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Contract Practices Hit Cycle Times, Workload

April 28, 2008

IACCM research has unearthed some fascinating data regarding the impact of contract review policies at many major corporations – and shows that they have generated increased workload and cycle times. While this research did not measure the economic cost of such policies, it is clear that they are responsible for lost savings opportunities.

The story begins with Procurement and the drive to contract standardization and compliance. As we all know, recent years have seen a steady push to develop standard term and condition templates. Many times, these are driven by Legal and have been accompanied by little if any discretion for negotiation by the procurement staff (separate research in 2007 confirmed this).

It seems obvious that risk and workload can be reduced by imposing standards on suppliers – and the research shows that this has indeed enabled a transfer of Legal resources away from support of Procurement. Indeed, in many cases, Legal has even imposed lengthy turn-round times for any deviation to the standards, to discourage requests for negotiation. (There is evidence that this is having significant adverse impacts on supplier relationships and wider aspects of business risk, such as innovation and pricing, but those findings are not the focus for this article.)

What the latest research reveals is that this approach has been self-defeating. The rigid and risk-averse clauses included in standard purchasing contracts have forced suppliers to push back and demand negotiation – especially in the typical areas of Legal concern, such as indemnities, liabilities and intellectual property. This has caused a substantial surge in workload for most Legal groups (in many cases close to 10% year on year) as they seek to counter the inflexibility of their customers. (About the only sectors immune from this are those in consumer industries – and they are some of the worst offenders when it comes to onerous terms and conditions and therefore among the most disliked by their suppliers.)

The research points to several shocking discoveries that forward-thinking corporations will wish to address:

  • Nearly 40% of staff in Procurement and Contract Management see Legal as ‘a roadblock’
  • Average contract review and approval cycle times in the last 5 years have INCREASED by more than 10%
  • For every head that Legal has saved in support to Procurement, there has been an average increase of 2.1 heads supporting Sales contracts

This data alone points to an urgent need to reconsider policies and practices related to Procurement contracting. And that is not a task for Legal alone – one key reason for this rigid approach is that in many corporations, there is little contracts expertise within the purchasing organization. Even now, most training materials for those in sourcing / supply chain are seriously lacking in anything to do with contracts, therefore limiting opportunities for immediate empowerment and flexibility.

The economic and relationship consequences of this weakness are only now becoming apparent – and they will the subject of a series of further articles. Overall, it is clear that this issue deserves urgent attention and requires cooperative efforts from senior legal and procurement staff.

 

5 Comments
  1. I guess this reinforces what many of us have known for sometime that the intent to create value often destroys it. What is also worth mentioning is that the delays do not only affect the ‘lost savings’ they can also impact delayed time to revenues and impact growth. My experience of how some organisations operate – all with good intention – shows that the internal treacle and checks/balances with inappropriate KPI’s can have serious opportunity costs for the business and its portfolio of customers, suppliers and other partners.

  2. The results of the research emphasize the importance of a collaborative effort between Legal and Procurement. The customers with whom I speak echo the importance of internal partnerships as a key to their success. Just recently I spoke with a company that had just begun their implementation of automated contract management for their Procurement team. Knowing that the ultimate goal was business-wide, they involved stakeholders from Sales, Legal, IT, Finance and Accounting to gain consensus early.

    We’ve seen companies reduce their contract cycle times significantly. Both automation and collaboration played a role in achieving success. Successful companies are able to gather all the stakeholders at the table and to have frank discussions around their contracts process and the implications that terms, conditions and deviations can have to the business. Their outputs become a company-wide standard that is highly adopted and drive their automated contracts process.

    Mark Severns
    Product Marketing Manager – Contract Management
    Emptoris

  3. Our customers see an average of 30% reduction in overall contract lifecycle and once software like ours has been implemented, the organization gets excellent visibility into exactly what is causing cycle times to be longer than expected. In most cases, users find that the problem is not with legal but in fact in the collaboration process or even not having visibility into the process or having technology streamline the mundane activities that just simply eat away a person’s time.

    Our best in class customers have realized over 80% in cycle time reduction. The interesting part about some of the deployments we have seen is that a contract management software deployment helpd bring the various groups in a company together – with visibility they better appreciate the common goal.

  4. I believe that one of the major management concern today in contracting business is time taken in completing contract document including review and incorporating all comments, how long it will take to have contract ready for execution? but with current review process by so many players involved in the contracting cycle within the corporate where it turn out that the idea of review is exploded out of proportion where it leads to increase the contacting cycle time.

    If each corporate entity review contract in terms of making its comments relevant to their business only and made by professional within reasonable time then we are home-free.

    I always believe that in centralization and some time you have to be a dictator when it comes to time as an important element in executing a contract then only then the review process can be eliminated once we have concrete, practical and acceptable general terms and conditions of contract as standard format.

    We as Contract engineers tend to hesitate to work with legal and finance peers because the Lawyer tells you “IT IS ILLEGAL” and the Accountant tells “NO BUDGET” then where we stand if you want to complete your mission.

    At any rate, I always consider having Balanced Contract but to achieve that then TIME is of the essence of the contract. Furthermore, time is mandatory tool to review contract by specific number of players where it is possible to manage it which revels as subject for research.

  5. Robert West permalink

    As a commercial contract manager, I agree that there is very little contract negotiating skill in most procurement departments, and many simple matters have to be referred to attorneys, because buyers are either not knowledgeable enough or not authorized to make decisions regarding important contractual issues.

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