Crossing the contractual chasm: using contract management automation to improve organizational relationships
by KEN MIKLOS Ariba Inc
• When developing a business case for contract management automation, don’t forget the positive impact of improved organizational relationships and collaboration.
• Contractual collaborations extend far beyond the functional areas like procurement, sales and contracting groups that traditionally lead contracting efforts, to include other stakeholders and partners within and outside the organization.
• Various capabilities of contract management automation improve these relationships including:
— contract request functions to initiate the contracting process;
— improved collaboration resulting from defined processes and approval workflow; and
— visibility into key dates and milestones to assure compliance with existing terms.
Working together through contracts
What organization couldn’t benefit from working more collaboratively? Team-building exercises, off-site meetings, task forces are all aimed and building better relationships. Does contract management automation provide the ice-breaker to help bridge the chasm between internal groups?
This suggestion may be surprising to some. The word ‘automation’ often has a sterile, impersonal connotation. However, the case of contract management, there are numerous examples where automation enables a new level of visibility and collaboration between once disparate functional groups, such as legal, procurement, sales and IT. In short, contract management automation tools are proving that it’s possible to build and foster relationships with an eye on performing contracting objectives for many organizations.
Building the business case
Research from independent analysts and organizations — such as the IACCM — on the benefits of contract management automation have made the task of building a sound business case for contract management solutions fairly straightforward, taking into account contract types, contract volumes, and organizational scope.
The drivers for contract management automation are many and varied, and usually depend primarily on the most pressing ‘deck fire’ threatening to damage or, in the worst case, sink the ship. A recent joint survey conducted by IACCM and Ariba titled Contract Management Automation: Legal’s Perspective and Roleidentified ‘minimizing risk,’ followed closely by ‘managing sales contracts’ and ‘managing procurement contracts,’ as the three leading reasons behind starting a contract management initiative.
The business case for automating procurement contracting hinges on optimizing and improving compliance with existing contract terms to avoid missed savings opportunities. The Aberdeen Group pegs the cost of poor contract compliance at US$153 billion annually.
Automation of sales contracting processes improves customer relationships and expedites contracting negotiation and cycle times, resulting in revenue increases of between 1 and 2 per cent, according to Aberdeen research.
Meanwhile, programs led by contracting, legal, and finance groups can be shown to have a marked impact on minimizing risks, both regulatory and organizational. In addition to these, improved visibility, process standardization, and performance management capabilities deliver numerous additional benefits, including better contract renewals, realized discounts and rebates, and improvements in resource efficiency.
While these are fairly obvious based on the functional area leading the charge for automation, what many don’t consider is the substantial benefits from the heightened participation of groups such as engineering or customer support, which have traditionally been strangers to the contract area, into the collaborative process of contract management. Just as contracting professionals lament the lack of clear, repeatable processes and guidelines in a contract process, stakeholders throughout the company similarly suffer from the inability to control what gets into the final contract. Through working more collaboratively and strategically, automation often results in better relationships, not only between the functional procurement, sales and contracting groups, but in other areas of the organization which previously had little to no interaction.
The organizational benefits of contract automation
In order to understand how relationships can be improved in traditionally distant areas of the organization, we must first examine the benefits that contract automation delivers.
The first area of the contract lifecycle that automation addresses takes place before the contract comes into existence — the request for a contract. I’ve regularly seen the contract request function to be the most widely-deployed of all contracting functions made available to virtually everyone in the organization, as it can be for any type of agreement — ranging from a complex outsourcing agreement to a standard non-disclosure agreement. Not everyone in the organization, for example, will actively negotiate or sign-off on a customer contract, but anyone with the knowledge of a potential deal can log a contract request in order to align the documents, processes and resources required to draft, negotiate, and execute the contract.
Once submitted, the real need for collaboration is evident. Budget holders, legal, finance, requestors and others must be notified of the request and its details. Subsequently, when the request has been approved, the contract must be vetted and authored. The contract creation process can leverage pre-constructed clauses consisting of approved legal language. These clause libraries broaden and empower the functional areas of the company to create contracts that legal can approve on an exception basis — reviewing only those documents containing non-approved language. As a result, legal can focus on more strategic initiatives.
Negotiation of contractual terms with trading partners according to a pre-defined process can be permitted to include not only those internal stakeholders requiring involvement in the process (often well beyond the functional procurement or sales functional area), but can be extended to strategic suppliers and customers, where necessary, who can be given direct, limited access to the contract management solution, thus expediting contracting cycle times. Stakeholders are notified when and where workflow-driven tasks are required in the process while leaving a trackable, enforceable audit trail of activities.
Once executed, contracts and all associated attachments and documents are stored in an electronic repository that is fully searchable and reportable. Again, interested parties throughout the organization can be notified when commitments and milestones are coming due, as well as when contracts are expiring and are due for renewal. The result is total visibility and management of the contract lifecycle — and possibly a new friend along the way.
These tools allow the contracting process to reach throughout the organization as is necessary. With access to the system, stakeholders beyond the contracting group can have visibility into an expedited, consistent contracting cycle. In fact, an IACCM study found faster cycle times to the tune of six weeks for companies in the top quartile versus 26 weeks for those in the bottom quartile. To further illustrate the value that automation can deliver, 75 per cent of those in the top quartile leveraged contract management automation tools versus 0 per cent of those in the bottom.
Organizational benefits of contract management in action
How does contract management automation benefit organizational relationships in the real world? And how have some peer organizations measured their success? Following, on page 16, are several real-world practical implications based on my experience.
• A state university has made the contract request function available to all personnel and faculty approved to make purchases, resulting in improved visibility for procurement into lead times for all of their indirect purchases.
• A leading high-tech company was able to increase the efficiency of their contract negotiation staff by 30 per cent, largely through better internal collaboration between procurement and functional stakeholders, while increasing sourcing opportunity discovery by 25 per cent.
• A pharmaceutical company decreased its contracting cycle times — this was important due to the limited timeline restrictions on the development of new drugs. Meanwhile, drug development and research teams became better aligned with procurement contracting processes to strengthen the supply chain.
• A leading retailer was required by the federal government to assure that all contracted supplier agreements incorporated consent decree requirements. Leveraging contract authoring, repository and reporting tools, procurement, legal, and finance are assured that the organization is compliant.
• A global auto manufacturer faced logistics issues in moving parts among locations all over the world. A global approach was implemented to customize a contract management system for the company. With complete contract visibility, anyone in the organization can now see language, clauses and pricing parameters anywhere in the world, ensuring consistent data and total contract visibility.
Improving organizational relationships is not a high-ranking objective of contract management automation tools, nor should it be. The entire company circling to engage in a round of ‘Cumbaya’ may be a stretch. However, there are real benefits in this area in addition to improved compliance, faster cycle times that should not be ignored when building your business plan. Think beyond existing organizational barriers that constrain your current contracting processes. Contract management automation can open new doors throughout the organization resulting, in benefits that may surprise you.
Texas Children’s Hospital case study ANGELIA TUCKER Manager, Contracts Administration, Texas Children’s Hospital
Our contract management solution has been most effective and, as a result, Texas Children’s Leadership has recognized and celebrated the value contracts administration brings to the organization. With the development of standard and preferred contract language, visibility to contract workflow, easy access to historical documents, and clear electronic approval guidelines, the Legal department and Contracts Administration agreed to increase Contracts Administration’s negotiation and approval authority. We would not have received the buy-in of the Legal department and Texas Children’s Leadership without the visibility created by our contract management solution.
The ability to report contract metrics has been essential to the buy-in of Texas Children’s Leadership; the proof is in the numbers. Within 12 months of implementation, we received 1021 contract requests, representing transactions in excess of a quarter billion dollars.
Since implementation, we have established a contract review and approval process owner, created a single point of entry for contract initiation and review, created the ability to track contract status throughout the process, developed clear timelines for review, created the ability to retrieve copies of fully-executed contracts, defined dedicated contract specialist roles and drafted standard contract templates and preferred language. These new processes are by no means static. As an organization, we are constantly discussing new and more efficient workflow measures, and with the use of Ariba we can actually tie our production numbers back to illustrate future more efficient workflow processes.
In my years of experience working in Contracts Administration and Compliance, I have never had such a positive and productive working relationship with an in-house counsel department, and I attribute much of that to the automated contract process. The Legal department is able to focus on specific provisions in the contracts, while Contracts Administration is able to focus on daily contract management, including but not limited to RFIs, RFPs, contract negotiation, review, drafting and termination.
Most impressive is that our robust contract management solution has been recognized and heralded by the Joint Commission, which is national hospital accrediting agency. Our ability to quickly search and report on specific clinical agreements on demand during a recent unannounced survey received a great deal of positive feedback from leadership. A prior ‘mock’ Joint Commission survey report stated, ‘This is a best-in-class contracts process; we haven’t seen anything like this — anywhere’. And we’ve only been live for 17 months!