If anyone understands how complex contractual commitments can be, it's an IT professional. For example, in 1997, as part of a Y2k preparation, the CIO at Toyota Motor Sales U.S.A. decided it was time to shore up the IT organization's buy-side contract management processes. Like numerous IT organizations, Toyota's group was leaking cash through manual contract processes and wanted to see if re-engineering and automating them through contract management technologies would improve efficiencies and data visibility.
The effort has paid off. Toyota initially deployed an Access-based desktop contract-tracking tool from Contract Management Solutions (CMSI) and later the vendor's Web-based Contract Manager application in a hosted model. Since then, Toyota has realized about US$14 million in savings, according to Sam Barton, senior contract manager at the Calif.-based company. Based on the system's success in the IT department, its use has spread to Toyota's logistics, financial services and legal departments.
Unlike Toyota, most businesses still rely largely on manual processes for managing their contractual commitments. Not only do they fail to exploit their contracts to full benefit -- missing expiration, service-level review, price review and rebate dates, or letting low-value maintenance contracts automatically renew -- but they sometimes mismanage them to legal peril. Given that 60 per cent to 80 per cent of business-to-business deals are predicated on some kind of contract, according to Aberdeen Group Inc., contract management can't be ignored.
If the financial toll exacted by missed opportunities and underperforming commitments isn't enough, the compliance pressures brought on by the Sarbanes-Oxley Act and other regulatory initiatives add incentive, as do growing concerns over risk mediation due to globalization. Companies are increasingly making a broader range of their contracting processes electronic through both in-house development efforts and commercial systems. To date, however, the penetration of commercial systems is small, and the market is immature, say experts.
"Even in larger companies, Excel is still the leading business application [for contract management]," says Tim Minahan, an analyst at Aberdeen Group. He says the next couple of years will be critical to the contract management market, particularly for pure-play contract life-cycle management software providers, including DiCarta, I-many, Nextance, Upside Software and CMSI, which was recently acquired by Atlanta-based sourcing provider Procuri Contract life-cycle management systems are designed to access and store structured and unstructured data such as pricing, pertinent dates, compliance criteria and negotiated terms. They're beginning to be integrated with ERP, CRM, content management and other data sources so that transaction data can be reconciled against contract criteria.
Meanwhile, enterprise application suite vendors such as Oracle, SAP AG and Siebel Systems are adding contract management functionality as part of sourcing and procurement strategies.
"Contract management is much more than an electronic document repository; the biggest value will come from predictive event management, where careful attention is paid to the events -- both date- and value-specific -- that happen during the life of a contract," says analyst Andrew Kyte at Gartner Inc.
Much of Toyota's savings, says Barton, stems from better tracking of maintenance agreements that have automatic rollover clauses, some of which weren't delivering value or were for IT systems Toyota was no longer using. Since deploying CMSI's Contract Manager module, Toyota has added Deal Manager, which manages deals from inception through negotiation, and Supplier Manager for sourcing. The company is exploring the feasibility and value of interfacing the contract management system with its PeopleSoft ERP system for sharing transactional data.
The need to gain better visibility into its contracts prompted Countrywide Financial in Calif., to move from an approach that relied on Lotus Notes and Access toward a comprehensive contract management strategy based on technology from Nextance. Countrywide's corporate contracts group, which handles all buy-side contracts for its 45,000 employees, managed 900 contracts in 2004 and expects to handle about 1,200 this year. This growth, coupled with regulatory pressures, drove Countrywide to automate its contract processes. The project group started piloting Nextance's Intelligent Enterprise last September and expects to go live this summer, according to Richard Layne, contract manager and project manager for the implementation.
Countrywide's IT, contract management and legal departments worked closely with Nextance's professional services group to create compliant contract templates and clause libraries and to map workflows that adhere to the financial firm's approval processes.
"It's a lot of work, setting up the templates," says Layne. "Somewhere down the road, contracts will incorporate best practices so they will be self-sufficient, taking into account variables as well as including conditional clauses." He says Countrywide is experiencing typical challenges as it integrates Nextance with its new Oracle/PeopleSoft ERP system.
"We want to make sure, for example, that accounts payable doesn't overpay or double-pay on a contract; by interfacing our ERP into our contract management system, we can avoid these situations," says Layne.
With the ERP integration, Countrywide will be able to automate a critical element of its 10-Q reporting -- determining outstanding liability on open contractual commitments -- rather than reconciling each contract manually. The company is also interfacing Intelligent Enterprise to its entire employee contact list and delineating contract approval and spending authority so that staffers access, create and approve contracts based on permission rules. Plans call for integrating the product into Countrywide's asset management module so it can better track acquisition and depreciation of IT assets.
St. Louis-based BJC HealthCare is also improving its contract management processes as part of an overall supply chain optimization effort across its network of hospitals. For BJC's centralized contracting group, IT has developed an in-house contract repository based on WebSphere and an Oracle database, says Kraig Butts, a project manager for information systems. The repository integrates with BJC's GEAC mainframe financial systems and with a front-end requisitioning system accessed through Global Healthcare Exchange LLC's (GHX) electronic business-to-business exchange. When a new contract is created, all pertinent information -- including pricing, units of measure, manufacturer ID numbers, terms and expiration dates -- is uploaded from the repository to the GEAC system, and an updated item master is transmitted to the GHX exchange. BJC replicates the item master to GHX daily, so stakeholders can log in for up-to-date reviews.
About 15 months into the project, BJC has more than 30 percent of the contracts related to its supply spend loaded into the contract repository, says Jim Gleick, director of supply strategy. BJC is trying to use the electronic process for all new contracts and is converting existing contracts as they make sense.
Like other companies moving to optimize supply and contract processes, BJC wants to better tie transaction data to its contract data so it can automatically reconcile discrepancies and ensure accuracy. Currently, it's manually pulling requisition and purchase data out of the GEAC system each month to compare the item master against the contract database. The company is also taking downloads from the financials system and the repository and putting them into an Access database for reporting purposes.
"We're happy that we're getting the data into users' hands and they're able to create various reports, but the process is still too complex and we need to automate it," says Butts. He says the company plans to create a data warehouse with business intelligence tools built on top for easier reporting and analytics.
The conversion has taken a lot of staffing, Gleick says, but he believes the efficiencies gained are critical to improving business operations and, more importantly, patient safety. "Our goal is that by the end of 2006, 87 percent of all our purchasing volume will be connected to electronic contracts," he says.
Contract Management Adoption
The International Association for Contract and Commercial Management released these findings from a recent survey of 172 respondents from more than 150 corporations:
- More than 45 percent of all buy- and supply-side executives say they've implemented some form of electronic contracting.
- 54 percent of sales organizations have implemented electronic contracting.
- 38 percent of procurement departments have implemented contracting systems.
- 91 percent of multinational corporations have introduced electronic contracting.
- 65 percent of respondents have developed their own electronic contracting system functionality. Of those adopting commercial products, 38 percent said they needed to perform extensive modifications.
Buying or Selling?
Though contract management vendors typically have products for both buy- and sell-side situations, says Gartner analyst Andrew Kyte, it's important that businesses understand that each function demands a different deployment approach. "Obviously, to be fully in control, a business needs to be managing all of its contracts," says Kyte. "However, each [side] demands separate projects because there are differences in systems integration, in users, in sponsorship. It's important that businesses initiate their contract management activity in an area they can effectively control and not try to simultaneously handle contracts for both the buy and sell sides."
It's the sponsorship question that often causes the biggest hurdle to contract-process improvements, according to Tim Cummins, president of the International Association for Contract and Commercial Management. "Eighty per cent of contracts deal with business issues rather than legal issues, and those business commitments come from many disparate owners. There's finance, IT, HR and external factors like regulatory compliance and accounting regulations," says Cummins. But, he says, although a contract is the result of the work of many stakeholders, all of whom have specific requirements, nobody has overall accountability for its maintenance and management.
Businesses that opt to move forward with contract management initiatives often do so in the procurement area, specifically in IT procurement. "It makes a lot of sense for CIOs to be the initial sponsors for adoption of contract management," Kyte says. The number of contracts is smaller than in other areas, and people in IT procurement are used to working closely with the IT organization on processes and integration issues, he adds.