Enhancing the Contracting Process with a Touch of Technology
Enhancing the Contracting Process with a Touch of Technology “Contracts do indeed play an important role, representing a source of economic value for a business. Yet, 30% to 35% of an organization's contracts underperform. That cost translates to about 9% of annual revenue.� – Tim Cummins, President and CEO of IACCM However, with the advancement in technology, organizations can redesign the existing contracting process, resulting in better collaboration, enhanced data and analysis and raise the over-all value derived from the contracts. This e-book takes a look at the steps that can be followed for better contract management and discusses the value attained by doing so.
Writing contracts by leveraging technology Relying heavily on MS Word to write the contract and emails to collaborate with concerned stake holders often results in an extended time cycle and erroneous contract. Technology, when picked and used correctly, makes the authoring process simple and time- efficient in the following ways: Standardization Use of pre-approved clauses in a format that is consistent with the legal guidelines within the contract templates can lead to having standardized contracts Audit trail Different versions of the contracts, including the Word document with red lines, can be compared side-by-side leading to shorter turnaround time and better accuracy while incorporating changes Integration with MS Word An approval workflow to rectify and validate the contracts according to a pre-defined hierarchy For further reading, refer the whitepaper “Scripting the Contract Story”
Negotiation Negotiation is a tricky art. It often is the reason for closing that proďŹ t-making deal, just like it can be the reason for the higher price we end up paying the supplier. Negotiation is a major part of procurement executive's life. Technology has no active role in helping the executive become a better negotiator. However, tricks & tips, cases of previously successful deals can be stored in a repository which, in turn, can serve as a reference point for future negotiations.
Creating a repository Create dynamic contract repositories that reect operational requirements. Having contracts stored at a centralized location drastically reduces lost contract cases. It can also serve as a library for all the legal clauses and contract templates.
Analyzing contract utilization Contract metrics need to be deďŹ ned to check the effectiveness and utilization of the contracts or the savings accrued. Ensure that the Service Level Agreements are well-deďŹ ned in the contracts and set up processes to measure supplier's Key Performance Indicators by linking contracts to spend in order to establish parameters of measurement, establishing benchmark parameters with regard to peers and industry, and tracking contract performance vis-Ă -vis these benchmarks.
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Tracking contracts Often during negotiation, both parties agree on terms like price escalation and de-escalation clauses based on market parameters like foreign exchange and commodity indices. However, these terms are often forgotten once the contract has been signed. Another very frequent occurrence is the ever-green contract. Procurement executives may miss the renewal date, and so the contract will continue without ever reviewing the supplier's performance.
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Setting a system of alerts and reminders for the speciďŹ c escalator/de-escalator clauses, linked to commodity or forex indices or to the renewal date, will help the procurement team to never miss the milestone events in the contract.
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Value derived from automating contract management Let's try and understand the benefits of contract automation by comparing it with the manual ways of writing and maintaining contracts
Manual
Leveraging technology
Cycle time Largely MS Word docs are used to write contracts and e-mails, back-and-forth to collaborate with different stakeholders for approval and changes. This results in longer time to write the contract.
Contract templates with pre-approved clauses, pre-defined approval work-flow which facilitates editing the contracts based on the input from different stakeholders and side-by-side comparison of different versions help cut down the time required to write contracts and improve the accuracy.
Visibility Lack of visibility in terms of contract utilization and the savings accrued
With contract metrics, organizations can track the performance of the contracts
Vulnerability Word-based contracts are either stored on the personal computers/laptops or shared common drives. This makes the contracts easily accessible.
Contracting technology with strong security features keeps confidential contracts secured from unauthorized use. This can be done by incorporating user or folder-based access.
Maverick spend It is difficult to link contracts with spend when using traditional means to manage them. Thus the chances of maverick spend increases.
Technology enables linking contracts with the organization's spend, reducing maverick spends. As per the Aberdeen study, organizations using contract management systems reduced maverick spend from 22% to 19%
Few tips on Contract Management by IACCM:
1
Watch out for over-commitment – incorrect estimates of contract value, overstatement of capabilities
2
Select contract model and terms that match business goals and drive the right relationship / behaviors
3
Harmonize contract content – avoid conflicts from poorly drafted appendices, statements of work, service level agreements etc.
4
Validate scope / Statement of Work – is it complete, is it realistic, can it be fully defined?
5
Address weaknesses in post-award contract management: Ensure obligations are actively managed, review controls over change management, adequate performance criteria and defined performance management regime, appropriate performance metrics
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Ensure that bid evaluation criteria reflect business need and priorities, including adequately validated technical and commercial requirements
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