When my clients ask me to help identify areas of opportunity for cost reduction with their existing suppliers, I ask two questions:
- Where are your contracts?
- How much do you spend?
The first question usually gets a lot of blank stares, shrugging shoulders and a general sense of helplessness.
The second question generates massive spreadsheets from the finance department, listing every supplier that ever submitted an invoice and got paid.
But the spreadsheets don’t give the specifics about what was purchased or the underlying contractual obligations.
And the reality is that, without a solid understanding of the existing terms and conditions, it’s difficult for any organization to negotiate cost reductions with their suppliers.
Unfortunately, many of the consulting firms that are hired to find cost savings opportunities fail to mention the importance of contract management as an underlying prerequisite to spend management.
Instead they spend months sifting through a client’s financial data and produce impressive graphs and charts that show exactly where the opportunities are. All the client has to do is consolidate, renegotiate or cancel contracts in order to reduce spend.
But by the time the client realizes that they need to first find and understand their contracts, the consultants are either long gone or walking through the door with one of their ERP systems vendors who just happen to have the perfect (expensive, complicated, hard to implement) solution for contract management.
The reality is that contract management doesn’t have to be expensive, complicated or hard to implement, as long as the organization understands what it really needs.
Why ERP Systems Make Terrible Contract Management Solutions
Enterprise Resource Planning (“ERP”) systems are designed to collect, store and manage data from various business activities.
These systems typically consist of a suite of modules that can be bundled together, or added on at a later date, to give the client an end-to-end solution.
Some suppliers sell a contract management module as part of their ERP system. They usually tout the following benefits of this add-on module:
- The client can create contracts from within the module, utilizing corporate standard terms and conditions, thereby eliminating the need to work off a supplier’s paper.
- The client can produce reports and summaries of the contracts stored in the system.
- The module seamlessly integrates with other modules (procurement, accounts payable, asset management, etc.) to provide a complete end-to-end solution.
The problem is these benefits are hardly ever realized when contract management modules are simply slapped on to existing ERP solutions. Here’s why:
- No one creates contracts in an ERP system. – I’ve been managing and negotiating contracts for almost 20 years. The way lawyers drafted contracts when I first started is the same way it’s done today, and I suspect that’s the way it’ll be done for the next 20 years. I’ve seen many contract management modules implemented at various organizations but I’ve yet to see one that’s actually used for contract creation.
- Reporting is useless if key data isn’t in the system. – Reports and summaries are only as good as the data used to create them. Garbage in, garbage out. ERP modules require manual data input into a lot of different fields across a lot of different tabs. This makes sense when dealing with numerical data such as financials or asset management, but it’s almost impossible with contracts. ERP systems produce very impressive financial reports but are utterly useless when trying to summarize contract data.
- Integration is great in theory, but near impossible in practice. The suggestion that the contract management module will seamlessly integrate with other modules is misleading at best. At worst, it’s just a way for the supplier to sell more modules. The truth is that any module will only provide seamless integration with other modules within the same ERP system AND as long as there’s no customization. However most organizations don’t go all in with one ERP solution for all of their business management needs and they will almost always need customizations for the modules they do buy.
So if ERP systems don’t work, how can you manage your contracts in a way that actually supports the spend analysis process?
4 Simple Requirements for Effective Contract Management
Most organizations, big and small, only have a handful of real requirements for contract management.
If you can find a system that does these things, you’ll be far ahead of where any ERP system can take you:
- Secure Storage – The final version of a contract needs to be stored in a secure location that can only be accessed by authorized personnel. When everything is in one place, everyone will know where to look.
- Easy Access– Most contracts that are signed and stored will never be read again, unless there’s a breach. However some contracts (usually IT) have renewal dates, service levels and milestones that need to be reviewed regularly. These should be as easy to find as possible.
- Simple Summaries– Once a contract has been countersigned and returned, most organizations require a summary to be sent (along with a copy of the final document) to key individuals and departments such as the CEO, CFO, Legal and Finance. Summaries should be readily available in the system without having to sift through the entire contract over and over again.
- Important Alerts– Organizations need to know when contracts are coming up for renewal so that they can plan for the cost to renew, as well as any renegotiation that may be needed. A good system should tell you when important dates are coming up — instead of making you guess.
A simple tool that addresses these 4 basic needs for contract management will be more than sufficient for most organizations and the cost will be exponentially less than an ERP module.