Managing contracts is a long-established task and Gartner estimates that 60-80 per cent of business-to-business transactions are governed by legally binding contracts. Most organisations have put in place some sort of contracts management practices but people forget where the original documents are filed and what terms the parties have to comply with.
Technology has been very poor at supporting this vital management process. Crude spreadsheets have been widely used to log details of contracts and commitments. However, these are cumbersome and the volume of contracts logged soon exceeds the realistic scope of the technology. One Open Text client had previously tried to manage 10,000 contracts through spreadsheets.
Some organisations move to databases, which allow filtering and rudimentary reporting, but flounder because there is no control over the documents themselves. There is no repository and no standard operating procedures to show to regulators.
Even document management systems offer little management support once the contract has been signed. Organisations can spend months negotiating contracts, tying up top managers, legal staff and specialists, but the major problems start when the contract is signed. In 90 per cent of cases they end up in a departmental filing cabinet or an archive offsite. Even if they are stored electronically, the document still has to be found, retrieved and read to establish key terms and renewal dates.
Organisations are increasingly looking more strategically at the whole contracting process. They want standard operating procedures and software to support them. Standard operating procedures are vital to control who can negotiate and approve contracts, and to protect the organisation against unscrupulous suppliers putting in over-advantageous terms or over-optimistic or maverick sales staff offering uneconomic prices or discounts.
Computer systems have recently started to come of age and viable enterprise-wide contracts management systems are now being successfully implemented. They are designed to support the entire process of creating, negotiating, approving, reviewing, storing and managing legally binding contracts.
These systems can handle all types of contracts, not just suppliers and customers. They cover human resources, including contracts of employment; commercial, especially revenue-generating contracts, such as alliances, partnerships, joint ventures and licensing; and property contracts, such as buying, selling, renting, leasing and sub-letting.
A contracts life cycle management system is intelligent and understands the key terms that need to be tracked and managed throughout the life cycle. These include penalty clauses, start dates, end dates, pricing schedules, volume discounts, early payment discounts, bonuses etc.
The key to the system is an interactive questionnaire that authorised business users complete when they want to create a contract. This captures the key terms and creates a customised document from a library of pre-prepared clauses. This is held and managed securely by the underlying document management system, which then controls subsequent revisions and versions.
The built-in workflow system sends it to the appropriate people for internal review and approval. Rather than send it out to the other party, where control would be lost, they are invited into a secure collaborative workspace within the organisation's firewall. This controls their responses and changes and enforces the agreed timelines.
Once a contract has been signed, the system uses its powerful and robust embedded business intelligence functionality. This provides reporting, analysis and alerting functions to track contractual commitments and answer complex queries. It links in with the core business systems to include important functions like supplier performance monitoring and spend management.
One of the most important benefits of a contracts management system is having complete control of the contracting environment. This is because the underlying document management, workflow and business intelligence technologies completely automate and control all processes throughout the life of the contract.
It is simple to use for the business user, yet supports them with sophisticated underlying clause libraries. Along with specialists in the organisation, such as legal, procurement and finance, they have instant access to documentation, management information and alerts. The contracts management system will produce reports of all contracts, for which the manager is responsible, that expire in the next three months or financial year and provides alerts in good time as each approaches its renewal date.
The system reduces costs by automating the drafting process and eliminating expensive internal and external legal time. Once signed, it assists cost control through reporting actual contract spend against forecast and provides supplier performance data. Increased control over terms reduces the risk of increased costs through unrealistic terms, including 'evergreen' auto-renewal on the other party's terms. Such a contract cost one North American company alone $150 million.
The powerful and intelligent reporting allows more aggressive terms to be negotiated, as compliance can be monitored and enforced. Such terms could include early payment discounts, timeline penalties and performance bonuses. This enables the organisation to maximise the potential value of the negotiated terms and conditions over the life of the contract through revenue opportunities or cost savings. Most of all, the document management features behind a contracts life cycle management system allow the organisation to prove to regulators and contract partners that it has complied completely with all its contracting process and obligations.
Contracts life cycle management software has come of age at a time when organisations are seeking to standardise their contracting and reporting procedures. By gaining control of contract processes the organisation can manage contractual liabilities and ensure complete compliance with regulations. This will create value by maximising revenue, reducing costs and mitigating risks.
Ronan Lavelle is business solutions director for EMEA at Open Text Corporation.