All business starts with an agreement. It can be as simple as the status quo business transaction that occurs when a consumer buys a product at its closest retail store. It can also be as in-depth to where two parties must come together to work out the details of their partnership in written format, such as in the case of a company merger. Regardless of the type, contract negotiations are the result of actions that stem from a business having to meet government mandates; economic impact; or financial gain and improved market share. And as increasing numbers of businesses rely on contract renewal as a large chunk of their revenue stream, they must understand and implement the necessary capabilities to garner the insights of those contracts for maximum results.
“A lot more industries right now are gravitating towards contracted revenue—so the subscription model is resonating very well,” said Kamal Ahluwalia, Chief Strategy Officer for Selectica, based in San Mateo, Calif. “This was happening anyways but now they realize that across most companies, 70 percent of your revenue comes from existing customers. Barely 20 to 30 percent comes from new customers. So companies need to look to contract management as the centerpiece of their revenues and profitability and not as a paper artifact of the transaction. Because what’s in there is the high likelihood of closing again and higher margin issue if you keep renewing the customers.”
Most relevant right now are perhaps the number of recent contract strikes that garnered added attention because of labor wage negotiations.
In September, unresolved disputes between the UFO union and Deutsche Lufthansa AG resulted in a cabin crew walkout. Despite the most recent resolution between the two earlier this week—the union agreed to more flexible working hours as Lufthansa cabin crew members each receive a 3.95 percent pay increase and a one-time payment of 320 euros—the strikes cost the airline the equivalent of €33 million in lost operating profit, according to a Wall Street Journal report.
In Chicago, a dispute over school reforms caused public school teachers to walkout in September—“the first strike by unionized educators” in the city in 25 years, according to a Chicago Tribune report. As a result of the Chicago Board of Education’s recent approval of the new three-year Chicago Teachers Union (CTU) contract with Chicago Public Schools (CPS), teachers will receive an average annual salary increase of 4.4 percent over four years.
On the East coast, potential port strikes—which would have the biggest implications on retail supply chains as they continue to prepare for the holiday season—were put to rest as the United States Maritime Alliance (USMX) and the International Longshoremen’s Association (ILA) extended their contract negotiations past the original September 30th deadline through December 29, 2012, according to the Federal Mediation and Conciliation Service (FMCS). To date, no agreement has been reached as the two parties continue to negotiate over a master contract to meet the needs of port workers who “are asking for fairer wages and job security as automated operations threaten their jobs,” according to a FOXBusiness report.
“Increasingly, what is happening in Chicago and the ports and with our customers also, is they recognize that contracts are not put in place in case everything is going well,” explained Ahluwalia. “In a lot of cases nobody looks at the contract. Contracts are enforced to make sure there are guard rails in place and expectations are very clearly set on both sides. Yes, it’s fine to create the contract for the first time but customers also want to know how to actually track performance against the contract. And those things are starting to transpire a lot more.”
From defining clauses in a contract to its repository to the automatic payment invoice reconciliation, there are a number of different aspects to contract management that each company must define as it pertains to its business.