Five Myths of Contract Management

• Make — The Make phase of the enterprise contract management (ECM) lifecycle prepares the organization for contract management and compliance measurement. During the Make phase, ECM uses sourcing technology capabilities that automate and manage the requests for proposal process, reverse auction, supplier scorecarding, and bring the key terms and variables into the contract creation process. Then you can begin contract creation and negotiation and electronic archival processes. Benefits here include reduced legal risk from the use of standardized contract terms and conditions, faster audit preparation, a reduction in maverick contracting, enhanced regulatory compliance and global contract visibility.
  


• Manage — The Manage phase of the ECM lifecycle administers and monitors all aspects of executed contracts, including pricing, rebates, royalties, collections, deductions and both transaction- and event-based compliance. Benefits include increased revenues and decreased expenses from adherence to contract pricing and incentive optimization, a reduction in collections and disputes due to questions involving contract compliance, and elimination of unintended contract lapses. Ensuring integrity and visibility into critical corporate contracts can help ensure compliance with the Sarbanes-Oxley Act of 2002.
  


• Maximize — The Maximize phase of the ECM lifecycle measures operational and financial performance against agreed upon commitments, and examines sales and purchasing activity across the enterprise. It also analyzes contract profitability and notifies senior management of non-compliant events or transactions. Benefits include increased revenue and expense control, enhanced trading partner selection, faster contract renewal and improved business intelligence and management reporting.
  

Myth 3: The sales force can manage contract milestones and expiration dates.

On the surface it may seem logical that the sales force should be tasked with the responsibility of administering contract expiration dates and milestones. A closer look, however, shows that this policy can be very risky for a company. And this only applies to sales contracts anyway. It does not include the procurement side of the business, nor any other contracts.

While it is true that the sales force's job is to be close to the customer and that they should be familiar with the firm's contracts, this is a relatively small part of contract management. Contracts must be maintained with both customers and suppliers, and the sales force may have no background at all with the latter.

Further, it is more than likely that the sales force is neither trained nor well suited to handle the detailed administrative tasks necessary to effectively monitor multiple contracts. And, even if the sales force is willing to take on this new responsibility, without a centralized, systematic way to monitor contract data, even the most diligent sales person — or any other person charged with managing contracts — can miss a key date, thus costing the firm funds and damaging its reputation.

In the same vein, failing to comply with key contractual obligations could lead to an audit of the firm's financials. If the audit reveals that the firmÕs financials are not in compliance with the Sarbanes-Oxley Act of 2002, it could have serious implications, including steep fines, penalties and even jail time. In the event of an audit, it is important that a clear audit trail has been established for each contract — a task that can be performed more efficiently by an automated system rather than members of the sales force. The most effective contract management systems provide automatic notification through the company's e-mail system and incorporate escalation procedures if action is not taken within a predefined period of time.

Myth 4: All of the firm's business transactions are compliant with customer and supplier contracts.

Compliance with a contract is more often assumed than actually verified. While it is easy to simply believe that the company is complying with all of its contracts, the only way to be sure is to maintain a centralized system that stores all contract information in a functional data structure that is then tied to the company's transaction reporting system (ERP) and financial systems. ECM software will allow the firm to see when its transactions are diverging from its agreements so it can take corrective action in a timely fashion.

When one considers the fact that some form of contract governs 80 percent of all B2B transactions and that the average Fortune 1000 company has between 20,000 and 40,000 contracts, the need for structure regarding contract data becomes clear.

By establishing this contract compliance system the firm can achieve several important business benefits, including:

• Control — ensures adherence to contracting best practices through a centralized, searchable contract storage repository


• Security — protects and archives documents through proven document management technologies and business process workflows


• Speed — facilitates internal and external communication through collaboration features


• Flexibility — enables companies to define the contract terms and transactions that need to be monitored and set tolerance levels


• Savings — reduces labor costs by eliminating the need to manually check and monitor milestones


• Enterprise Fit — integrates with transactional systems — including ERP, CRM, supply chain management and other transactional systems


• Risk Reduction — contract related audit trails are preserved for future use and thus risks of a regulatory audit are minimized


• Consistency — all contracts adhere to the corporate standards and agreements with customers and suppliers are consistent