Contracts Management: Mitigate Risk and Establish Your Next Profit Center
Although contracts underlie virtually every business relationship, companies fail to adequately manage commercial contracts professionally, which in turn can cost them billions of dollars worldwide every year. Adopting an Enterprise Contract Management (ECM) strategy can generate serious revenues and cost savings while minimizing business risk.
What is ECM? Quite simply, it is the practice of addressing and implementing improvements for the entire contracting process – from initiation to compliance, assessment and refinement – across the organization. By managing all aspects of an agreement, including granularity of clauses and the business terms used to create them, companies can ensure that contractual commitments are met and that pricing and terms are optimized for better business performance and stronger customer-supplier relationships.
Why is it important? Contracting is a critical path step for any B2B process, (i.e., Sourcing-to-Pay or Contact-to-Cash) since it is the point in the process where financial, product and service level terms for business transactions are negotiated and established. This provides visibility to the key metrics that companies have explicitly agreed with customers and vendors to use for governing and assessing the effectiveness of their business transaction. Contracting is one of the rare functions of an organization that enables visibility to both customers and suppliers, particularly for companies that often play both roles, depending on the nature of the transaction. As such, Contracts Management often serves as a foundational component of a Government, Regulatory and Compliance (GRC) framework, for risk mitigation, transparency and a 3600 view of their contracting parties.
For instance, one client is using Contracts Management to proactively and systematically manage their vendor relationships. This client is able to leverage risk information in drafting vendor contracts with language and terms that help mitigate these risks, ensure that the appropriate personnel are aware of how these vendor relationships are structured and changed over time, and alert professionals of key milestones defined in these agreements. By leveraging Contracts Management in conjunction with it’s GRC – Vendor Management offering, the client has been able to achieve the following benefits:
- Eliminate data entry errors by automatically pulling information about customers and vendors directly into agreements
- Reduce rogue contracting by leveraging the appropriate language and terms and initiating the appropriate approval workflow process based on risk assessment, business impact analysis and deal model scenarios
- Improve effectiveness of strategic sourcing and contract negotiations by providing an enterprise view of all contracts, corporate vendor documentation, services, and utilization
- Minimize risk and maximize business performance while minimizing risk associated with vendor and customer relationships by tracking key performance indicators, SLA objectives, and the status of deliverables defined in contracts
- Increase throughput and legal staffing efficiencies by enabling anyone in the company to request new agreements through a self-service contract kiosk that ensures all contract drafting policies and procedures are followed
Companies should expect to generate ROI of $25 – 30 million over 5 years from a Contracts Management program. Consequentially, it should come as no surprise that an important trend is developing where companies are establishing Contracts Management as a distinct shared services function and are transforming the contracting function into a strategic profit center, rather than just the cost of doing business.