What value contract templates?
Many organizations develop contract templates or standards as a way to impose internal controls. However, few have undertaken analysis to determine the impact on external relationships or contract effectiveness.
The questions that IACCM sought to answer were two-fold. First, do templates in general have an impact on customer or supplier relationships and second, is there any evidence that the approach to development and maintenance of the templates alters this impact?
An obvious place to start our investigation was to look at cycle times. We know from extensive benchmarking that the bid-to-contract cycle times vary substantially between organizations, up to 400% for some contract types. It seems obvious that the existence of a standard template should reduce the time it takes to put contracts in place. Our findings were interesting. While the top quartile performers in terms of cycle time (bid-to-contract) almost universally use templates, so do many of the organizations in the second and third quartile. However, the nature of the templates proved to be significantly different.
The leading companies develop and maintain what we term ‘market-based’ templates and they also tend to have pre-approved fall-back or alternate terms. Their focus is on ensuring proposed terms are appropriate to the customer or supplier – for example, that they reflect industry practices, regulatory needs and are attuned to the specific product or service under consideration. In addition, via their pre-established term alternates, they significantly speed the process of negotiation, sometimes through empowering the customer interface, sometimes through simply accelerating internal review.
The ‘laggards’ are those who develop templates purely as a method of internal control. They generally lack an established process for periodic review and update of the templates and almost none have developed term alternates or fall-backs. Their attitude is often driven by perceived market power and a wish to impose greater risk onto their supplier or customer (these template approaches are particularly common among buyers). Their cycle time performance was only marginally better than the organizations which had no templates at all and operated on a case-by-case review model, generally based on the counter-party’s template.
Ultimately, does this matter? The answer is yes. Cycle times certainly impact the attitude of the business towards its Legal, Procurement or Contract Management groups. Faster closure is obviously important, whether because of time to revenue, time for product development and availability, time to savings or as a source of competitive advantage. It encourages internal compliance. Organizations with market-based templates suffer a lower level of non-compliance.
But perhaps the most telling statistic was our discovery that the nature of the templates also impacts the frequency of subsequent claims and disputes. Market-based templates have the effect of reducing disagreements by 8% – 18%, reflecting significantly more harmonious relationships.
In summary, the analysis suggests that contract templates definitely create value – so long as they are the right form of template. There is plenty of room for further research in this area, to look at more detailed impact on areas such as margin, savings or innovation.
The IACCM report on contract templates is available in the member library at http://www.iaccm.com.