How a Contract Management System Creates Value
Procurement organizations commonly deploy eProcurement tools for the RFx functionality. They’re often thinking about streamlining their sourcing process or standardizing response formats to facilitate rapid analysis and improve record keeping.
A surprising number of companies overlook Contract Management, which on the surface lacks the tangible benefit that eProcurement tools enjoy. Yet Contract Management – often offered as part of the package when eSourcing tools are purchased – provides the kinds of value that CFOs and internal audit groups appreciate.
- Automated alerts and reports on contract and supplier certification expiration.Setting triggers that give an alert before contracts are due for renewal avoids those “gotcha” moments when a supplier walks in with a new agreement and vague threats about shutting off service because a contract is about to expire. When multiple suppliers are working on premise, using a contract management tool to organize Certificates of Insurance provides an extra measure of safety and mitigates liability. For example, using the alert trigger set at 30 days advance notice allows plenty of time to get updated COIs.
- Captures payment terms to support early payment discounts or improve cash flow.When a CFO asks how quickly vendors are getting paid, there’s usually a stock answer: 60 days, 30 days, whatever the standard is for your firm. And it doesn’t always conform to the number in the firm’s contracts. During a down cycle, payment terms are an area typically tightened up. Having that data tagged in a contract summary is a great facilitator for determining what action you can take—and a lot faster than slugging your way through a pile of paper.
- Provides visibility to supplier rationalization options. If you’re uploading contracts for four different office supply vendors, you shouldn’t be. Organizing contracts in a single database allows procurement professionals to see where duplicate suppliers are being used, and thus provides an opportunity to improve leverage by consolidating suppliers.
- Helps the accrual process by providing visibility to contractual commitments.In an ideal world, you’ve got a global ERP system helping to identify accruals. But in a less ideal environment, a robust contract management process can give a pretty good idea of the long-term commitments that are out there.
- Assists in assessing compliance to signatory policy. I’ve seen shocking disparities in the signatures on contracts – big differences between what a company’s authorized signature hierarchy allowed and what was actually happening. For example, it can be tempting for a well-intentioned meeting planner with low or no signing authority to sign that hotel agreement anyway, in the interests of moving quickly. There is a natural audit process that occurs when contracts are entered into a management tool. Running reports on contract owners or signatories is a way to check that signatures on contracts belong to the people who should be signing. To be sure, it is after the fact, but if employees know that there is a signature check taking place they will be less inclined to ignore the rules.
- Improved negotiation prep.How many times do you start getting ready to negotiate a contract renewal with a frantic search for the actual document? How often have you had to ultimately go back to the supplier to get the paperwork so you can figure out the starting point? This is a bad idea, and sends the wrong message to your vendor partners. Having all documents, addendums, etc., at hand gives you the opportunity to prepare the right way. Contract management tools can provide immediate access to contracts across all departments in your organization.
It takes discipline to get this right. There needs to be a consistent workflow and some rigor around making sure that contracts are captured and placed in the repository the right way—that the right searchable elements are identified and tagged correctly. But once the system is set up, your company gains all the control elements listed above. And the procurement team gets a to-do list for years to come.
* Read this article featuring Gartner research to learn about the complete source-to-pay process, the importance of collaboration, and how to define a shared vision and goals for your procurement and legal needs with an enterprise approach to strategic sourcing and contract management.