Strategically thinking about contracts can net real profits
Can simply putting contracts into the category of “things that need to be managed” and not “things that need to be filed” create real gains for companies?
And by real gains, yes, we’re talking about reduced costs and bottom-line benefits.
Anecdotes pop up from time to time in the “Commitment Matters” blog, written by Tim Cummins, CEO of the International Association for Contract & Commercial Management (IACCM). Recently in a post titled “Missed Opportunities” Cummins wrote about the experience of two companies he met with recently that had success stories to relate.
The pair of companies reviewed their in-house contracts and found large (25 percent) cost savings with suppliers. Cummins reported that the two companies reviewed over 40 contracts and discovered some common problems: poorly defined requirements and badly defined scope.
Instead of focusing on outcomes, many contracts were concerned with how the supplier got the job done – regardless of whether or not it increased costs (and the implication was that it increased costs).
The bigger picture: rethinking the value of contract management
The good news is that when the companies focused on what really mattered in the contracts, they achieved huge cost savings (“exceeding 25 percent”) without affecting supplier margins. That’s called a win-win.
The bigger picture here, of course, is that before the two companies mentioned in the post achieved their cost savings, they had to commit to delving into their contracts and supplier relationships. That can be a daunting task; especially so when you are dealing with vendors who aren’t just providing a “nice to have” service, but business-critical supplies or key components of an end product.
That kind of roll-up-the-sleeves task can be mind-bendingly difficult if there is not a prior commitment to actively manage contracts with a contract management solution. Let’s imagine what would happen if these contracts did not exist in a central database with one-click access to everything from reports, financial summaries and key clause information.
Most likely the process would start by backtracking contracts to key stakeholders, and then to the end product produced by legal. A further search may determine that administrative staff actually “hold” and store contracts in each department.
And here is a common source of problems with contracts: different people may hold different versions of the same contract. Before a review of a contract and vendor/supplier performance can take place, you need to start with what is the accurate contract – and match its key information with results.
So now you have to track down information from accounts payable or department budget-keepers to match up that information.
Or … you could do it the easy way
Of course, with a contract management solution such as Contract Assistant, this task would be immeasurably easier. In the event that you’ve purchased Contract Assistant (see overview of all editions here), for example, by the time your organization has committed to a review of contracts, your organization will have created a complete database of all in-house contracts.
These electronic records can be searched easily via an index, and each record will contain the kind of information that would make an in-depth review a much easier task (thought admittedly, still a complex one). But by starting with a complete and accurate record of all contracts, complete records of financial summaries, key contract terms, any review is on firmer ground to study performance/results.
A contract management solution may sound like “another piece of software” but it does have one huge potential benefit. By simply committing to a solution, an organization will have taken the first step to thinking critically about contracts.
Simply moving from “things that need to be filed” to “things that need to be managed” is the first step to thinking strategically about contracts – and possibly reaping big bottom-line gain from doing so.
[About the author: Todd Hyten is a former business journalist who now writes about B2B topics and consults on content marketing. You can find him on Twitter and Google+.]
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