A large enterprise wants to reduce the time and expense of writing and negotiating its enterprise contracts. A mid-size outfit grapples with off-contract spending that may cost it more for goods it already agreed to purchase cheaper. A sales person fails to realize when a customer contract expires and misses the renewal opportunity.
Companies struggle with these and many other contract management issues as those agreements become more numerous and complex. Unfortunately, a majority of organizations still tackle many related tasks manually, including contract negotiation and monitoring.
By automating management throughout the contract life cycle – and storing those documents in a central repository for easy access – companies can streamline cumbersome processes, obtain better performance from vendors and customers, reduce costs and improve collaboration across the supply chain.
In fact, Fortune 1000 companies that adopt the strategy can reduce manual effort by 50 to 75 percent and boost their bottom line by tens to hundreds of millions of dollars, industry analyst Accenture says.
The case for automating contract management
Why the need for advanced contract management strategies? Expensive, cumbersome processes, human errors and “maverick” off-contract purchases cost companies a bundle each year. The price tag can be immense for the typical Fortune 1000 company, which commonly maintains 20,000 to 40,000 contracts throughout the contract life cycle, (authoring, negotiation, execution and monitoring).
Contract authoring and negotiation alone can take months to complete on both the sell and buy sides. Unwieldy processes and version control remain common problems and extensive legal reviews of early drafts add time and expense. Companies also struggle with human error when converting a negotiated legal agreement to the official operational contract, which can mean payment errors, revenue loss and potential compliance failure.
Once in place, the operational contract lets companies take advantage of negotiated discounts and other benefits by applying the proper terms and pricing against transactions. Unfortunately, it’s difficult to know when a contract already exists. Thus, internal employees commonly buy “off contract” when fulfilling purchase orders, usually shelling out more for the same purchases. Accenture estimates a company with $100 million in annual contracts typically purchases another $50 million to $100 million off contract. Reigning in even a portion of this maverick spending can save companies millions of dollars annually.
To help achieve top results, companies can improve contract management by excelling in four areas: process, organization, knowledge and technology. According to Aberdeen group, the 20 percent of best performing, mid-size companies surpass their counterparts in contract management because they:
- Identify inefficient processes
- Develop and enforce standard contract language and pre-approved legal clauses to simplify contract creation, reduce legal costs and strengthen agreements
- Automate processes throughout the contract lifecycle
- Use contract management to improve overall compliance and reporting.
Likewise, to more easily create the agreement and make related changes, companies should have the ability to configure contracts easily using Microsoft Word. Another top priority is a central repository with strong search functions.
Aberdeen Group suggests that companies can further excel by integrating contract management with other systems, such as ERP, sourcing and procurement, ordering, invoicing and billing.
The SAP xApp Contract Lifecycle Management (SAP xCLM) product meets the challenge by automating and streamlining contract management throughout the contract lifecycle. It also stores those contracts in a central repository for easy retrieval and better transparency.
Authoring and negotiation
SAP xCLM introduces a clause and template library that lets organizations choose a model contract, then easily collaborate and customize the language and terms using Microsoft Word. Available by third quarter, 2007, SAP xCLM adds a unique right-hand panel to the Microsoft Word interface, via Duet for Microsoft Office and SAP.
The panel lets users manage contract details such as header data, line items and pricing conditions. Based on the contract section content, the Duet panel intuitively understands which data options to offer. So, for example, when a user clicks the contract’s line-item section in Microsoft Word, the Duet panel automatically allows users to designate the product number.
The ability to easily share the contract as a Word attachment helps speed authoring and negotiation. Automated workflows can engage specific reviewers when certain clauses change to further streamline contract review and approval. The product also provides a clean audit trail of these processes and approvals to address regulatory mandates.
For purchase agreements, SAP xCLM also saves time by linking SAP’s automated sourcing application (E-Sourcing) with legal contract creation. Contract clauses and terms can be specified in an online Request for Proposal/Quote, and the suppliers can agree or propose changes. Upon award, users can create an automatic draft legal contract using the supplier’s RFx response, which can include clauses confirmed or changed during RFx negotiation and related questions/responses.
Also unique to SAP xCLM is the end-to-end integration it provides between the legal and operational contracts, and related contract execution. With it, users can integrate contract management with back-end order taking, payment and invoicing systems. That allows the accounts payable systems to recognize when purchases can be ordered and billed against an existing contract. The feature can immediately enforce the contracts to eliminate much maverick spending.
In addition, SAP xCLM automatically converts the legal contract to the official operational contract to eliminate human errors to financial terms, which helps users avoid lost revenue and compliance failures. SAP xCLM also prohibits operational contract changes without official legal amendments.
SAP xCLM includes a central repository for all agreements and powerful built-in search capabilities. Users can also access contracts quickly by searching directly from Microsoft Outlook using Duet. The xApp can send date- and volume-based reminders before contracts expire to provide time to prepare for contract negotiations.
For purchase agreements, companies can monitor and control “savings leakage” by tracking off-contract spending and price variances to realize the full, negotiated savings.
By taking advantage of a strong contract management solution, companies can save thousands or even millions of dollars by reducing errors, meeting compliance, negotiating stronger contracts and curbing maverick spending. SAP xCLM provides the monitoring and transparency many organizations lack.
Wide reaching benefits
Automating and streamlining related processes can improve productivity (or reduce related head count) by 10 to 20 percent, analysts estimate. The strategy can also speed contract negotiation cycles by 50 percent and reduce related operating and processing costs by up to 30 percent, and erroneous payments by 75 to 90 percent. The strategy can help push contract renewals to more than 90 percent.
Companies can also greatly reduce maverick spending and increase contract compliance. In the mid-market segment, top performing companies reported 86 percent of their transactions comply with supplier contracts. Less than 15 percent purchased off contract. By comparison, other companies complied with their own contracts about 48 percent of the time, says the Aberdeen Group. Automated tools also allowed companies to establish contracts in seven days, compared with 30.