November 13, 2017
At its core, contract lifecycle management (CLM) is about being proactive. It is about managing all elements of a contract, from initiation and authoring, to awarding, compliance and maintenance. A proactive approach allows for an organization to focus more on strategic initiatives rather than tactical, reactive situations. Correct implementation of CLM can reduce or mitigate financial, legal and procurement risks.
Let’s take a closer look at two critical elements of CLM: contract renewal and standardized contract authoring.
Automation of Renewals:
One source of unexpected costs in an organization is the surprise increase of goods/services pricing due to the expiration of contracts. Considering a recent client of mine, we saw how the sourcing department invested time and effort into creating cost saving contracts, only to have some of the negotiated pricing revert back to manufacture pricing after a contract expired unnoticed. They had upwards of eighty thousand contracts with a “home-grown” solution that alerted sourcing mangers when it was time to renew.
The “home grown” solution was based on a database that provided notifications without automated actions. Their email client was leveraged to send employees reminders of manual work that needed to be done. This required the contract owner to be the link between system and contract. As the number of contracts rose past eighty thousand, this left a lot of manual work to be managed.
Contracts were expiring before renegotiations could take place. The sourcing team felt they were being reactive to the contract lifecycle – they spent time ‘putting out fires’ instead of investing time in better sourcing and negotiations.
Without proper governance and structure of a CLM tool, vendors will not hesitate to revert back to pre-negotiated pricing on orders once a contract has expired. If they can make more money, they will. It is cheaper to renew an existing contract than it is to renegotiate a new contract. These cost increases can be due to labor, opportunity costs, potential price increases, penalties or shipping delays due to defaulting to non-negotiated pricing.
This is reminiscent of a recent personal story that happened to me.
My family and I live in the city of Chicago and recently went to an event where we had to find street parking. When we came back to the car, a hefty ticket was waiting on the windshield. Expired license plate sticker: $200! This put a bit of a damper on the evening to say the least and once I ordered the new sticker, I also had to pay a late penalty! A very expensive lesson to learn.
Now let’s think how a CLM tool could have helped in this situation. I could have avoided the costs of the ticket altogether because an updated sticker would be automatically ordered, shipped and expensed near the time of expiration. I would have avoided any late payment fees and maintained compliance with the local city government. Maybe most importantly, I would have maintained some harmony in my family and avoided the inevitable ‘evening damper effect’ of a surprise ticket.
CLM with expiration and renewal management is not just the sending of notifications to contract managers, it can automate tasks and leverage business intelligence to keep contract managers informed and help identify future sourcing and contracting needs based on spend and purchasing trends.
Standardized Contract Authoring:
One way for an organization to easily introduce CLM functionality is to integrate into their existing P2P platform, thus making it a true ‘source to contract to order’ solution. For example, a ‘non-catalog free form’ requisition can trigger a sourcing event and then, after awarding the business, a contract can be created, authored and signed all within the tool. Once the contract is active, the requisition can continue. This is now ‘spend on contract’ which is a hallmark of optimized procurement programs.
An obvious concern here is moving contract authorship away from the traditional legal-department-centric model to a procurement-department-centric model. This may cause some to think the risks outweigh the efficiencies. One method to address this, and one that a strong implementation partner can help with, is the building of a legal ‘clause library.’
Leveraging a CLM’s contract authoring capabilities can mean easy contract set up that is specific to the category, commodity and vendor types. This allows a sourcer to create a policy-driven contract that meets governance and legal requirements without needing to get the legal department to sign off every time.
Think of bowling: the clause library and authoring tools are like the “bumpers” that keep the ball out of the gutter and ensure a strong hit of the pins. A clause library adds standardization to the authoring process by providing sourcers with approved clause templates and a platform that leads the sourcer to the right templates via configurable rules about commodity and category mapping.
A goal of implementing a CLM tool is maintaining proactive governance across the procurement function. Incorporating CLM into a P2P platform allows legal governance and control to lay the foundation of a procurement activity ensuring that the contract is authored with approved clauses. Once that foundation is set, automation of renewals will help maintain the control mechanisms and P2P integration allow the contracts to be utilized to for increased spend management.