Automating the Contract Lifecycle: Challenges and Solutions Strategies
Emerging operational strategies for procurement and supply-chain transformation
envision a substantial role for contract lifecycle management (CLM) and contract
process automation. (See Atif Rafiq's white paper "Contract Management and Organizational
Transformation.") Methodical leverage of negotiated relationships presents one
of the largest opportunities for value creation that enterprises have experienced
in recent times. Research indicates that over two-thirds of the Global 2000 have
substantial active investments in strategic initiatives related to the procurement
function.
Over the years, almost every large enterprise has implemented several limited systems for the management of contracts and the automation of contractual activities. The nature of these projects runs the gamut — from spreadsheets and desktop databases to Web forms, shared network folders, and Notes-based contract requisitioning workflows. In some cases, the systems incorporate proactive notifications for key contractual events, and, on rare occasions, they automate entire contractual processes (e.g., new contract creation, renewal, or adjustment). For a majority of organizations, however, these legacy contract systems have either failed to take hold or have encountered fundamental limitations that do not allow them to scale with the needs of the enterprise. The growing pressure for improved organizational effectiveness, coupled with the substantial latent value locked up in negotiated business relationships, has led many executives in procurement, supply chain, finance, and sales to revisit the issue of contract lifecycle automation.
Despite its intuitive appeal, contract lifecycle management remains as one of the last areas of opportunity for business automation within Global 2000 organizations. The difficulty in successfully implementing a long-lived enterprise contract automation strategy stems partially from organizational issues (the people, processes, and policies that make automation viable) and partially from technology limitations that have rendered extended visions for CLM intractable. While several of these fundamental barriers have recently been breached, major challenges to contract automation persist — both organizational and technological.
For those organizations that have recognized enterprise CLM as an immediate business priority, it becomes critical to fully identify the implementation challenges and put in place a robust solution strategy to overcome them. In this paper, I present a perspective on these challenges and solutions, based on experiences with multiple recent CLM implementations within the Fortune 1000.
Organizational Challenges — People, Process, and Policy
Many organizations lack the infrastructure and capabilities needed to make their strategic vision for procurement and supply chain transformation a reality. This gap manifests itself in three critical aspects of the organization — people, processes and policies. Few enterprises have invested the resources to fully define the skills, standardized processes, templates, procedures, and guidelines required to power their organizational vision. Nowhere is this gap more evident than in the area of CLM, where traditionally, strategic activities like managing contractual risk have been left up to the discretion of the individual front-line managers. Putting in place a consistent infrastructure related to these three aspects of the organization is the essential foundation upon which a robust contract automation system can be built.
Figure 1: Lifecycle and Administrative Processes in CLM
People
Lack of clarity in the roles and responsibilities related to the contracting function is a primary barrier to successful CLM implementation. As enterprises strive to move more business under contract, the primary activity of the typical procurement and supply-chain organization is shifting from supporting transactions (such as processing PO's and invoices) to supporting strategic activities (such as sourcing and contract negotiation). For example, people in the organization increasingly are involved in processes for creating and negotiating contracts, reviewing and approving portions of the contract, referring to historic contract trends, creating negotiation strategies, defining minimum standards, reviewing contractual performance, and so on.
In addition to the evolving nature of operational roles in procurement, new roles have been necessitated by the need to support advanced contracting practices and to maintain automated systems. It is of utmost importance to recognize the nature of these new roles, understand the responsibilities and skills required to fulfill these roles, and to train people to staff these roles appropriately. Two crucial roles that have emerged are that of the contracts administrator and the contracting officer.
The Contracts Administrator
Contracts administrators are the owners of contracting processes and standards. They work closely with strategic sourcing, supply-chain, procurement, and legal personnel to produce the best practices for CLM. The administrator's responsibilities can include defining the standard contract types for the organization; establishing target terms and minimum acceptable positions; defining approval and review processes and guidelines; defining the approval routing for exceptions from the company preferred positions; defining escalation procedures if activities do not unfold in a timely manner; establishing default access control policies for contract information (who is permitted to see what content, who can run specific reports) and functionality (who can edit or modify contractual information); and creating the event notification hierarchy.
In addition, the administrator designates the specific individuals that fill each contract management role in the organization. (For example, Joe from IT needs to review all hardware purchase agreements that exceed $125,000 in value.) This person also determines the touch points between the contracts processes and other functions within the organization, such as sourcing managers, buyers, and legal counsel — and provides crucial contractual guidance during sourcing and performance evaluation processes.
One or more administrators may be required to support the organization, depending upon the scope and complexity of the contracting practice or supplier/customer base. In a large organization, it is likely that there would be a need for a lead administrator, who could also be an executive title dedicated to contracting strategy (such as vice president of contract management). Additional administrators can be organized by division, contract type or contracted commodity. Depending upon the organization, this resource resides within the corporate procurement, supply-chain, legal operations, or financial functions. The contracts administrator needs to be experienced in contracting (drafting and negotiation), supply-chain management and sourcing, and must have significant expertise in enterprise data management, process definition, and other Six-Sigma practices.
The Contracting Officer
The contracting officer is the primary facilitator for a particular contractual relationship. This function forms the outbound, operational facet of the contracts organization. A contracting officer receives the requisition for the creation or adjustment of a contract from the internal customer (business unit), puts together a contract team and contract document, and orchestrates all the steps required to get to a signed agreement. This includes creating or selecting the appropriate contract template, generating a first draft of the agreement, routing the contract document for review and approval, working with the internal customer to negotiate the agreement, generating the final executable agreement, updating enterprise systems, distributing the contract agreement upon contract execution, and performing all the ongoing maintenance for the agreement (amending, terminating, renewing, and so on).
The contracting officer owns all the formal aspects of the partner relationship and could be assigned by contract type, commodity type, or by individual supplier (for larger relationships). After contract execution, the contracting officer is also the primary relationship manager, contributing to such tasks as performance management, supplier scorecarding, dispute resolution, and claims processing.
Process
Achieving contract consistency, improving productivity, and reducing cycle time via contract process automation is predicated on establishing standard methods for completing specific activities. However, a system that facilitates any complex processes using workflow automation needs to be conditional, flexible, and granular in its operation in order to accommodate the nuances of any business scenario. In most organizations some contractual processes, such as approvals, are well-established and easily encoded within workflow automation systems. Other contractual processes may be less standard and may proceed in a fairly heterogeneous manner, depending upon the legacy of the department or at the discretion of the individual contracting officer. Contract processes that can benefit from automation include the following:
Lifecycle Management Processes
- Process for creating contract forms and a standard pre-approved term library
- Process for creating first-draft contract based on preliminary requirements
- Process for internal review of business and commercial terms in a contract
- Process for internal review of legal terms in a contract
- Process for negotiating business and commercial terms
- Process for negotiating legal terms
- Process for internal approval of contract terms
- Process for executing a final contract
- Process for adjusting, changing, or amending executed contracts
- Process for renewing or terminating an existing contract
Contract Administration Processes
- Process for notification of ongoing or impending contractual activity
- Process for establishing or modifying negotiating guidelines, preferred positions, and minimum acceptable terms
- Process for establishing or modifying the review and approval policies in the enterprise
- Process for capturing contract data for enterprise consumption
- Process for creating, modifying, or deleting contract templates and standard contract language
- Process for establishing, setting, or modifying access permissions for contractual information
- Process for searching for and accessing contractual information
Policy
Most enterprises do not have a structured process for creating and implementing corporate policies for contract management. Today, policies are created in a vacuum and communicated "open loop" via emails and memos, with no follow through on the policy actually being implemented on the front line. Automated systems, with provisions for templates, libraries, workflows, and access controls, provide the instruments by which corporate policy can be captured and enforced within the organization. Examples of policies that are important to establish up front in the contracting organization are:
Figure 2: Comparing Structured and Unstructured Formats
Rules for Drafting Contracts
- How are contracts created?
- Does the organization work with partner paper?
- Is there a library of standard and approved contract terms?
- What are the company's preferred positions and the minimum acceptable terms?
Review and Approval Policies
- Who needs to review and approve each type of contract?
- What is the approval policy for contracts that do not depart from company standards?
- What escalation needs to be in place if review and approval is not completed in a timely manner?
Negotiation Guidelines
- Who needs to be involved in negotiations on a contract?
- What is the protocol for negotiation with the supplier?
- When is a contract draft ready for external consumption?
- How are contractual trade-offs communicated and managed?
- When is negotiation complete?
Access Control Policy
- How is access to contract information provided or restricted?
- What contract information is shared externally?
- Who has access to contract management functionality (deleting a contract record, for example)?
Data Management Policy
- How is contract information tracked and reported?
- What are the metrics by which contractual activity is measured?
- How is data quality monitored?
Technological Challenges — Adoption and Integration
Fostering End-User Adoption
A major benefit derived from automating contract administration is the achievement of a high degree of consistency and quality in contract terms. In an environment where end users — divisional procurement personnel, sourcing managers, and contract negotiators — have historically had a lot of flexibility in negotiating contracts, adoption of a system that enforces standards becomes a key challenge. Tension between the speed and flexibility desired by the operational function and the structured process desired by the corporate function is natural. In the absence of a healthy balance between these conflicting requirements, the success of any contract automation initiative can be seriously jeopardized.
In practice, the end-user adoption in contract automation is contingent on the resolution of two fundamental issues:
Ease-of-Use of the Application
Application usability is determined by several quantitative and qualitative metrics, such as time taken to complete a specified task, system response, ease of access to application functionality, interactions that are consistent with other familiar application interfaces, availability of in-context help, the ability to take work offline, and integration with email systems. End users will naturally resist adoption of any system that adds substantially to their workload, ties them down to a single workstation or device, or requires them to interact with the system in inconsistent or unfamiliar ways.
Balancing Structured and Unstructured Formats
Structured data refers to information that is captured in structured formats, such as XML, HTML, or relational databases. The structuring of contractual information enables automation of contractual activities — such as creating contracts from clause libraries, routing of contracts for approval and review depending upon term-specific exceptions (such as routing the contract for legal review if a nonstandard clause is inserted into the document), and distributing contractual information to operational systems. However, the vast majority of everyday contractual activities happen using unstructured formats such as text documents, emails, image files, and so on. An effective contract administrative system needs to allow end users to continue working within their familiar unstructured environments while simultaneously capturing substantial amounts of structured information (such as key business values, rules, and actionable terms). Tools and technologies for the conversion of contractual information between structured and unstructured formats play a crucial role in fostering application adoption.
Integration With the Enterprise Ecosystem
A contract management application typically lives within an ecosystem of complementary applications that support procurement and supply-chain processes. End-user experience is enhanced when entire processes are contained within a single application or when context passes seamlessly between applications, such that data re-entry and context reestablishment is minimized. Since it is unlikely that a single integrated application will surpass best-of-breed capabilities, many organizations choose to implement and integrate multiple applications. This task has become less onerous with the advent of enterprise application integration (EAI) technologies, Web Services, and XML standards for data interchange. However, clear definition of application interfaces and proper design of the business application ecosystem remain critical tasks for system architects.
The applications that need to interoperate with a CLM system include document management, sourcing/RFx, finance (AR/AP), ERP, e-procurement, catalog management, and the like. It is important that the CLM system supports robust inbound and outbound data integration with these applications and also maintains enterprise data models (item catalogs, supplier profiles, organizational hierarchies, and so on) to capture any required contractual information that does not have a natural home in any other enterprise application.
Conclusion
Automation of the contract lifecycle presents a substantial value creation opportunity for the enterprise. This value is in the form of improved productivity, reduced time-to-contract, superior quality of contract terms, reduced contractual risk, spend consolidation, and better compliance enforcement. Applications recently released in the market have brought a lot of maturity to the space and have made the vision for contract automation a viable option for most organizations. While these recent solutions have overcome the weaknesses of earlier legacy applications by leveraging the latest Web technologies, significant challenges remain that could stall a contract management initiative in practice. By focusing attention on the people, processes, and policies needed to support the emerging contracting function, enterprises can significantly mitigate the deployment risks and reap substantial benefits from CLM.
