When you think about business agility, especially when software and analytics are to be applied, one of the last areas you’d probably think to focus on is contract management. Although today’s contracts are more electronic and automated than their paper-based predecessors, they are still managed as a relatively static component of the end-to-end P2P process.
In fact, some procurement organizations consider contracts the ‘finish line’ in terms of their active involvement with a category or supplier. We push to reach that point – getting the necessary signatures on time and with all the right terms in place – and then hand it over to budget owners or business managers until the contract is up for renewal.
This limited approach to contracts presupposes that the name of the supplier organization and the agreement expiration date are the two most important components of the contract. This assertion might even be true if procurement only established a small number of contracts on behalf of their organization annually. But many procurement teams are involved with dozens or even hundreds of contracts over the course of the year. In the context of contracts, therefore, agility has less to do with the sustained activity level associated with one contract over its term, and more to do with repeatability and risk minimization.
Like many of the other opportunities procurement has to increase agility, improving the contribution that contracts make to business outcomes requires us to do more than just improve any one agreement. We have to put a framework in place that contains elements available to be used in multiple contracts, setting a precedent for how each agreement will be structured and the impact it will have.
Take the quick yes / no test below to determine how agile your contract management program is today:
1. Do you have a centralized library of best practice templates available for use to immediately leverage relevant category, geography, and line of business-based terms?
2. Do you have a standard clause library that you can mix and match based on each contract’s specific needs?
3. Are existing contracts available for easy re-use?
4. Do the terms from winning proposals auto-flow to the contract without cut and paste, re-keying, or cumbersome email exchanges with attorneys?
5. Can you live track and audit of term edits in a way that allows you to see all changes and provide transparency for all parties?
6. Are you (and your suppliers) able to receive personalized and proactive alerts or notifications for contract milestones or relevant circumstances?
7. Are you able to quickly locate each contract’s location years later?
8. Can you measure each contract’s use without frustrating searching?
9. Are you able to monitor how well contract terms are being carried out in the organization?
10. Are you able to ensure alignment with corporate strategy and savings targets based on circumstances and the accuracy of pre-contract risk assessments?
Before reading further, tally up the number of times you responded with a “Yes.” Each yes maximizes the agility of your contracts and ensures that they deliver the expected results. On the other hand, each “No” is an opportunity to improve agility – and yet, not all of those no responses are the same.
Opportunity #1: Creation
If you answered no to one or more of questions one through five, you have an opportunity to increase the agility with which your organization creates contracts going forward. Although this may feel like the most tactical improvement, it should not be regarded as simple. Being able to leverage existing contracts requires them to be saved centrally in a re-useable format and indexed for searchability. Isolating, standardizing, and organizing terms is best done by someone intimately familiar with current contracts – and turning those contracts into standardized templates will benefit from being led by someone who understands both the value in existing agreements and also the likely characteristics of future purchases.
If the above are somewhat manual opportunities, questions four and five lend themselves to an automated solution. Transferring or re-keying the terms from a winning supplier RFP to a contract may not be a difficult task, but it can easily be made risky through human error – not to mention the fact that making such a transfer is a zero value-add activity. The level of auditability and transparency that all involved parties have during the negotiation and redlining process, while undoubtedly technology enabled, forms the foundation for an open and trusting supplier relationship. Ideally this initial positive experience will foster a dynamic that remains in place as long as the contract is active.
Opportunity #2: Execution
Questions six through nine speak directly to the value creation term of the contract. Although, as noted above, procurement often regards contract signature as the finish line, it is actually the starting point. Nearly all of the value associated with each contract is created between execution and expiration – and this phase is just as in need of agility as the creation process.
The activities referred to in these questions – milestone alerts, location tracking, usage, and actionability – remind us the real reason contracts are put in place. Contracts attempt to establish a framework that will support an organization’s estimated demand during a predetermined window of time. If no one is monitoring the match between the contract and the actual buying habits of the organization, it is impossible to know if the right contract with the right terms and with the right supplier is in place.
Despite how important the results of this monitoring are, the oversight itself is another zero value-add activity. The best case for maximizing business impact occurs when a system is able to provide passive oversight and then provide data to procurement, whose time is best used comparing projections with actual purchasing and realigning the two if necessary.
Opportunity #3: Alignment
Contracts are not established in a vacuum, and they represent more than just anticipated demand. Each agreement also has an expected impact on the business that extends beyond quantity, price, and delivery terms. There may be cash flow implications, contributions to profit margin, or risk mitigation requirements – and only someone with an understanding of overarching corporate priorities and strategies can be expected to determine this level of alignment. Given the level of understanding such an activity calls for, contract management becomes both the subject of agility improvement and also executive level insight.
Although we’ve primarily focused on how contracts can become more agile, the end game is for them to enable the organization as a whole to become more agile. Agile contracts put in place by strategically-minded professionals can be leveraged when the business has an opportunity to be nimble and responsive to changes in internal or external conditions. Not every contract will have the opportunity to support such changes, but any one could – enough of a possibility to set the expectation that ALL contracts will be created with maximum flexibility in mind.