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Considerations on Contract Automation

January 16, 2012

Contracting is one of ‘the next big things’ in the world of business. That is because it is a critical contributor to the management of complexity and risk. Economic conditions are pushing organizations towards new sources of savings, revenue and project funding; into new and emerging markets; to dealing with unfamiliar cultures and business practices; growth in Asia is shifting the power of businesses to impose their way of working; companies are dealing with increasingly complex, interdependent systems. CEOs are struggling with how to understand, make sense of, and manage ‘interconnections and interdependencies’.

In this environment, the analytical and disciplined approaches that a high-performing contracting process brings are fundamental to business management and controls, plus they then provide a firm platform for the management of change (which today is inevitable during the lifetime of every relationship).

More than 60% of organizations see automation of their contract management process as a priority; indeed, it emerges as the number one priority for 2012 in the latest IACCM global benchmarking study. There are several reasons why automation is seen as key to improved performance:

  • Management is demanding ‘greater value’ from the contracting process, which includes improved cycle times, improved controls and improved management information
  • Resources applied to contract management are stretched; workload is increasing and hiring is generally not an option
  • Increasing regulation is imposing growing pressure on compliance, which is frequently achieved through contract management. Without automation, the necessary visibility and controls cannot be achieved

Acquiring the right automation is critical. For example, most Procurement groups have invested heavily in technology in recent years, including in many cases some rudimentary tools for contract management. Yet many are finding that what they acquired is not ‘fit for purpose’. A simple repository and a system that supports transactional management of standard forms of contract are inadequate to deal with today’s volatile, fast-changing market conditions. Far from enabling the business, such systems act as a constraint.

To become effective at managing contract risk, organizations need to focus on business and market intelligence that will help steer them towards improved decision making and will safeguard planned contract outcomes. To do this, we need to be far more thoughtful about the nature of the data needed for analysis and how to combine this with forecasts based on likely market trends and directions. Through this combination, the quality of risk management would improve and result in increased bottom-line contribution.

Some Key Considerations In Selecting Your System

It is critical to remember that contracts are instruments of economic value, in which legal considerations are of fundamental importance, but not their primary purpose. Contracts represent an economic arrangement and the underlying system should be designed and managed to maximize the probability of a successful outcome.

Second, contracting is a life-cycle activity. Businesses must have a system that supports their contracting strategy and allows appropriate flexibility during the opportunity or needs evaluation, negotiation and post-award environments. The contracting process brings cohesion across these phases of activity and provides a framework for clarity over requirements and goals, roles and responsibilities and on-going relationship governance.

Third, because of this scope, contracting has many stakeholders – Legal, Finance, Operations, Project Management, Sales, Procurement (not to mention the external trading partner). Each has areas of policy or resource interests which make them sensitive to authorities and review and approval processes. Therefore a contract management system must address their needs and be seen to deliver benefits and advantages consistent with their interests.

Together, these factors mean that gathering requirements and building consensus will be key to success. The right vendor will have the experience to assist you in developing a business case and will be able to offer a solution that not only addresses your perceived needs of today, but also has the flexibility to adjust to the fast-emerging needs of the future.

2 Comments
  1. Tim: Two thoughts:

    First, when it comes to contracts, automation can mean one or both of two things: contract creation and contract lifecycle management (CLM), which helps with monitoring performance. If you’re looking for sophisticated contract creation, I’d be wary of add-on solutions offered by CLM vendors.

    Second, automated contract creation could conceivably allow companies to outsource the task of building and maintaining contract templates. Such systems are in their infancy (to put it politely), but this kind of outsourcing should become more plausible as vendors (including my company, Koncision Contract Automation) devote more resources to developing rigorous products.

    Ken

  2. Hi Tim, great article.
    As a solution provider, we tend to focus more on the productivity aspect for the larger organization, for example when streamlining the execution of transactional and legally binding documents (http://www.xpertdoc.com/en/business-value/electronic-signature). From that perspective, the flexibility to adapt to the current practices of the organization typically gets a higher rating than the strict enforcement of sound discipline.Obviously, integrating both perspective is what will ultimately provide the best overall value to all parties. My view is that this is best accomplished with strong technology (of course 🙂 but most importantly experienced consulting and coaching, preferably from a counsel with strong local and/or industry experience.

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