Growing complexity and business uncertainty has raised the profile of contracts and contract management as a key business discipline, yet management typically has limited insight of the risks or performance of their contract portfolio.
Today’s ethical business needs greater visibility of its obligations, its performance and its supply ecosystem. Is technology the answer – and, if so, what technologies should be used?
Every business depends on its ability to structure and manage external relationships and, in most instances, this involves the use of contracts. Multiple factors are making business relationships more complicated, leading to growing interest in the role that contract lifecycle management can play. Regulatory and reputational risk, compliance, cost reduction and revenue realisation – each of these depends on the overall quality and integrity of the contracting process. Yet today, senior management typically has little insight into their contract portfolio, unless or until things go wrong. Does contract lifecycle management (CLM) technology offer an answer?
The world of technology is changing at a dizzying pace and there are certainly many developments starting to impact the field of contract and commercial management. Terms such as digitisation, artificial intelligence, cognitive systems, data analytics, smart contracting, computable contracts, blockchain – these and more – being discussed and promoted for their impact on how we undertake acquisition, form or negotiate contracts and manage trading relationships. But how real are they? How relevant are they? And which, if any, should we be thinking of adopting now?
The situation today
Before we venture too far into the practicality of these emerging tools and systems, we must recognise that few organisations are starting from a blank sheet. While there is currently quite limited software supporting contract and commercial management specifically, that doesn’t mean that there isn’t software impacting it and the way it is done. Most large organisations have implemented some form of enterprise software, most commonly Oracle and SAP. Many on the buy side have expanded these with ‘procure to pay’ systems, that may be modules from their core provider, or from other suppliers, but integrated into the enterprise system.
The challenge with all these systems is that they were designed to drive internal standardisation and efficiency. They typically presume that the implementing organisation has the market power to impose its standard terms and policies onto their trading partners. They were also designed in an era when most transactions were for products; they assumed an overwhelming proportion of contracts would be for commodities and that high levels of standardisation are achievable. These assumptions have also been reflected in the resourcing policies of major organisations, where large groups in the workforce were replaced by automated systems, removing the ability to operate flexibly and eliminating key areas of knowledge or experience. Contract administration was one of those areas.
In reality, contract relationships are diverse in their nature and market volatility requires far more agility than ERP systems allow. Contracts – and their associated relationships – are not ‘one size fits all’, so current systems often operate as a straitjacket, not a business value enabler. The greater flexibility demanded by today’s uncertain markets is increasingly enabled by emerging technologies. This offers executives the chance to think beyond the enterprise and consider how best to facilitate greater efficiency and effectiveness in their market relationships – essentially, to consider the technologies that enable relationship resource planning, or RRP. Therefore, it is right, indeed essential, to explore incremental technologies to support the contract lifecycle.
The contracting environment
The last 25 years has seen three key trends that have elevated the importance of contracting. The first of these have been globalisation of trade which has led to the breaking down of traditional loyalties and relationships, the lengthening of supply chains and the creation of incremental risks. Second has been the extent of outsourcing, resulting in an average 60-65 per cent of corporate revenues typically being spent on external sources of supply. Third is the extent to which business-to-business trade has undergone a steady move away from products towards services and solutions (see Figure 1, above). While the change has been gradual, it is of major significance; it represents a shift from managing delivery of tangible goods to managing the longer term performance of intangible services. This fundamentally alters the nature of the contract and the importance of effective contract management.
IACCM capability assessments frequently reveal that organisations have not adjusted to shifting market conditions. Many lack the right contract templates or models, the staff to understand and implement exceptions and the resources to manage the results. A lack of meaningful performance data has resulted in the blind and rigid adoption of ‘compliance’, regardless of whether it is actually operating in the business interest.
So, where next?
To understand the issues and then consider the role of emerging technology, we must first appreciate the scope of the activities we are discussing and how these vary between different forms of trading relationship. The graphic below illustrates a typical transactional lifecycle (See Figure 2, below).
When buying or selling a commodity, the process is relatively simple and the objective of technology should be to further streamline sales or procurement activities and largely eliminate human resources, for example through robotic process automation (RPA). For many businesses, commodities represent a relatively high proportion of transactions and it makes sense to persist with current investments such as ‘procure to pay’ solutions from established software vendors. These can be further enhanced by considering digitisation – for example, the introduction of electronic contracts, e-signatures and automated review and approval processes, together with enhanced data analytics to improve the quality and accuracy of oversight and reporting. The goal should be to create more agile and transparent systems and procedures, removing identified points of tension or delay or quality shortfalls – for example in volume or requirements generation, performance analysis or ensuring use of the right terms and conditions. A standard ERP module may be adequate for this, though many organisations supplement that software with analytics tools, such as those offered by Seal Software or e-signature modules that come from a variety of vendors, with DocuSign the current leader. The most efficient are embedding ‘intelligent questions’ into the front end of their systems to ensure requirements are captured and appropriate relationships and terms are formed to support them.
For many industries, in the post-award environment there may be benefit in developing robust tracking systems, perhaps based on blockchain, such as those put in place by Walmart and major logistics suppliers to ensure increased visibility and tracking, including verification of the provenance of goods. But while this approach may handle high-volume transactional business, it does not address the issues associated with lower volume, high-value contracts that, for many, represent the majority of spend and, perhaps, also revenue – as well as being a major source of business risk. Therefore, it is in this context that we most urgently need to consider both additional systems and emerging technologies.
What questions should we ask?
Procure-to-pay systems typically provide great value in automating simple acquisitions, but they rarely offer a coherent contract management application, nor do they address sales contracts. It is essential to think in terms of the nature of the relationships that the business needs or offers and for each of these:
■ The extent and nature of risk
■ The need for resources to maintain manual interventions and/or
■ The need and justification for complementary tools and systems
Considerations should include an understanding of volume, potential severity of incidents and the duration of need. For example, how many of your contracts contain multiple, interdependent obligations? What is the volume of statements of work or service level agreements to process and manage? Factors such as this may generate the need for a system with powerful obligation extraction and tracking capabilities; or perhaps an AI system with natural language processing (NLP) tools that can support drafting and test for high-risk language; or a blockchain solution that ensures integrity of records and can drive automated performance management through a ‘smart contract’.
In general, a high volume of services or solutions contracts is likely to justify the adoption of a supporting technology, which could range from a stand-alone contract lifecycle management (CLM) system, to a dedicated artificial intelligence system that uses NLP to support document standardisation, analysis and production (for example, being used in General Motors to support the production and review of several thousand contracts each week).
It will most likely take many years before more complex and high-profile agreements for outsourcing or major programs (where it may be critical to oversee multiple interdependent relationships) are within the capabilities of an ERP-based system. Therefore, long-term manual interventions will be needed unless an alternative dedicated system is acquired, especially to cover post-award performance.
Based on contract portfolio analysis, some organisations conclude that it is wiser to acquire a dedicated CLM solution rather than manage the work-arounds demanded by an ERP-based P2P system. Such a decision may be justified, but it needs careful assessment, not only related to integration, but also whether there is an appetite for driving organisational adoption. Many CLM systems have struggled to deliver expected benefits. However, they continue to develop and there are significant advances in ‘ease of use’.
Making sense of the options
Having recognised the need for a CLM system, the next big challenge is ‘which one?’ There is a plethora of choice in the market – more than 200 options, some offering full life-cycle support, others being more niche in their capabilities. Making sense of these
is challenging, especially since most are offered by relatively small companies and there is significant market consolidation. To assist in identifying and reviewing the best options, IACCM has created an online tool that is free to use which can be found at www.iaccm.com/resources/contract-management-software/
Broadly, solutions can be broken into three areas – those that provide content, such as contract templates, precedent and general guidance; those that operate as efficiency tools, primarily contract lifecycle management systems which include those from the major ERP providers, but also now starting to include blockchain; and, thirdly, those that provide analytics, in some cases using AI and cognitive capabilities. Many of the systems offer a little of each of these capabilities, but none currently does so in a comprehensive way.
Tackling other weaknesses
Another way to explore the relevance and value of contract management systems is to explore current process weaknesses. A major reason why executives are often unaware of contract value leakage is the fact that it is rarely viewed as an integrated process with an accountable owner. Activities are typically fragmented and IACCM research has shown that this is the primary cause for underlying performance risk and value erosion. The chart below shows the most frequent issues and their cumulative impact on financial performance. (See Figure 3, below.)
New technology potentially plugs some of these gaps, but only if its introduction is accompanied by 1) process review and redesign and 2) integration with other systems, to ensure required data flows are achieved. Without these actions, there is a high probability of joining those with failed or disappointing implementations.
Conclusion
In summary, there can be little question that we are on the brink of dynamic changes in procurement and contracting processes and methods. Executives need to consider how new technologies can help them escape the constraints imposed by ERP systems and focus their minds on RRP – relationship resource planning. This offers remarkable opportunities to cut costs and improve business integrity.
The role and required skills of human interfaces will change dramatically, focussing increasingly on data analysis and strategic initiatives that drive improved relationships, greater value and superior results. Senior management is right to demand better performance and risk management from its contracts, but these benefits will be achieved only if there is executive sponsorship of the overall project and an acceptance that software alone will not be sufficient.
