Enterprise contract and commitment management.
Both public and private organizations have been dealing with contracts from the beginning of their existence. Every business function or process has a basic contract root that enables that function to be created and become productive--from the first contract signed to lease the first building as a newly formed company, to employee contracts, purchasing contracts to buy materials, and sales contracts to begin selling products.
Each area of a large company or government organization--purchasing, sales, legal, finance, customer/client support, human resources, and intellectual property--employs hundreds or thousands of contracts to do its job.
While each type of contract differs from the rest, they do have some things in common--the creation and approval process and the existence of a set of commitments (rights and obligations) that need to be actively managed on a regular basis.
Current Situation and challenges
Given the breadth and importance of contract and commitment management, one might expect to find robust information systems in place to manage these processes. The actual situation today in most large organizations, however, is a complete lack of usable, flexible, and scalable enterprise contract management software.
Contract administrators in departments such as sales, procurement, and legal have had few options beyond using outdated legacy systems or brute force manual processes. Consequently, contract and commitment management has largely been a manual and decentralized process- resulting in process inefficiencies, errors, and ad hoc processes that can significantly affect revenue, cost, and risk exposure.
This situation is exacerbated by the many contract types used by large organizations or companies. Without a single system that can handle a broad range of contracts, users face the challenge of learning and mastering multiple systems and processes, and IT faces the challenge of deploying, maintaining, and supporting multiple systems.
Departments driving their own largely manual contract processes have many further complications:
* Corporate or government standards and policies are difficult to implement and enforce.
* Contracts are created in an inefficient and ad hoc manner.
* Rights and obligations are tracked and managed manually or with one-off systems that lead to commitments falling through the cracks.
Reporting and understanding "the big picture" is virtually non-existent.
Recently, the benefits of an enterprise contract and commitment management system have gained more attention. Public and private organizations are looking for a solution to these difficult and potentially costly challenges. (1,2)
With enterprise contract and commitment management software, significant opportunities exist to improve the way contracts, rights, and obligations are managed at every step of the process. These benefits are summarized below and also in Table 1.
Initiate, Create, and Approve
A contract typically begins its lifecycle as a project, term sheet, or deal sheet, and then is fleshed out to include the various legal clauses relevant to it and negotiated for signature. With a contract and commitment management system, this process happens more rapidly than in a manual environment. The necessary contract templates and terms are available to begin the process. Drafts are routed to the appropriate personnel for edits and approvals. Clause libraries provide alternate clauses. Versions are attached and recorded, and the key terms that need to be managed going forward are captured in the system.
Once a contract is signed, typically it is stored as a hard copy in a filing system or electronically in a document management system. What most organizations lose track of, however, are the key rights and obligations that need to be managed on an ongoing basis. Important milestones such as performance requirements, payments, collections, and renewal dates are missed due to the lack of a comprehensive system to track them. Such a system alerts the appropriate people that an action is required and automatically requests to invoice or make payment as required by integrations to enterprise resource planning (ERP) and other systems.
Store, Search, and Analyze
For many organizations, simply having fast, online access to their contracts and terms is reason enough to implement a contract and commitment management system. Common questions about contracts are very difficult to answer without a good system in place. Some frequently asked questions may be:
* Where is the non-disclosure agreement (NDA) we have with company X, who signed it, and when does it expire?
* What can we do to negotiate more effectively with Company Y based on all the contracts we have with them?
In addition to process improvements, a contract and commitment management system delivers tangible bottom-line benefits and improved compliance with required policies and procedures for a rapid payback of the system.
Many Global 2000 companies estimate they lose millions of dollars each year due to under-collecting revenues to which they are entitled. While ERP systems are often implemented to manage revenue from standard product sales, they do not adequately manage revenue from the fastest-growing parts of today's economy-- revenues from services and licensing. Even for standard product sales contracts, often there are renegotiated terms, which are not captured in any information system. A good contract and commitment management system enables you to track, forecast, and monitor revenue from any contract, including license and service revenue due from your customers and partners.
Greater Productivity and Lower Costs
Because contracts typically require input from multiple departments--a business unit, the legal department, finance, and often senior management--the process of developing agreements is cumbersome and time consuming. With a contract and commitment management system, approved templates and alternate language are readily available, thereby jumpstarting the process of creating a contract and paving the way for a smoother creation and approval process. The workflow to create contracts is simplified and automated, saving the time spent requesting and obtaining approvals and managing documents through the creation and approval process.
The significant cost savings, however, result from business improvements that have direct bottom-line impact--reduced overpayments and penalties, lower audit and recovery costs, and better contract terms across contracts.
Enhanced Compliance and Minimized Risk
A contract and commitment management system provides several avenues to enhance compliance in the contracting process and reduce risk. Greater control of the upstream process of creating contracts
* ensures that approved practices are followed,
* minimizes or prevents the use of non-standard or ad hoc terms and conditions, and
* supports approved accounting rules such as revenue recognition guidelines.
In the downstream or commitment management phase of a contract lifecycle, actions such as a contract renewal or termination should be taken in advance of key dates and milestones. It is equally important to monitor compliance with the specific key terms of each individual contract and across contracts to avoid penalties that result from a lack of visibility into current and future contractual obligations.
Organizations looking to implement a contract and commitment management system should consider a set of requirements as outlined in Table 2. Several of these "top 10,, requirements deserve further discussion because they are mission critical to making the deployment of a contract and commitment management system a success. They include:
* flexibility to manage any contract type or term,
* end-to-end contract and commitment management, and
* easy configurability.
Companies need to have one enterprise system for all of their contracts across all departments. If each functional area was to use a separate system for every contract type (there are typically more than 100 contract types in a normal enterprise or large organization), or even for the major 10 to 12 classes of contracts in a corporation (for example, sales, purchasing, finance, and human resources), there would be a proliferation of stand-alone systems for users to learn and the IT department to support. To prevent this impractical situation, a contract and commitment management system must be scalable and flexible to handle any type of contract and any number of contracts. A single system that handles all contracts is a powerful tool for any organization.
A contract and commitment management system also must be flexible to support the specific business processes of any organization. While there are similarities across companies and government organizations in how they create and manage contracts, each organization has its own distinct processes. We have found unique processes within the same enterprise in part driven by different types of contracts and business functions. Even within a single business function such as procurement, there can be a variety of processes within the same organization depending on the type of good procured, contract form, and procurement method (direct, indirect, and Web/auction, etc.). If a packaged software product is to support multiple organizations, it must be inherently flexible.
Contract and commitment management should be viewed as a single, end-to-end business process that encompasses a number of sub-processes within it. Generically speaking, a contract is typically initiated with a set of terms that are routed for internal approval. Once the key terms are approved and negotiated, a complete contract is created and negotiated for signature. After the contract is signed, an electronic copy of the document and the individual terms must be stored in a central repository accessible to all relevant personnel. Over the life of the contract, the rights and obligations contained within it must be managed. Finally, the contract is terminated, renewed, or renegotiated during or at the end of its term. An enterprise solution that addresses the end-to-end lifecycle gives an organization the capability to manage the complete process with the highest return on investment possible.
One of the challenges in managing contracts is their dynamic nature--contracts constantly change during the creation and negotiation phases of their lifecycle. Changes are even made once a contract is signed: Amendments are inserted or attached, terms are renegotiated, and renewals or cancellations are made. In addition to the changes that take place within a contract, organizations also need to make changes across contracts and contract types. For example, finance may change the approved payment terms, and these terms must be executed across many contracts. An information system that is to effectively manage contracts and commitments must be easily configurable to allow business users themselves to make changes to the contracts. Previous contract management systems have not had this high degree of configurability and thus required an IT project to make changes in the system. This is a major factor that has caused many users of a legacy system to work around the system in order to fulfill their jobs.
A Key Technology Enabler
Contract and commitment management software should be designed to be highly extensible in order to accommodate a wide variety of agreement types, commitments within agreements, and constant changes in each agreement. XML (extensible mark-up language), a global standard information structure, provides a highly flexible platform that lends itself perfectly to the dynamic nature of contracts. This type of architecture eliminates the explosion of tables and code proliferation that requires massive customization efforts in typical Web-based or client-server solutions that attempt to support many types of agreements. XML allows for the easy creation of customized tags, enabling the easy management of both structured and unstructured data among applications and organizations. The pervasive use of XML technology throughout an enterprise application greatly enhances its effectiveness and usability within the contract and commitment management domain.
Implementing a contract and commitment management system across a large organization for every type of contract is a comprehensive exercise if done with a "big bang" approach. The fastest way to benefit from the system is to begin by implementing two to three types of contracts that are of high value or causing significant "pain" in the organization in terms of how they are being managed. This provides the most rapid return on investment and payback for the system. Once the benefits of the system have been validated, it is easy to expand the use of the software throughout the enterprise to hundreds or even thousands of users.
To date, contract managers have been under-served by the enterprise software vendor community. There are both technology-based and market-based reasons for this. It has only recently become technically feasible with the advent and maturation of XML technology to efficiently manage the unstructured and structured data in contracts that change frequently. Also, organizations are able to absorb a limited amount of new technology at a given time and many have been vigorously implementing ERP and customer relationship management (CRM) systems for the past several years. Many of those projects are done and transitioning to steady-state work, so companies and government organizations are looking at new software solutions that can add value to their business. Contract and commitment management software is a high return on investment and rapid payback opportunity.
Table 1 BENEFITS Contract Process Key Features Initiate, Create, and * Initiate term sheets or Approve contracts using templates * Add, change, or create new terms or clauses * Configure using your business rules * Automated routing and approval * Contract and term repository Manage Commitments * Time-and event-based triggers * Term management * Notification through, email, pager or any data medium * Automated routing and approval Store, Search, and * Simple or complex search at Analyze term level * Multi-level reporting * Role-based views * Download search results into MS Excel for easy manipulation Contract Process Benefits Initiate, Create, and * Rapid contract creation Approve * Secure role-based participation * Automatically involve the right people at the right time * Consistent company standard terms * Comprehensive log and audit trail Manage Commitments * Manage any commitment type * Be notified of renewal dates or any milestone * Accurate revenue collection * Accurate payments * Increased renewal rates and upsell opportunities Store, Search, and * Full visibility into any Analyze contract or term * Analysis across contracts, terms, or the enterprise * Accurate financial and risk management * Quick queries and rapid reporting Table 2 KEY REQUIREMNTS Requirement Explanation Flexibility Manage any type of contract and associated terms. Scalability Support hundreds or thousands of users. End-to-end Management Manage rights and obligations from contract creation. Term-level Functionality Manage rights and obligations embodied in any key term in any contract. Easy Configurability Add, delete, or change terms without requiring IT support or creating an IT project. Efficient Contract Pre-approve first-choice Creation and alternate clauses, automate routing for approvals, configure your organization's own process. Advanced Search Search for contract terms, parties, and related documents across all contracts. Automated Alerts and Receive system-driven Notifications alerts and notifications--key dates, business milestones, or other events. Integrate with related systems such as ERP, CRM, LDAP, e-mail, document management, and others. Security and Secure and authenticate Authentication data and application from outside parties, and role-based security, so the right users see the right data. Pure Web U! Use a web browser for the application.
(1.) Goldman Sachs Global Equity Research, "Technology: B2B Software, United States, Time to Manage Those Contracts!" February 2, 2001.
(2.) Meta Group Inc., "Enterprise Contract Management: Part 1--Consolidating and Leveraging Trade Agreements." September 27, 2001.
RELATED ARTICLE: CONTRACT AND COMMITMENT MANAGEMENT SOFTWARE IN ACTION
A "Fortune 100" manufacturing company had more than 200 people managing more than 100,000 contracts. They had difficulty locating contracts and insufficient visibility into their rights and obligations. This resulted in under-collected revenues and overpayments that amounted to millions of dollars of direct bottom-line impact. Implementing a contract and commitment management solution enabled the company to have a secure, centralized, searchable agreements registry accessed via a Web server. It also allowed them to identify, track, invoice, and forecast revenue and expenses more accurately.
A leading software company has more than 10,000 pieces of intellectual property (IP) included with more than 50 software products. During the contract creation process, it was difficult for their product managers to know which of the seven P-related contracts to use for a given piece of IP in a given product. When managing the commitments in their contracts, they lacked sufficient visibility into where specific pieces of IP could be used (according to the usage rights specified in their contracts with their licensors) and what IP had been used within a particular version of a particular product. A contract and commitment management system gives them an efficient way of creating the right contract and the visibility downstream into how they can use their licensed IP.
About the Author
KIRK KRAPPE is president and CEO of Nextance, Inc., in Fremont, California. Send comments on this article to firstname.lastname@example.org.
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|Date:||Mar 1, 2002|
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