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The Case for Contract Management: Why You Should Get Started Today

by Emily Rakowski | SAPinsider

April 1, 2011

How well-versed are you in the three key areas of contract lifecycle management (CLM)? Take this quick quiz to determine your competency regarding contract visibility, contract creation/authoring, and contract performance management—and understand whether a CLM solution would benefit your organization.
 

Without proper insight into its contracts, a company cannot effectively control its top or bottom line. Nor can it easily access the data needed to comply with legal and regulatory requirements. To get a handle on this critical business information, an organization should focus on three key areas of contract lifecycle management (CLM): contract visibility, contract creation/authoring, and contract performance management.

How well-versed are you in these areas? Take this quick quiz to determine your contract competency and understand whether a CLM solution would benefit your organization.

1. Contract Visibility

Think of a contract with which you were recently involved. Can you answer these questions?

  • Where is the signed contract, as well as its related attachments?
  • How many contracts does your company have with that third party? Are any redundant?
  • What business units and regions should be using the contract?
  • If it is a supplier contract, can you identify alternative suppliers of the same product or service?
  • When does the contract expire, and when does it need to be renewed or renegotiated?

If you find it challenging to answer these questions, you’re not alone. A lack of contract visibility plagues most companies that have not implemented a CLM solution, which can help them maintain an electronic contract repository and make contract information more accessible.

Contract visibility allows employees to proactively manage business relationships. Purchasing managers will know when agreements will expire and can renegotiate those contracts ahead of time. They will also see how much of the company spend is covered by agreements and which spend categories require strategic sourcing activity.

Accounts payable and accounts receivable employees will be able to see agreed-upon payment terms and pricing to match to invoices. Sales executives will understand what customers own, what they should up-sell, and when they should engage on contracts that are approaching expiration. And customer-facing employees will know what they promised to customers and be better able to deliver on those promises.

When considering CLM, companies typically prioritize visibility first — especially if they don’t have technology in place to support this area, or if their CLM process is primarily paper-based.

2. Contract Creation/Authoring

Next, answer these questions about the contract:

  • Where did the contract’s template originate?
  • Did the contract use approved legal language?
  • What process was used to create, negotiate, and finalize the contract?
  • If it is a supplier agreement, does the contract contain agreed-upon terms based on a request for proposal (RFP) process?
  • Who reviewed and approved the final contract?
  • What was the cycle time associated with the contract negotiation process?

These questions may be equally difficult to answer. But a well-implemented, automated contract authoring process can address these issues, as well as decrease legal and regulatory risk, provide a clear audit trail, and enable faster time to value, especially when based on supplier solicitation activities. According to Aberdeen Group, contract creation cycle times can be lowered by 50% on average when using a CLM solution.1

A company should make this area a priority if it is focusing on process controls, its current processes are not aligned, or it has recently experienced significant legal or financial exposure stemming from poorly managed contract content.

3. Contract Performance Management

Finally, how would you answer these questions?

  • What are the agreed-upon milestones or service levels in the contract, and are they being met?
  • How much spend was realized against the contract in the last year?
  • Are employees adhering to this contract?
  • Do your purchase orders and payments reflect contract pricing terms for goods and services?
  • Have any contract performance reviews been conducted, and if so, how did your company or the other party fare?

If you don’t measure and monitor your contracts’ performance, you cannot know whether you’re actually realizing their benefits. Being able to enforce both internal and external compliance to your contracts is the only way to maximize and unlock the identified opportunities. To address performance management, a typical CLM solution includes audit functionality and scorecard/
KPI tracking against a contract, and it enables usage reporting from the back-end system.

Companies typically save this area for last because of the effort involved, but a long-term strategy to support contract performance management is critical to realizing contract value. Some companies may consider it earlier if they recently completed sourcing activities and need to instantiate those contracts to realize savings quickly.

Achieve Your Goals with a CLM Solution

Many companies are implementing a CLM solution to gain insight into these three areas. Some of the KPIs supported by Aberdeen Group show the overall success of best-in-class companies using CLM solutions (see Figure 1).

 

 

   

Best-in-class

   

Industry average

   

Incremental change

Spend under management

   74%    53%   40%

Spend on contract

  69%   50%   38%

Compliance

  88%   43%   105%

Savings leakage

  4%   17%   76%
Figure 1 “Best-in-class” companies — those that are more likely to use a CLM solution — are realizing significant incremental improvements in reaching their CLM goals (Figure 1 source: Aberdeen Group, March 2009)

SAP Contract Lifecycle Management (SAP CLM) offers the functionality necessary for end-to-end management of your critical business agreements. It enables visibility into existing contracts, automates and standardizes new contract creation, and enables enterprise-wide compliance to contract terms. The application provides a central, searchable contract repository; contract workspaces and standard templates; document management tools; a portal for users to access daily tasks and compliance reports; and the ability to integrate contract information into back-end systems.

Companies across various industries use SAP CLM to achieve their specific goals. For example:

  • A major North American insurance provider focused on contract creation, having authors capture Sarbanes-Oxley-related purchase commitment information for its buying agreements. By capturing and automating its Sarbanes-Oxley reporting, the company cut the reporting process time by 90% (from days to minutes).
  • One of the world’s largest media companies authors all new agreements in the CLM system and publishes those agreements in SAP Supplier Relationship Management (SAP SRM) to support compliant purchasing against them.
  • A major IT systems and services provider loaded over 50,000 contracts into a repository to provide global visibility and create a starting point to further identify sourcing opportunities.
  • One of the world’s largest pharmaceutical companies enabled back-end integration on most contract types to ensure that critical agreements would be executed with compliance to contracted pricing and terms.

Standardized contract creation, improved visibility, and proactive performance management contribute to the overall ROI that a CLM solution can provide.

Keys to Success

A successful contract management program calls for managing stakeholders, scope, and momentum. The key is to know your priorities, implement a solution in manageable pieces, and ensure that your most critical company-specific requirements are met. To get started with SAP CLM, please visit www.sap.com/clm.

Emily Rakowski (emily.rakowski@sap.com) is Senior Director of Procurement Solutions Marketing at SAP. In this role, she drives the direction and market awareness for procurement portfolio solutions to ensure customer value and business growth. She brings more than 15 years of experience in high-tech marketing and management consulting to SAP, having held procurement and sourcing-focused roles at Ariba and A.T. Kearney. Emily holds an MBA from the Kellogg Graduate School of Management and a BA in international relations from Stanford University.

1 Aberdeen Group, “Contract Lifecycle Management and the CFO” (March 2007). [back]

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