The Importance of Contract Management when Analyzing Spend
When my clients ask me to help identify areas of opportunity for cost reduction with their existing suppliers, I ask two questions:
1. Where are your contracts?
2. How much do you spend?
The first question usually gets a lot of blank stares, shrugging shoulders and a general sense of helplessness.
The second question generates massive spreadsheets from the finance department, listing every supplier that ever submitted an invoice and got paid.
But the spreadsheets don’t give the specifics about what was purchased or the underlying contractual obligations.
And the reality is that, without a solid understanding of the existing terms and conditions, it’s difficult for any organization to negotiate cost reductions with their suppliers.
Unfortunately, many of the consulting firms that are hired to find cost savings opportunities fail to mention the importance of contract management as an underlying prerequisite to spend management.
Instead they spend months sifting through a client’s financial data and produce impressive graphs and charts that show exactly where the opportunities are. All the client has to do is consolidate, renegotiate or cancel contracts in order to reduce spend.
But by the time the client realizes that they need to first find and understand their contracts, the consultants are either long gone or walking through the door with one of their ERP systems vendors who just happen to have the perfect (expensive, complicated, hard to implement) solution for contract management.
The reality is that contract management doesn’t have to be expensive, complicated or hard to implement, as long as an organization understands what it really needs.
Enterprise Resource Planning (“ERP”) systems weren’t developed for contract management.
ERP is business management software intended to collect, store and manage data from various business activities.
The system typically consists of a suite of modules that can be bundled together, or added on at a later date, to give the client an end-to-end solution.
Suppliers that sell a contract management module as part of their ERP system highlight 3 key benefits of their product:
1. The client can create contracts from within the module, utilizing corporate standard terms and conditions, thereby eliminating the need to work off a supplier’s paper
2. The client can produce reports and summaries of the contracts stored in the system
3. The module seamlessly integrates with other modules (procurement, accounts payable, asset management, etc.) to provide a complete end-to-end solution
However, if we take a closer look at each of these 3 supposed benefits we see something different.
1. Contract Creation – I’ve been managing and negotiating contracts for almost 20 years. The way lawyers drafted contracts when I first started is the same way it’s done today, and I suspect that’s the way it’ll be done for the next 20 years. I’ve seen many contract management modules implemented at various organizations but I’ve yet to see one that’s actually used.
2. Reporting – Reports and summaries are only as good as the data used to create them. Garbage in, garbage out. ERP modules require manual data input into a lot of different fields across a lot of different tabs. This makes sense when dealing with numerical data such as financials or asset management, but it’s almost impossible with contracts. ERP systems produce very impressive financial reports but are utterly useless when trying to summarize contract data.
3. Integration – The suggestion that the contract management module will seamlessly integrate with other modules is misleading, at best. At worst, it’s just a way for the supplier to sell more modules. The truth is that any module will only provide seamless integration with other modules within the same ERP system AND as long as there’s no customization. However most organizations don’t go all in with one ERP solution for all of their business management needs and they will almost always need customizations for the modules they do buy.
So what does an organization really need for contract management?
The Simplicity of Contract Management: What you really need
Most organizations, big and small, only have a handful of real requirements for contract management:
1. Summary – Once a contract has been countersigned and returned, most organizations require a summary to be sent (along with a copy of the final document) to key individuals and departments such as the CEO, CFO, Legal and Finance
2. Storage – The final version of a contract needs to be stored in a secure location that can only be accessed by authorized personnel
3. Ease of Access – Most contracts that are signed and stored will never be read again, unless there’s a breach. However some contracts (usually IT) have renewal dates, service levels and milestones that need to be reviewed regularly
4. Alerts – Organizations need to know when contracts are coming up for renewal so that they can plan for the cost to renew, as well as any renegotiation that may be needed.
A simple tool that addresses these 4 basic needs for contract management will be more than sufficient for most organizations and the cost will be exponentially less than an ERP module.
With Q4 around the corner, I’ve been talking to a lot of executives about the impact contract management’s having on year-end cost savings initiatives in the post-COVID environment.
As one executive recently told me “…one outcome of remote work is that it exposed flaws in our processes that we just ‘made work’ when we were in the office”.
It was an interesting comment that really drove home a point I’ve been making for some time…less is more when it comes to contract management.
The reality is that expensive, complicated ERP systems just don’t make sense anymore which is why I truly believe the solution I designed and built, OneView, gives procurement teams everything they need when it comes to contract management…for pennies on the dollar.
If you would like to know more, feel free to message me directly at [email protected]