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Driving better fiscal management and revenue recognition with enterprise contract management technologies

Published: 15 Dec 2008 Average Rating: unrated Print
 
This article appeared in Contracting Excellence magazine on 15 Dec 2008 view edition
 

Enterprise contract management technology can play an important role in improving a company’s fiscal management and results, ensuring proper revenue recognition; revenue maximization; and speeding the sales and revenue recognition process.

KEVIN POTTS, Emptoris

By Kevin Potts, Emptoris

Main Points

• CFOs are faced with increasing pressures from compliance to cost controls to revenue recognition.
• Global 2000 companies are increasingly turning to enterprise contract management (ECM) solutions for better contract management and fiscal management.
• Improved contract management can mitigate financial risks, lead to more profitable contracts and speed revenue recognition.

A fast-growing trend in fiscal management is a focus on improving contracting processes and strengthening contracts, and the application of ECM technologies toward these ends. Such technologies have long been used to impact the bottom-line, but most commonly applied by procurement organizations to help manage and reduce costs — or by legal and contract professionals to more efficiently and effectively manage contracts, processes and corporate compliance. However, beginning with the increased regulatory requirements of Sarbanes-Oxley and accelerated by the drive to control costs and better manage revenue at the onset of an economic downturn, usage of contract management technologies by the financial operations within Global 2000 companies has been accelerating.

Of course, contracts are the foundation of every business and every business relationship. Contracts dictate virtually every aspect of a business and customer relationships, including payment terms, service levels and pricing. Thus, contracts also play a central and critical role in the sales-to-cash process. 

ECM technologies can play a critical role in fiscal management, from controlling spending and mitigating financial risks, to managing compliance and speeding revenue recognition.

The average Global 1000 corporation maintains over 40,000 active contracts, and the number and complexity of those contracts is growing. Yet, most enterprises still struggle to manage those contracts, particularly when managed manually or with very limited applications, such as the limited contracts capability available with their enterprise resource planning (ERP) systems. The manual or low-tech approach to contract management exacerbates existing pressures, causing lack of visibility into legal and financial risk; maintaining the status quo “file and forget” un-auditable paper trails; and relying on deficient contract approvals and compliance checks. Addressing these pressures is rarely as simple as adding processes or personnel, particularly with trends toward reducing staff costs. 

So where are global companies turning? Consider that nearly all the productivity gains US companies have made in the past 25 years have come via the application of new technologies. With admitted bias, I think best practice dictates the application of best-in-class ECM technologies to manage contracts and the contracting process. Fortunately, leading independent analysts and a significant and growing number for CFOs at Global 2000 companies agree. 

ECM solutions provide the visibility and control needed to create better contracts, actively manage the contracting process, ensure contractual obligations are met, and accurately manage and speed revenue recognition. They can help manage across the entire sales-to-cash process, from initial sales proposal through contract creation, negotiation, and acceptance. ECM solutions can also help manage across the enterprise, from sales operations, field sales and planning, to finance, legal and operations.

Four areas where ECM can improve fiscal management

Below, I outline four specific areas where improved contract management and ECM technology can be applied to improve the fiscal management of the global corporation:

1. Drive compliance and reduce risks

From Sarbanes-Oxley, to the Securities Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) rules, the fiscal management of a Global 2000 company carries with it significant compliance requirements over and above the demands of running a fiscally tight ship. 

Many companies are handcuffed in their compliance efforts by a significant lack of visibility into legal and financial risks, and the inefficiency and limitations of their contract preparation and approvals processes. 
With the right technologies, companies can ensure and enforce compliance by building in proper contract review and approval procedures and by providing greater and more timely visibility into financial and legal exposures.

In the study entitled Contract Lifecycle Management and the CFO, published by the independent analyst firm, the Aberdeen Group, it was found that upwards of 65% of enterprises using ECM solutions reported immediate benefits in their visibility into and identification of financial and legal risks. 

With a contract management solution, companies have a library of contract templates with approved language, and alternative and “fall-back” clauses to quickly produce stronger contracts in compliance with regulations and internal rules and controls. Contract creation wizards can enable self-service contract creation by front-line personnel while still ensuring compliance and approvals of any notable modifications or anomalies.

Further, complete transparency across the full contract lifecycle enables cross-functional cooperation and accountability, and a clear audit trail that makes any deviations from internal rules and controls readily apparent. Finally, a central contract repository, and rules-based notifications and alerts help ensure companies have broad and immediate visibility into the contracts at the heart of their revue generation

2. Ensure proper revenue recognition

Contracts also play a central role in revenue management including:

• forecasting revenues;
• ensuring proper revenue recognition;
• certifying that financial statements are accurate and complete; and
• generally managing cash flow and revenue. 

Best-in-class contract management software can help ensure proper accounting of revenues (and spend) in terms of accounting rules and guidelines. Of course, in a worst-case scenario, poorly written contracts can lead to revenue recognition issues and revenue restatements.

With the complexity of today’s sales agreements and revenue recognition, particularly in industries such as high-tech and software with multi-element contracts, contract management solutions can help ensure the appropriate accounting of revenue, including when and how it is recognized. Using the contract management solution itself, or through integration with billing or accounting software, companies gain direct visibility into and automatic alerts on schedules and milestones in contracts that impact revenue. 

By automating processes and improving visibility into the contracts that are at the heart of revenue generation, companies create a strong foundation of internal controls over revenue processes. This leads to greater integrity and accuracy of revenue data.

Having a library of standard contract terms related to revenue recognition business rules allows companies to ensure that best practice in revenue recognition is consistently applied. And an automated approval process allows for more efficient management and ensures review of non-standard contract terms, specifically those that would impact revenue recognition. Finally, contract management solutions offer a reliable, consistent and efficient manner in which to review and report on revenue aspects of contracts, allowing for quicker insight into risks and quicker resolution of potential problems.

3. Capture and maximize revenue

Another research study by the Aberdeen Group among Global 2000 companies found that poor contract management in the sales-to-revenue cycle results in revenue leakage, on average, between 5% and 9%. Thus, even under a conservative scenario, for a company with just over $1 billion dollars in contracted sales, revenue leakage could run between $50 million to $90 million. Capturing just half of that can add tens of millions of dollars back into a company’s revenue stream. Obviously, in today’s economic environment, that revenue is especially important to capture. And capturing that leakage is highly achievable. In the Aberdeen report, best-in-class companies in terms of contract management had leakage at just a fraction of the average company.

Revenue leakage can result from a range of problems — from sub-optimum or missed contract renewals; improper invoicing, to regulatory fines or penalties.

Contract management solutions allow companies to capitalize on each renewal opportunity by identifying upcoming renewal candidates, notifying internal and external parties through dynamic workflow rules, automatically generating renewal contracts, and initiating processes in other enterprise systems. The result is higher renewal rates, higher revenue through stricter enforcement of pricing terms, and lower contract renewal and administration costs.

A contract management solution also allows companies to monitor customer (and supplier) performance against commitments and conduct timely audits, performance checks and reviews so that the value of contracts is maximized. (On the buy-side, companies capture more savings opportunities by ensuring that they obtain the discounts and rebates they’ve negotiated with suppliers.) 

Finally, contract management solutions allow companies to structure more profitable deals by leveraging information from all historical contracts, and from other enterprise solutions, to give an edge in the negotiation of contracts. The solution also improves contract quality by enabling professionals across functional areas to develop contracts collaboratively, and gives senior management clear dashboard visibility into key contracts and key terms.

4. Speed sales and revenue recognition 

An additional benefit of improving contracting processes and applying contract management technologies is in speeding the sales and revenue recognition processes.

The process of managing deals from initial sales proposal through to contract creation, negotiation and execution typically involves numerous resources across an organization. In most organizations, sales operations, field sales, finance, legal and consulting are involved in the sales process. Coordinating the process across all resources, while ensuring deals contain only accurate and beneficial terms, can be time consuming and challenging, to say the least. 

According to one study, each day a contract is delayed in the sales cycle at a Global 2000 company results in an estimated reduction of $88,000 to the bottom line of the company through both time-costs and lost revenue. Obviously, situations vary by industry and contract, but just think of that as your general yard-stick — close to a half-million dollars a week for contract delays.

“Companies using contract management solutions to enforce systematic and efficient procedures for creating, executing and managing corporate contracts have been able to cut process cycles in half, reduce contract administration costs, improve contract compliance by 50% to 55%, diminish risk and increase revenues and profits,” according to the Aberdeen Group. One medical technology company we worked with saw a reduction of roughly 60% in time spent creating, negotiating and approving contracts. The Aberdeen report found similar successes, with best-in-class companies applying ECM technologies taking just 20 days to go from contract creation and negotiation to approvals, compared to more than 30 days on average for Global 2000 companies in general.

Another technology service company we work with has reported that they halved the time required to close contracts using ECM technology. They commented, “This enables us to accelerate revenue each quarter. We could bring forward tens of millions next year, and ever greater revenue numbers in future years.”

So, whether it is speeding sales and revenue processes; capturing and maximizing revenue; or ensuring proper revenue recognition and compliance to revenue recognition rules, enterprise contract management technologies can play a significant role in compliance and driving a bottom-line impact. 

Kevin Potts, Vice President of Marketing and Product Management, Emptoris,
Email: kpotts@emptoris.com,
www.emptoris.com.

Emptoris is a leading supply and contract management software company.
For further information about the studies cited, please contact the author.

About the author

Kevin Potts works with customers, industry leaders, and the media to share the vision for how Emptoris’ innovation accelerates profitable growth.

Kevin has nine years of enterprise software experience, including seven years in supply and contract management applications.

Prior to joining Emptoris, Kevin worked with McKinsey & Company, and he served in the U.S. Marine Corps and is a decorated combat veteran. He has a BSc in Systems Engineering from the U. S. Naval Academy and an MBA from Stanford University.