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Lies, Statistics & Contract Management

October 4, 2010

I recently received the following question from an IACCM member:

“I am reaching out, because the statements below are being tossed around at a client organization where I am engaged on a project with the General Counsel: 

PricewaterhouseCoopers suggests that a company can realize savings of 2% of their annual costs by eliminating inaccuracies and non-compliance through contract management on both the buy and sell side.

Goldman Sachs estimates that contract automation could accelerate negotiation cycles by 50%, reduce erroneous payments by 75 to 90%, and cut operating and processing costs associated with managing contracts by 10-30%.

 One, do you believe these?  Two, are there other named organizations making such statements? If so, what are they?”

I am sharing my reply – and will welcome input that may add to the data available for those contempating contract management investments.

“As you will note, the two statements represent very different measures. The PWC data implies process improvement leading to a specific 2% reduction in business costs. The Goldman claim relates specifically to automation and is only in the context of  improvements to the contracts activity – clearly a much smaller number (and on base measures that most likely no one currently knows).

Should these be achievable? Yes, in general I think they are. It really depends on the nature of the business (types of contract) and how good they are at present. Our data suggests the potential for much larger benefits than these if you compare bottom quartile with top quartile performers. There is the possibility not only of cost reductions but also revenue improvements.

We see buy side and sell side ‘value leakage’ affecting companies that:

– select the wrong suppliers / customers
– apply the wrong form of agreement or terms
– fail to provide the correct contract governance and oversight in post-award

Obviously, addressing all of these requires a holistic review of procedures and ownership for the contracting process, but has been seen to generate overall improvements of around 7% in cost reduction and 5 – 7% in revenue improvement.

Automation alone will have much less impact – and indeed may have virtually none if the process itself is not reengineered.

This task is of course far bigger than the GC’s remit and if it is confined to a purely legal perspective, returns will be fairly small. However, it is certainly possible for the GC to sponsor such a project and a growing number do so.

Various analysts have published data, I imagine Deloitte and other consultants also have a view. But these tend to be highly generalized, with limited indications of the source of savings or improvements, and also assume a fairly standardized, compliance-driven business model,which can actually be quite dangerous for competitiveness in today’s markets.

Our model assumes contracting has a more strategic role in the business and that a key element of value is to increase empowerment and agility, coupled with increased oversight and central governance.”

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