.

The reality is that traditional, installed, enterprise software shops have high overheads. There’s a reason their software costs hundreds of thousands, if not millions, of dollars. It’s because they literally can’t afford to sell it for much less and stay profitable because they need large teams of people to install, maintain, and support their customers as each instance has to be upgraded and patched separately. They also need large teams of enterprise sales people to continually pound the pavement to bring in enough software and service deals to keep these large implementation and support teams busy. Then they need lots of expensive office space to house all these people. And so on. (Now I’m not saying that enterprise software isn’t worth hundreds of thousands, or millions of dollars – as long as the ROI is there, some of it is. I’m specifically saying that, whether or not their software is worth that much, chances are the traditional enterprise software vendor cannot afford to sell for less than that and remain profitable – and if they claim they can, that should set off big warning bells!)

Integrating Contract Management and Spend Analysis

Today I’d like to welcome back Eric Strovink of BIQ [acquired by Opera Solutions, rebranded ElectrifAI] to Sourcing Innovation. In this post, Eric tackles the contract management – spend analysis integration issue that the sales and marketing representatives of a number of suite vendors often make a lot of fuss about.

If your company is like most, your contracts are a hodge-podge of dense language resulting from hundreds of negotiations, whether you have a Contract Management (CM) system or not. If you already have a CM system, chances are good that most of your contracts aren’t written with the templates and standard language that some of them offer. In fact, most companies use CM systems simply to organize existing unstructured contracts for better searching, reporting, accessibility, and tracking – with the promise, in some CM systems, of proactive alerts.

So when an e-sourcing vendor claims to “integrate” Contract Management with Spend Analysis, exactly what does this mean? Well, as it turns out, it isn’t even necessary to have a CM system in order to integrate your contracts into your Spend Analysis (SA) system.

Let’s imagine that there’s a stack of contracts on the corner of your desk. The “stack” can be a “virtual” stack that’s held in a CM system, or it can be a physical stack of documents; it’s not important which. Each contract represents an ability to buy a commodity or a group of commodities from a specific vendor, over a specific period of time, perhaps additionally limited to a geographical region or a business unit.

Let’s walk through the process of integrating a contract into the SA system.

1) In the SA system, we create a data dimension called “Contract.” It is a simple list of contract names or other identifying information. An entry is defined for each of the contracts in our stack.

2) Using the SA system’s mapping rules, we map potential spending to each contract in turn. The spending on a contract is typically a function of Supplier, Date Range, and Commodity. For example, if contract C174-KELLY was for temp labor, and it was valid between February 2001 and October 2001, and it was with Kelly Services, then we map the combination of

Commodity

Time

Vendor

to the contract:

Mapping

After applying this rule, if we then filter (“drill”) the SA system on the HR>Recruiting>Temps commodity, we see these amounts in the Contract dimension:

Contract

Does this mean that all of the 95,996 Kelly spending was on contract? Absolutely not, since we cannot know (1) if Kelly charged us the correct contract price, or (2) whether someone used Kelly without realizing that we had a contract, or (3) whether in fact anyone ever used the Kelly contract at all when doing business with Kelly. Which is why talking about “compliance” at this level of analysis is silly. But we do know, if we’ve entered all our contracts this way, that the “Other” spending was definitely not on contract. That’s valuable information, and it’s better than half-measures to find bypass spend, such as a “preferred vendor” dimension.

Now, what was the difficult part of the above? Well, it was figuring out what “Commodity” the contract was for, from the perspective of the SA system. Building the Contract dimension is easy (perhaps a vendor’s “integration” logic performed this few minutes of work for you) – but building the rule that maps the contract into the spend cube requires reading the contract and deciding what SA commodity should be referenced. The final work to add the appropriate rule to the SA system? 20 seconds, tops.

Bottom line: It’s easy to integrate contracts information into your SA system. And, with some SA systems, you can embed an HTML link to the contract document itself, directly from the Contracts dimension, to establish a useful reverse linkage.

All without a CM system at all!

Nextance: Next Generation Contract Management

In our last post, we tackled the subject of Enterprise Contract (Lifecycle) Management. In this post, we are going to discuss Nextance (acquired by Versata Enterprises) – one of the more innovative players in the contract management space and one of the few players trying to tackle the breadth and depth of Enterprise Contract Management. With the recent release of their new Proposal Management Software, Nextance is extending their enterprise footprint – which is quite respectable. This module complements their contract authoring, contract management, and business management modules which provide solutions for sales, procurement, legal, and intellectual property.

Nextance, which is bound to have some cool new announcements and campaigns in the near future (since July starts their fiscal year), recognizes that there is a large gap between contracts and financial processes in many companies, and specifically between contract creation and revenue tracking, and is endeavoring to close that gap. Its contract management solution allows you to define event triggers around milestones, orders, and invoices for compliance purposes and its business management solution allows you to determine all of your contractual spend for the current or coming quarter.

That’s why Nextance is currently focussed on contract lifetime value optimization. Most companies have significant value locked up in their contracts, and without the tools to track, manage, and extract the value, it will go untapped. In order to obtain the savings you negotiated in a supplier contract, you need to make sure you’re paying the contracted rates and not a penny more. In order to keep your profit levels up, you need to insure that your customers are paying you at contracted rates, and not at an unauthorized discount. In order to maximize the value of your IP, you need to be able to keep on top of the IP assets you have and effectively market and license the technology.

However, the greatest benefit a well-defined and well-managed contract can provide is risk mitigation. If you’re competing in an open marketplace, you can usually get a good price – especially if your supplier knows you can switch (or you threaten to). If supply exceeds demand, you don’t have to worry about supply availability. If you have a relationship built on trust and collaboration, chances are you’ll never need to refer back to the contract to settle a debate. But if you’re in a closed marketplace, if demand exceeds supply, or if there is the potential for distrust on either end of the relationship, then risk becomes an issue – and the way to prevent against it is to mitigate those risks up front in a contract.

And now that Nextance tackles pretty much every major business function except HR, and handles the contract process from the proposal stage all they way through to active compliance management, they are in a prime position to start tackling contract-based risk management. And when you factor in their strong XML foundations, Microsoft Word integration, advanced search, and strong reporting capability, it becomes a solid foundation for building contracts that tackle risk and determining whether or not your current contracts leave you exposed to newly identified risks.

And considering that most of Nextance’s implementations are large deployments throughout multiple departments, if not the entire enterprise, on a national, international, or global scale with thousands of users, and in some cases hundreds of thousands and users, you know they can support the scalability needed to capture all of the information needed to make risk mining a possibility. There are very few other companies that can claim the size and breadth of the deployments they have and it should be interesting to see how they fare against the other niche best-of-breed vendors, such as the Emptoris (acquired by IBM, sunset in 2017) Dicarta solution, iMany (acquired by LLR Partners), and Upside Software (acquired by SciQuest, rebranded Jaggaer). I think that they’ll definitely be a very interesting company to watch this year and I am a little anxious to see what they announce first.

Enterprise Contract Management

Contract Management (CM), sometimes known as Contract Lifecycle Management (CLM), can be simply defined as the management of contracts made with customers, vendors, or employees. (Wikipedia) From procurement’s perspective, contract management is the process of tracking contracts to determine who you should be ordering from, when, and at what price;

and ensuring that your suppliers are adhering to the agreed upon terms. From a legal perspective, contract management is the process of ensuring that you are using standard terms, that risks are mitigated, and that contracts are in place for at least all key relationships. From a sales perspective, contract management is the process of dotting the i’s, crossing the t’s, and making sure payment terms and dates are clearly specified.

In my first post on contract management, I overviewed some basic features of a C(L)M system, including searchable centralized contract repository, collaborative capabilities, workflow capabilities, monitors, alerts, reporting, and template and clause-based contract creation capabilities. In my second post, I noted that Enterprise Contract (Lifecycle) Management (EC(L)M) offers advanced features beyond basic contract tracking, including collaborative capabilities, workflow capabilities, monitors, alerts, reporting, and template and clause-based contract creation capabilities.

However, I feel I’ve yet to capture the essence of Enterprise Contract Management. An Enterprise Contract (Lifecycle) Management solution is one that captures the holistic view of contract management from the enterprise perspective. It’s a solution that lets you do full Contract Information Management (CIM). Just like a true Supplier Information Management (SIM) solution lets you capture, manage, query, and create initiatives around your supplier information, a Contract Information Management (CIM) solution lets you capture, manage, query, and create initiatives around your contracts and all of the information that pertains to them.

With a true Enterprise Contract (Lifecycle) Management solution, you’re not only managing your contracts, but you’re managing the information that is within the contracts and related to the contracts. It’s being able to not only find the contract for the part you need, but share that information with your sourcing and procurement systems for automated compliance verification of invoices. It’s about being able to not only create standard terms and conditions in your contract templates but being able to annotate them with the reasons therefore. It’s about being able to determine not only what contracts are about to expire, but what risks you are open to with respect to your current contract base with respect to liability, supply stability, and corporate social responsibility. It’s about being able to drill down from a supplier contract into relevant supplier data and performance metrics to determine compliance. It’s about being able to drill down from your customer contracts to your delivery information to determine delivery statistics. It’s about being able to determine whether or not you are violating any labor regulations with respect to your temporary labor or out of compliance with International Labor Organization standards or Corporate Social Responsibility policies. Its about being able to truly manage your operations off of your contracts, and not just about being able to determine compliance and performance after the fact. After all, you can’t be defined by your contracts if you cannot effectively execute against them.

In our next post, we’ll examine Nextance (acquired by Versata Enterprises) one of the pioneers in the Enterprise Contract Management movement.

Procurement Contract Risk Management

As pointed out by JP Massin in his Strategic Sourcing Europe [WayBackMachine] blog, APICS and Protiviti recently released a study on “Procurement Contract Risk Management”.

As noted by JP Massin, the conclusion is that a large proportion of organizations need to improve the management of their procurement contract risks and opportunities. And this seems to hold true across the board, for direct and indirect procurement alike.

The study does a great job of pointing out many types of procurement contracts management risks you should be aware of:

  • End-customer satisfaction risk
  • Authority limit risk
  • Regulatory non-compliance risk
  • Information security, access, and privacy risk
  • Terms and Conditions risk
  • Reputation risk
  • Environment, health, and safety risk
  • Inventory and obsolescence risk
  • Off-balance sheet inventory liability risk
  • Automatic renewals risk
  • Contractual and legal risk
  • Employee/third-party fraud risk
  • Outsourcing risk
  • Efficiency risk

It also does a great job of pointing out some key capabilities a company will need to tackle these risks:

  • Strategy and Policy
  • Processes, Practices, and Procedures
  • Organization and People
  • Contracts Management Process
  • Information Methodologies / Tools
  • Systems and Data

And provides some great recommendations, including:

  • Never underestimate the importance of having a clear process vision, and well-designed and defined objectives, strategies, and plans for the process.
  • No matter how well the process is designed, it cannot be effective without the right people and structure.
  • It is essential that technology be leveraged.

I would highly recommend downloading a copy of the “Procurement Contract Risk Management” study and reviewing it at your leisure to make sure you understand what the contract risks are, what the key capabilities you will need to mitigate the risks are, and where the major problem areas are in most companies so that you can insure they are not in yours.