Daily Archives: June 16, 2006

Contract Management

Monday we defined a basic strategic sourcing process, indicated there were five critical process driven phases that can be greatly enhanced by software solutions, and indicated that we would spend one day discussing each of these technologies this week.  Monday we discussed spend management and spend analysis, Tuesday we discussed RFX, Wednesday we discussed auctions, and Thursday we discussed decision optimization, a personal passion (and expertise).  Today we are going to discuss the last critical technology in the basic strategic sourcing cycle – Contract (Lifecycle) Management – C(L)M.

Whereas yesterday’s topic of Decision Optimization is my personal favorite, I have to confess that contract management is probably my least favorite.  After all, all the fun takes place leading up to the award.  Once the award is made, all that’s left to do is execute it, track it, enforce compliance, and ensure performance – the boring tactical elements come into play big time.

However, this is the very reason that contract management should not be overlooked!  I’ve read numerous studies, including some from Aberdeen, that state that, on-average, 60% or more of negotiated savings are never captured in practice?  Why?  There are a number of reasons, but most of the costly ones come from incorrect orders and lost discounts and rebates, due to poor contract management and compliance tracking. 

Without a good contract management system in place that tells a buyer who she should be ordering from, when, and for what location, she is likely to simply reorder from the last supplier used when supply gets low.  If it turns out that this is the supplier that was only supposed to be used as an overflow supplier, then chances are the costs are much higher then the primary supplier with whom discounts were negotiated.  Furthermore, many suppliers offer their volume discounts in the form of rebates, which buyers have to apply for.  If you don’t have a good compliance-based contract management system in place to track your purchases, you will probably not realize when you qualify for rebates and these applications will probably not be collected in the long run.

Furthermore, today’s C(L)M systems are quite powerful and offer a number of advanced features above and beyond just contract tracking.  These features will generally include a searchable centralized contract repository, collaborative capabilities, workflow capabilities, monitors, alerts, reporting, and even template and clause-based contract creation capabilities.

Of course, as with every other technology we’ve discussed this week, I think there is still some room for improvement.  I think one of the areas of improvement will be in the area of business intelligence, specially in the area of automatic recognition of contracting patterns.  These systems will not only point out What types of contracts and clauses are usually used for a certain type of supplier and / or commodity, but what types of contracts and clauses should be considered given the financial status of the supplier, historical performance, and commodity specifics.  They will automatically draft starting contracts for you and indicate when you are missing important clauses like IP protection or delivery terms and when recommended updates are inconsistent with your usual practices.

This concludes sourcing week and our introduction to the basic strategic sourcing processes where technology has a large role to play. I’m sure many of you are already familiar with these steps, but I wanted a solid foundation on which to kick off the blog and lay the seeds of future innovation.  Next week we’ll kick it up a notch and discuss some innovative practices of leading procurement centers and additional innovative practices that the future may hold.