The Quick Payback from Contract Automation

AMR: Early adopters reporting 150-200 percent ROI within a year on targeted projects

Boston  February 13, 2003  Automating purchasing contracts can be a quick win with a rapid payback for any enterprise that wants the benefits of increased visibility, better compliance and streamlined workflows, according to a new study from technology consultancy AMR Research.

In its study on the return on investment (ROI) from contract automation, AMR found that despite the challenges of defining a project's scope and digitizing paper contracts, early adopters of the necessary processes and technologies are reporting 150 to 200 percent payback within a year on targeted, two-to-three month-long implementation projects.

"Contract management applications are systems that business users  not IT staff  use to not just create online contracts, but also gain the decision-making power that comes with better visibility of contract information," said Pierre Mitchell, vice president at AMR Research and co-author, with Lindsey Sodano, of the report, titled "The Compelling ROI of Contract Management."

"Using these systems," Mitchell continued, "managers are able to curb maverick spending by buyers, identify suppliers who are overcharging and catch contracts for unwanted services that would have otherwise automatically renewed."

Through interviews with early adopters, AMR learned that buy-side contract automation is producing results in four areas, including supplier compliance, where companies can get rebates from suppliers that fail to meet contract terms, and internal compliance, where companies can identify off-contract purchases and eliminate this sort of "maverick" buying.

Companies may also be able to improve their sourcing through contract automation, which can help identify spend categories ripe for improvements that traditional sourcing might miss. In addition, automation can help companies take advantage of savings that could be achieved by re-sourcing a contract that originally had been set up as auto-renewing.

Finally, contract automation can help companies improve their contract creation and approval processes, thereby shortening sourcing cycle times, the analysts found.

AMR reports that the average implementation time for contract automation was two to three months, with the average price tag coming in at $275,000, although the costs varied widely, depending on the scope of the project and the attendant services. For their money, the companies that AMR surveyed reported a 150 to 200 percent return on their investment within a year.

The study notes that contract automation solutions are available from enterprise resource planning (ERP), supply chain, procurement, sourcing and niche solution providers, and AMR advises that a particular company's spending categories and information technology architecture will determine which type of solution will be the best fit.

Mitchell and Sodano also offer a set of criteria for evaluating contract automation solutions, such as the ability to model interdependencies between different contracts, the ability to cross-reference spending categories with category taxonomies used in other enterprise systems, and the flexibility of the rules within the solution for tracking renewal dates and conditions, among other criteria.

The consultancy recommends that companies not dive into contract automation all at once. "Companies that have reported the most success are those that started small with focused implementations covering previously ignored spending categories," AMR advises. "Pick spending categories with a high likelihood for success: software maintenance renewals, lease-based categories, trade goods with high price variations, or any spending categories that have highly variable suppliers or haven't been well addressed to date."

For more information on contract management automation, see the article "Digging Out from the Contract Clutter" in the January 2002 issue of iSource Business.