Contract Management - Implementation
Challenges and Strategy
By Gurjeet S Tuteja,
CPIM, PMP
Today Contract Management has gained immense visibility due
to competitive pressure, global sourcing initiatives and
SOX regulatory mechanism. Not all the contract
implementations have been smooth. This paper discusses in
brief about opportunity, challenges and recommends an
Inverted Funnel Approach. An Inverted Funnel Approach will
ensure right implementation strategy for this initiative.
Contract Management
Opportunity
Organizations
understanding
and
expectations from contract management
have come a long way. A contract is a
legally binding agreement between the
parties identified in the agreement to fulfill
all the terms and conditions outlined in the
agreement. It started with the recognition of
long term relationship between buyers &
suppliers with commitment on volumes.
This was a win-win situation helping
suppliers to derive maximum benefit
through economy of scale and pass it on to
buyers. Last decade there was a drive in
most of the organization to automate the
contractual process with considerable
backing or push by the finance.
Unfortunately most of the ERP vendors
were not able to encash this opportunity
due to their inability to meet unique
requirement of organization. The smaller
but agile “Best In Class” product vendors
clearly exploited this niche area. The
emergence of “recognized savings” instead
of “booked savings” as one of most widely
accepted performance parameters of
procurement organization coerced most of
the organizations to integrate contractual
process with procurement process. The
outsourcing of manufacturing and services
initiative and so the need to formalize the
long term relationship between buyers &
supplier has also added to the craving of
organizations to churn out more and better
contractual agreement.
However the real fillip to contract
management initiatives came after SOX
(Sarbanes Oxley) regulatory mechanism
came into force where in compliance
become a faith and organizations were
forced to formalize the relationship with
buyers and supplier through legal
documents and emphasis on process of
adherence to that formal relationship. Now
almost all the contracts are scrutinized by
legal which mean process of approvals and
scrutinizing of terms & conditions by non
procurement entity (like legal & finance)
becomes even more complex.
Contract Management Scenario
Consider the following scenario which
elaborates challenges faced by most of the
organizations
The sourcing head of an oncology division in a
pharma company has embarked on a major
procurement initiative. The demand for facility
equipment is consolidated across all divisions in
a pharma company. Based on the consolidated
volume data and consumption the sourcing head
has done an excellent negotiation with City
Electronics and projected an excellent savings.
Memos/ mails have gone to sourcing heads of
other divisions to ensure that City Electronics is
the sole supplier and volume commitment needs
to be honored by the pharma company. The
negotiated price was extremely competitive and
City Electronics provided an excellent discount
based on annual committed volume. Every one
is excited about the potential savings and this
new initiative. However the sourcing head
overlooked just two important aspects. First the
process of contractual adherence by all the
purchase persons while buying from City
Electronics. Second the there was a clause which
mentions City Electronics as a preferred
supplier which mean City Electronics was able
to push the “not so popular” brands which leads
to end user dissatisfaction and increased annual
maintenance and worst this clause was not
reviewed by the legal and some of the Sourcing
divisions were forced to comply with the
purchase of these brands to adhere to the volume
commitment. At the end of year there was a
huge gap between recognized savings versus
booked saving, which leads to increased tussle
between sourcing and finance while assessing
the performance of department.
Are you electronically capturing the
rebates, discount and incentives
negotiated in a contract to ensure that
you are getting the best out of contract?
Today with ever increasing pressure to drive
the cost down sourcing professionals are over
zealous to source from new sources, vendor
and countries which have created newer
challenges on the legal landscape. This is
further complicated by initiatives like
supplier base rationalization and supplier
spread across geographies. The globalization
impact on the supply and market side has
also exposed organization to various
countries jurisdiction. This has made
contractual process even more challenging
with increased involvement of legal.
Contract
Management
inherent
challenges
I am not sure if above scenario looks
familiar to you, but most of the company
even after imbibing the process and
enforcing most of the spend through Contract Management perception
contacts still face some of the basic within organizations
The
major
fallacy
in
contract
challenges and questions like:
implementation
is
that
it
is
considered
as
Do you know your contacts expiration
another
IT
initiation.
The
approach
and
date? What is the mechanism and how
strategy for contract implementations
it is tracked?
mostly focuses on automation of processes.
Can you search a specific terms and
Some of the keys points to keep in mind
condition within contract?
while doing contract implementations are:
Do you know a specific deliverable or
Assess the contract process first in
milestone within a contract and has it
terms of unique requirements of
been completed on time or not?
organizations
Are all contractual rates and terms
Understand contract types in use today
complying
internally
by
the
and project needs of organization
procurement specialist? Do you know
Do a spend analysis and identify the
the saving leakage of your spend?
focus areas i.e contract type which will
There is a Sarbanes Oxley compliance
give maximum returns
program but has it been extended to
Decide on approach for contract
contract governance?
implementation
The “Inverted Funnel Approach” is
Can you identify and
for
the
a process of enabling contracts
types by building a basic
monitor
high
organization.
performance metrics infrastructure for contracts similar
This
article
to creating a base vanilla and
for a supplier based
discusses
on
adding various flavors over a
on
contractual
“inverted funnel”
planned time
agreements?
approach later in
Do we know if the contracts are in
this article
compliant with the legal terms
Involve all the relevant stakeholders
provided by your legal department? Do
from the beginning of implementation.
legal department review those terms
Take their inputs and capture specific
periodically?
issues.
Get a project sponsorship from the top
management and involve them as a part
of steering team
Inverted Funnel Approach for
contract management
implementation
“Inverted Funnel Approach” is a process of
enabling contracts types by building a basic
infrastructure for contracts similar to
creating a base vanilla and adding various
flavors subsequently.
In no way contract management initiative
should be considered as one time project
implementation. It is a slow, business
intensive
process
requiring
change
management across the organization
departments. It affects the way sourcing
does business with external suppliers and
communicates with internal departments.
“Inverted Funnel” approach is a systematic
way of implementing contract types by
introducing complexity gradually while
Most of the contract organization initiatives implementing.
This
involves
clearly
fail because of complex scope and “big differentiating
the
stakeholders
and
bang” approach adopted by organizations. sustenance guardian within the team. The
Considering the sensitivity and price tag
various
stakeholders
involved, most of the
The contracts in any organizations
involve
in
this
projects try to rope in
can be grouped in to broad
initiatives are:
categories as Frequent, Generic,
all
the
sensitive
Steering
Team
Challenging and Tough. The team
contracts making the
responsible
for
scope complex and should establish appropriate metrics
setting the strategic
to quickly assess the right
difficult
to
be
direction of this
implementation strategy based on it.
implemented. Instead
initiative.
This
the contract management should be a
includes representation from Finance
continuous roll out initiative as depicted
and Legal.
below.
IT implementation Team responsible
for setting e-process for contracts. This
will also include activities like package
implementation, setting contractual
terms & condition, approval by legal,
SOX compliance etc.
Business Enabler team responsible for
bringing out process change not only
within the organization (i.e. users,
departments) but also for external
suppliers. They are also responsible for
defining the contractual terms &
conditions,
contract
compliance,
implementing contract types and
The initiative needs to implement
suggest right type of contracts for
infrastructure for all types of contracts viz.
different scenarios.
Frequent, Generic, Challenging and Tough
Legal Team responsible for authoring
types. However the implementation
contractual terms & conditions and
strategy should always begin with
suggesting approval/review work flow
“Frequent” type of contracts to take
for sensitive terms & conditions.
advantage of low hanging fruits.
Formalize strategy to build
basic infrastructure and
implement contracts types
The contracts in any organizations can be
grouped in to following broad classification
and there needs to be a specific
implementation strategy/ approach for
each of it. The most logical way of broad
classification can be based on potential
saving opportunity and sensitivity of
contracts (like complex terms & conditions,
legal impact on organizations, business impact,
period & price involved and other
considerations).
The
most
logical
classification of contract type is:
Frequent
Generic
Challenging
Tough
High Sensitive
Less Sensitive
Low Spend
Frequent
(NDA, Service Agreement,
Physician Contract,
Confidentiality Agreements)
Challenging
(Item Level, Volume discount,
Lease, IP Agreements)
High Spend
Generic
(Supplier Level Agreement,
Commodity Level Agreement)
Tough
(Customer Agreement, Partner
Agreement, Outsourcing
Agreement)
The graphic representation of various
contract types is explained in above 2x2
quadrant diagram. The entire contract
landscape of the organization should be
assessed by the implementation team. The
team should establish appropriate metrics
to quickly assess the right implementation
strategy to develop basic infrastructure and
identify key consideration. Similarly project
team along with business enabling team
also provide adequate crucial criterion in
selecting technology support.
Implement
contract
solution
using inverted funnel approach
It is recommended to separate out
implementation approach for all the types
viz. Frequent Type to Tough Type. While
the solution should put in place the basic
infrastructure, the Frequent Type can be
implemented on an immediate time frame.
The implementation team should also
attempt to fit in contract types in relatively
easy quadrant depending on organization
inherent needs eg. acceptance by legal to go
ahead with complete automation of
frequent & generic contract type and having
manual intervention for challenging and
tough contract type. This can be done by
involving all the necessary stakeholders,
complying with SOX regulations and
contract compliance while placing orders by
purchase.
CONCLUSION
Contract Management can not be ignored
due to huge saving potential, legal impact
on
business
and
SOX
regulatory
requirements. It is an organization wide
initiative lead by purchase, legal and
finance. The implementation team needs to
asses the contract landscape and decides
right implementation strategy by following
an inverted funnel approach. There needs to
be a specific strategy each of broad types
like Frequent, Generic, Challenging and
Tough. The contract management program
should have a strategy for all contract types
AUTHOR PROFILE
Gurjeet Tuteja is a Senior Consultant with
Enterprise Solution group at Infosys
Technologies Ltd. He has no of years of
working experience spanning Procurement,
Business Consulting and IT consulting in
various areas of Supply Chain.
Gurjeet holds PGDIE (Post Graduate
Diploma in Industrial Engineering) from
NITIE, Mumbai (India). He is certified in
CPIM (by APICS) and PMP (by PMI).
He can be reached at [email protected] or
[email protected]