Procurement Contracts: Real Value, Real Returns...Procurement Contracts Real Value, Real Returns...

Procurement Contracts Real Value, Real Returns

March 2009

William Browning III

Procurement Contracts: Real Value, Real Returns

© 2009 Aberdeen Group. Telephone: 617 854 5200

Executive Summary Research Benchmark

Aberdeen’s Research Benchmarks provide an in-depth and comprehensive look into process, procedure, methodologies, and technologies with best practice identification and actionable recommendations

Facing the worst economic crisis since The Great Depression, enterprises are in a constant battle to manage spend and control costs. Procurement is the chief architect of spend management and savings, and procurement has at its disposal an underutilized tool to meet savings expectations: contract management. Procurement contracts represent the culmination of spend analysis and sourcing efforts and are used to subsequently guide the purchasing process for the commodities and / or services covered by outlining negotiated prices, expected supplier service levels and agreed upon concessions and commitments on the side of the buyer. The effective management of the contract creation process in combination with the development of greater analytics and reporting capabilities around contract compliance delivers real value and returns for enterprises.

Best-in-Class Performance Based on the aggregate performance of over 170 enterprises surveyed, Aberdeen used two key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard organizations:

• Realized savings, measured as the percent savings captured or realized on contract spend

• Contract compliance, measured as the percentage of spend in compliance with contracts

Competitive Maturity Assessment Survey results show that the firms enjoying Best-in-Class performance shared several common characteristics. Top performing organizations are:

• 79% more likely to leverage contracts as part of the sourcing process

• 58% more likely to communicate the status of contract commitments and obligations to stakeholders

• 85% to 145% more likely to develop compliance measurement capabilities

Required Actions In addition to the specific recommendations in Chapter Three of this report, to achieve Best-in-Class performance, companies must:

• Standardize contract language to ensure consistency and mitigate enterprise risk

• Engage suppliers as part of the contract management process, including establishing a formal dispute resolution process

• Leverage analytics and reporting to develop a business case

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Table of Contents Executive Summary....................................................................................................... 2

Best-in-Class Performance..................................................................................... 2 Competitive Maturity Assessment....................................................................... 2 Required Actions...................................................................................................... 2

Chapter One: Benchmarking the Best-in-Class ..................................................... 5 Business Context ..................................................................................................... 5 The Maturity Class Framework............................................................................ 7 Building the Contract Management Business Case.......................................... 8 The Best-in-Class PACE Model ..........................................................................10 Best-in-Class Strategies.........................................................................................10

Chapter Two: Benchmarking Requirements for Success ..................................13 Competitive Assessment......................................................................................14 Capabilities and Enablers ......................................................................................15

Chapter Three: Required Actions .........................................................................23 Laggard Steps to Success......................................................................................23 Industry Average Steps to Success ....................................................................24 Best-in-Class Steps to Success ............................................................................24

Appendix A: Research Methodology.....................................................................26 Appendix B: Related Aberdeen Research............................................................28

Figures Figure 1: Impact of the Economy on Procurement Contract Management....5 Figure 2: Top Pressures for Improving Procurement Contract Management6 Figure 3: Cycle-Times for Contract Creation and Approval (Days) ................ 8 Figure 4: Best-in-Class Strategies ............................................................................11 Figure 5: Process Management Capabilities for Procurement Contracts......12 Figure 6: Contracts Leveraged as Part of Sourcing Programs..........................13 Figure 7: Contract Management Program Maturity ............................................17 Figure 8: Technologies Utilized for Procurement Contract Management ....19 Figure 9: Contract Management Solution Strategy .............................................21

Tables Table 1: Top Performers Earn Best-in-Class Status.............................................. 8 Table 2: Best-in-Class Performance - Incremental Improvements.................... 9 Table 3: The Best-in-Class PACE Framework .....................................................10 Table 4: The Competitive Framework - Process ................................................15 Table 5: The Competitive Framework - Organization.......................................16 Table 6: The Competitive Framework - Knowledge Management .................17 Table 7: The Competitive Framework - Technology .........................................18 Table 8: The Competitive Framework - Performance Management ................20



Table 9: The PACE Framework Key ......................................................................27 Table 10: The Competitive Framework Key........................................................27 Table 11: The Relationship Between PACE and the Competitive Framework.........................................................................................................................................27



Chapter One: Benchmarking the Best-in-Class

Business Context Fast Facts

√ 77% of enterprises indicated that the economy has led to an increased emphasis on management of procurement contracts

√ 71% of enterprises noted the need to control / reduce spend as the key driver of improving procurement contract management

As a global recession marches onward, enterprises are finding that they must closely monitor and control spending to protect their bottom-line performance. And when it comes to maximizing savings and managing spend, most of the enterprise turns to the procurement organization. Within Procurement's source-to-settle process, Contract Lifecycle Management (CLM) is a critical tool that can be leveraged to these ends while also enabling enterprises to optimize supplier performance and mitigate risks. Procurement contracts represent the culmination of spend analysis and sourcing efforts. They are used to subsequently guide the purchasing process for the commodities and / or services covered by outlining negotiated prices, expected supplier service levels and agreed upon concessions and commitments on the side of the buyer. Managing procurement contracts more effectively from creation to implementation and to renewal or expiration delivers real value and returns for enterprises.

Raising the Profile of Procurement Contracts In response to the wildly uncertain state of the world economy, the management of procurement contracts has received significant emphasis within enterprises, according to over 170 respondents to Aberdeen's survey for this report (Figure 1).

Figure 1: Impact of the Economy on Procurement Contract Management

“A global economy and global pricing; that is our biggest challenge right now. How do we succeed in such a tough market?”

~ VP Operations, Small Automotive Parts Manufacturer

40%

37%

21%

2%

Significantly increasedemphasisModerately increasedemphasisNo change

Decreased emphasis

Source: Aberdeen Group, March 2009

The current economic climate places procurement front and center in the eyes of enterprise executives due to the value that can be delivered through savings. Within the context of procurement's skill-sets, management of procurement contracts has become more readily recognized as a process that can support attainment of savings; there is real value and real returns that can result from more effective contract management.




Control the Spend, Work with Suppliers, Reap the Rewards Implicit in the increased emphasis on procurement contract management is a realization that procurement contracts directly support enterprise performance. With greater understanding of the many value propositions of effectively managing procurement contracts comes a heightened set of expectations around how they can be used to manage procurement-based business pressures. Overwhelmingly, improving control of enterprise spend is the top driver of efforts to improve procurement contract management (Figure 2).

Figure 2: Top Pressures for Improving Procurement Contract Management

27%

33%

35%

38%

71%

Poor visibility into contractualcommitments

Need to improve supplier compliance tocontracts

Pressure to reduce supply / supplierrisks

Need to improve internal compliance tocontracts & processes

Need to reduce / better controlenterprise spend

“Our enterprise has well-defined contract procedures that are approved and vetted by the finance and legal cells. The enterprise contract lifecycle management could improve if delegation of powers and levels of workflow could be reduced.”

~ Kaushal Pandey, Logistics/Supply Chain Manager,

Steel Authority of India, LTD.


Although a constant focus for procurement groups, enabling tighter control over enterprise spend takes on added importance at a time when credit markets are weak and enterprises face real concerns about short- and long-term financial planning. In the face of these liquidity constraints, improving savings provides greater financial flexibility to enterprises by diminishing the need to seek alternate sources of funding that may not be available. Every dollar counts in this environment and contract management is recognized as a means to drive more to the bottom-line.

However, enterprises also face internal compliance management issues and external supplier-related challenges. Compliance lays the foundation for successfully realizing the value expected from contracts. More stringent enforcement of processes ensures that successful contracts can be duplicated and that each contract includes all of the required components. Contacts created and implemented without following the prescribed process increases the risk to the enterprise, potentially resulting in lost savings, damage to the supplier relationship and even litigation. Additionally, processes in place are designed to facilitate efficiency so deviating from




these processes could delay implementation. Once implemented, user compliance is critical to ensure that contracts are utilized so that negotiated savings can be captured and volume commitments can be reached. Non-compliance results in a no-win situation for both parties in the buying relationship.

Interestingly, enterprises also note specific supplier-related drivers for improving management of procurement contracts. Suppliers have also been impacted by the economic slowdown, increasing their risk profile as a trade partner and also their need to sustain business. A dynamic has now been created where each relationship must be closely managed to ensure mutual success (and even survival), especially with more strategic suppliers. These risks may ultimately manifest themselves in the form of supply disruptions, which can impact an enterprise both financially and operationally. If a manufacturing company experiences a disruption in their raw material supplies, the risk is ultimately lost revenues and potential damage to its reputation among its customers.

“The volatility of the marketplace may present more risk in terms of supplier stability. Contract personnel have to be on top of this right now, on top of all the other issues should be.”

~ Director, Procurement, US University

Operationally, whether a contract governs direct or indirect materials, higher costs for securing alternative sources and an additional investment in time by procurement personnel are some of the potential outcomes of supply disruptions. As legal documents, contracts can be leveraged to set forth the guidelines for such events, including provision for additional discounts and / or damages for additional costs incurred. Such protective measures are often instituted and negotiated during the contact creation process so pre-implementation oversight is also critical.

The Maturity Class Framework Aberdeen used two key performance criteria to distinguish the Best-in-Class from Industry Average and Laggard organizations:

• Realized savings, measured as the percent savings captured or realized on contract spend

• Contract compliance, measured as the percentage of spend in compliance with contracts

Based on the aggregate performance of over 170 enterprises surveyed, Aberdeen used these metrics to classify respondents into three different performance groups: the top 20% of performers are Best-in-Class, the middle 50% of performers are Industry Average, and the bottom 30% of performers are Laggards. Table 1 displays that performance gaps that define each category.




Table 1: Top Performers Earn Best-in-Class Status

Definition of Maturity Class Mean Class Performance

Best-in-Class: Top 20%

of aggregate performance scorers

11% realized savings on contract spend 88% rate of compliance on contract spend

Industry Average: Middle 50% of aggregate

performance scorers


Laggard: Bottom 30% of aggregate

performance scorers



The performance of the Best-in-Class reflects their ability to address the two highest pressures noted: the need to better control or reduce enterprise spend and to improve user compliance to contracts. On average, the Best-in-Class capture 80% more savings than all others (i.e. the aggregate performance of Industry Average and Laggards) and demonstrate rates of compliance that are over 2.4-times higher than their competitors.

In addition to savings and compliance, the Best-in-Class have streamlined their lifecycle and reduced contract creation and approval cycle-times by 15% to 20% compared to all others (Figure 3).

Figure 3: Cycle-Times for Contract Creation and Approval (Days)

17.515.4

22.0

18.2

Contract creation Review and approval ofcontracts

Best-in-ClassAll Others


Building the Contract Management Business Case While it is no secret among procurement professionals that the benefits of investing in a contract management initiative and building out a formal




contract management program outweigh inaction, the true value has been difficult to quantify. This Aberdeen report shows that there are measurable differences in benefits as a result of contract management that are also significant in the key areas that procurement organizations measure their performance:

• Spend under management

• Savings leakage

The question commonly asked; "is there really a return on the investment in contract management?"

Savings Impact of Contract Management Contracts can be used to improve spend under management by enhancing visibility into planned versus actual spend patters, allowing enterprises to understand the level of maverick or off-contract spend. This information can then be used to craft targeted strategies to improve contract compliance and capture more of the savings negotiated. Additionally, by improving the amount of spend under management, enterprises are able to place more spend under contract, capitalizing on the ability of their procurement organizations to capture savings. The incremental changes that can be realized are noted in Table 2.

Table 2: Best-in-Class Performance - Incremental Improvements

Best-in-Class

Industry Average

Incremental Change

Spend under management 74% 53% 40%

Spend on contract 69% 50% 38%

Compliance 88% 43% 105%

Savings leakage 4% 17% 76%


Contracts end up having a domino effect on procurement's performance and the impact realized by the enterprise. As more spend is brought under the management of procurement, there are more opportunities to place spend on contracts to capitalize on potential savings. Contracts are even drivers of bringing more spend under management as the savings and operational efficiency benefits prove to be very palatable for executives. Once under the control of procurement and placed on contract, contract compliance can then be addressed to ensure savings capture. As companies make inroads into Best-in-Class status, they will ultimately be able to reduce savings leakage and deliver financial returns and justification for contract management investments. The business case is outlined to follow.



Contract Management Business Case

Business Case: $500M enterprise spend

• Spend under management - $270MM

• 40% increase in spend under management - $108MM

• 38% increase in spend on contracts - $41MM

• Additional spend in compliance - $18MM

• 76% reduction in savings leakage - $1.7M

$2.3MM potential incremental benefit if performance across all metrics is optimized

The Best-in-Class PACE Model Regardless of whether a supplier contract is considered strategic to the enterprise or whether the spend volume on a contract is significant, Aberdeen has shown that there is a clear relationship between the pressures companies identify, the actions they take, and the subsequent competitive performance. Improving management of procurement contracts requires a combination of strategic actions, organizational capabilities, and enabling technologies that can be summarized as shown in Table 3.

Table 3: The Best-in-Class PACE Framework

Pressures Actions Capabilities Enablers Better control over enterprise spend

Establish central repository for contracts Standardize contract management policies, processes and content Improve collaboration with suppliers during contracting process

Formal contract management program Enterprise-wide contract management policies Standardized process for contract approval Standardized contract language and use of templates Ability to communicate contract terms and obligations to all stakeholders Contracts leveraged in support of sourcing efforts Escalation process for dispute resolution

Contract management solution part of e-sourcing / e-procurement suite Online repository for contracts and related documents Electronic library of contract clauses, terms, conditions Library of contract templates Automated notification of key dates and events Automated workflow and routing


Best-in-Class Strategies While the top strategies that enterprise implement in order to improve the management of procurement contracts center on improving pre-implementation processes, there is also a push by the Best-in-Class to



collect and take action on information available on their contract management performance (Figure 4).

Figure 4: Best-in-Class Strategies

21%

24%

30%

14%

50%

30%

33%

37%

37%

48%

Strengthen contract language

Establish and measure Key PerformanceIndicators (KPIs)

Centralize oversight of contractmanagement

Improve collaboration with suppliers

Establish a central contracts repository

All Others Best-in-Class


Central contract repositories provide a measure of efficiency for enterprises in their quest to capture savings. Although placing contracts in a central repository is a strategy pursued by relatively the same number of enterprises across all competitive sets, the Best-in-Class have emerged as significantly more adept at the tactical execution of this strategy (to be discussed in Chapter Two). Establishing contract repositories is a basic, yet key strategy that enterprises pursue as a matter of course to improve contract management capabilities. Automation is not necessarily required to centrally store contracts, providing a lower barrier to entry for all enterprises.

An interesting differentiation between the Best-in-Class and their competitors is in their focus on collaboration with suppliers. This strategy is in direct response to pressures enterprises face around mitigating supply risk and improving supplier compliance to contracts. Engaging suppliers as a collaborative partner allows mutually beneficial courses of action to be pursued, which is especially critical in these tight economic times. Preemptive measures can be taken to recognize and avoid supply disruptions, resulting in the avoidance of extraneous costs and contentious interactions. Additionally, establishing a closer working relationship with suppliers also paves the way for compliance by suppliers to contract pricing and service levels.

Also distinguishing Best-in-Class enterprises from their peers is the development and use of Key Performance Indicators (KPIs) for measuring contract management performance. Noted as a strategy by one-third of all top performing enterprises, KPI measurement provides more granular visibility into contract management activities and allows the Best-in-Class to more accurately assess their performance. KPIs should be instituted that not




only measure such standard contracts-related metrics such as compliance and spend on contract, but also more advanced performance measurements such as cycle times, supplier compliance to service levels, and capture of rebates.

Aberdeen Insights — Enterprise Strengths

Contract Lifecycle Management (CLM) consists of specific steps that address the development, approval, and execution of contracts. Given the chance to self-rate their ability to manage (on a scale of 1 - lowest to 5 - highest), enterprises noted a stronger ability to manage the pre-implementation processes for contracts (creation, approval, and negotiation), as shown in Figure 5.

Figure 5: Process Management Capabilities for Procurement Contracts

2.39

2.38

2.42

3.05

2.85

3.01

Contract / supplier risk assessment

Process auditing

Compliance tracking and reporting

Supplier negotiation

Contract approval / review

Contract creation


The fact that enterprises rated all of their post-implementation management abilities lower than all of their pre-implementation management abilities reflects the ongoing struggles by enterprises to quantify the return on their investment in contract management initiatives. Without the ability to measure savings, compliance or risk, procurement groups will not be able to provide a concrete measure for the benefits of contract management that executives require. Enterprises must make a concerted effort to improve those capabilities, which can then be leveraged to make a case for contract management investments.




Chapter Two: Benchmarking Requirements for Success

Fast Facts

√ Best-in-Class enterprises are 52% more likely to standardize contract language than their peers

√ 30% of Best-in-Class enterprises use a contract management solution through their current e-procurement or e-sourcing provider

Contracts are a critical business management tool for procurement. Effective management of buy-side contracts enhances enterprise visibility into spend and enables tighter control over contractual commitments, pricing and supplier relationships. In a volatile business environment that is unyielding in its pursuit of bottom-line savings and process efficiencies, enterprises have placed even more emphasis on effectively managing procurement contracts to deliver enterprise value and economic returns. The potential returns from contract management investments are intrinsically tied to the higher-level operations and goals of procurement. Savings are the returns on contract management investments (whether they are operational or capital investments) and sourcing is what sets the savings targets.

Sourcing efforts, though, only set for the potential savings; contracts are used to enforce these negotiated savings and enable savings to be realized. Spend against a contract is a valuable tool that can be used in the sourcing process to drive prices lower based on historical spend volumes with a supplier. Best-in-Class enterprises are nearly 80% more likely than their peers to integrate and leverage contracts and associated information as part of the sourcing process (Figure 6).

Figure 6: Contracts Leveraged as Part of Sourcing Programs

75%

45%

37%

Best-in-Class Average Laggard


Contracts can be leveraged in a variety of ways to support sourcing efforts. Contract content can be utilized as the basis for competitive bid documents (RFP, RFQ, RFI, etc.) to drive efficiencies. These RFx documents do not have to be created from scratch and contain most, if not all, of the information around pricing and service level agreements that are expected from the supplier. Conversely, RFx documents can be flipped back into contracts, adding another dimension of efficiency.




Contract data, though, is perhaps of greatest value. Reporting and analytics on contracts can be leveraged in conjunction with spend analysis reports to identify opportunities for future savings and also instances where savings were lost due to maverick / off-contract spending, incorrect pricing or discounts and rebates that were not properly applied. Contract performance data is a valuable tool for supplier negotiations as well.

Case Study — More Than Just Automation

A large, EMEA-based manufacturing enterprise has imposed strict controls over the timing of contract reviews, auditing contract performance at lease once every five years. “Contracts are not permitted to run for longer than five years without a formal review (i.e. RFQ process). While a vendor remains competitive and delivers satisfactory performance, the contract will be allowed to run to its full duration,” noted the Supply Chain Manager. With such stringent review guidelines, an automated system is required to enable the reporting capabilities that support its policies.

Leveraging two different solutions to automate management of their procurement contracts, the enterprise has driven the following performance benefits:

• 85% of spend under the management of procurement

• 75% of spend compliant with contracts

• Over 5% realized savings

• Less than 10% savings leakage

“Simply put: we couldn’t manage our contracts manually,” said the Supply Chain Manager.

Competitive Assessment Aberdeen Group analyzed the aggregated metrics of surveyed companies to determine whether their performance ranked as Best-in-Class, Industry Average, or Laggard. In addition to having common performance levels, each class also shared characteristics in five key categories: (1) process (the approaches they take to execute their daily operations); (2) organization (corporate focus and collaboration among stakeholders); (3) knowledge management (contextualizing data and exposing it to key stakeholders); (4) technology (the selection of appropriate tools and effective deployment of those tools); and (5) performance management (the ability of the organization to measure their results to improve their business). These characteristics identified in the tables to follow serve as a guideline for best practices, and correlate directly with Best-in-Class performance across the key metrics.



Capabilities and Enablers Competitive pressures, in concert with a now highly uncertain and volatile global economy, force companies to seek out strategic advantages across all business functions and processes. Procurement contract management has garnered increasing enterprise focus as the value and returns on these efforts become more readily apparent. Best-in-Class enterprises have demonstrated their ability to capitalize on the savings benefits of effective contract management efforts. Some of those advantages across Aberdeen's competitive framework include the findings in the sections to follow.

Process

Table 4: The Competitive Framework - Process

Best-in-Class Average Laggards

Standardized contract approval process across the enterprise

81% 62% 51%

Standardized contract language utilized

76% 54% 44%

Formal process for dispute resolution with suppliers

Process

64% 51% 37%


Process standardization enables a higher level of control for enterprises. By establishing a basic, universal methodology for contract creation, implementation and evaluation, enterprises are able to achieve a level of consistency in their activities. Such consistency serves two main purposes: 1) best practices are captured and formalized to allow for repeat success, and, 2) consistency and predictability of processes sets a basic level of activity that can then be measured. The result of process standardization is the elimination (or at least reduction) in wasteful and inefficient steps in the contract management process. Establishing a prescribed, enterprise-wide set of processes also removes the need for an individual to interpret a course of action in most cases. While exceptions are a part of any process, the handling of these exceptions should also be embedded in the process map.

A specific process that should be included in the overall workflow is the resolution of disputes with suppliers. Best-in-Class enterprises are 25% to 73% more likely than Industry Average and Laggard enterprises to develop a specific dispute resolution process. Contract management is not simply about creating the document and trying to execute against it, but also entails interaction and development of some type of working relationship with



suppliers. At a time when 36% of enterprises indicate that they expect supplier negotiations to become more adversarial over the next year, it behooves enterprises to have a specific path designated for dispute escalation and resolution. Such planning could save a trade relationship and prevent additional costs from being incurred.

No matter what the specific process, standardization will best take hold when training is provided to stakeholders. Setting a policy or process on paper is not enough; guidance is necessary to ensure acceptance and optimization of standardized processes.

Organization

Table 5: The Competitive Framework - Organization


Formal contract management program in place

88% 81% 71%

Executive sponsorship of procurement contract management initiatives

Organization

64% 45% 38%


Contract management is not just an ad-hoc practice that is a part of the source-to-settle process. Over 70% of all enterprises have moved past this point of view and formalized contract management responsibilities and programs. However, a long-term commitment must be made to achieve success with a contract management program; returns may be initially difficult to quantify but the payoff looms on the horizon. Best-in-Class success is, in part, buoyed by the fact that they have remained committed to contract management programs, whose responsibilities include oversight of the development and improvement of processes, reporting and analysis of pre- and post-implementation performance and stakeholder education. The Best-in-Class are 32% more likely to have a program in place for two years or more (Figure 7), which has allowed them to develop a deeper understanding of what has or has not worked.



Figure 7: Contract Management Program Maturity

74%

14% 11%

0%

56%

21% 21%

2%

More than 2 years Less than 2 years Planned No plans

Best-in-Class All Others

“We have a long and arduous way before we will be able to efficiently manage our procurement contracts.”

~ Procurement Manager, Mid-size Asia-Pacific

Manufacturing Enterprise


Lessons learned have allowed these companies to leverage contract management strategies and tools to a greater advantage and higher levels of savings and compliance performance than their peers. So while many have established contract management programs, experience in execution has impacted performance.

Knowledge Management

Table 6: The Competitive Framework - Knowledge Management


Standardized contract language utilized

76% 54% 44%

Ability to communicate contract terms and obligations to stakeholders

68% 47% 41%

Visibility into inventory of all procurement contracts across the enterprise

Knowledge Management

54% 31% 30%


Enterprises are able to exert more direct control over their contract management processes without having to micro-manage by standardizing contract language. This ensures that, during the creation process, all the basic elements are included and phrased in such a way that the enterprise is protected from financial, operational, regulatory and legal risks. Standardization also facilitates a more streamlined contract creation process by limiting the subjectivity of the authoring process. Contract managers do




not have to start contracts from scratch and can be reasonably certain that all of the key basic elements required are included.

While increasing the volume of spend under contract is a goal for procurement organizations, the contract itself is not the end-game. Utilization and compliance drive the true value and returns expected from contracts. However, it is incumbent upon procurement leadership to ensure that all stakeholders and users are aware 1) that a contract even exists for a product or service, and 2) that there are volume obligations and commitments associated with the contract that will financially impact the enterprise. The ability to communicate to stakeholders the existence and requirements of procurement contracts is a differentiating characteristic of Best-in-Class enterprises; they are 58% more likely to demonstrate this ability than all others.

Technology

Table 7: The Competitive Framework - Technology

Best-in-Class Average Laggards Contract management solution leveraged as part of e-procurement / e-sourcing solution

30% 20% 19%

Functionalities of procurement contract lifecycle management tools

Technology

67% online repository for contracts and related documents 60% library of clauses, terms, conditions, etc. 36% automated notification of key dates and events 32% automated workflow and routing for review and approval 28% automated analysis and reporting of compliance




To enhance their capability to manage their portfolio of procurement contracts, enterprises leverage an array of non-mutually exclusive



technologies to support organizational capabilities for managing the various aspects of the procurement contract lifecycle (Figure 8).

Figure 8: Technologies Utilized for Procurement Contract Management

19%

30%

12%

27%

14%20% 18%

26%

Contractmanagment point

solution

Contractmanagementsolution fromprocurement /

sourcing provider

Contractmanagement

solution from ERPprovider

Enterprise content /document

managementsolution

Best-in-Class All Others

“By automating the contract lifecycle management process, we’re spending less time on administrative tasks and more time on analysis and negotiation of our deals.”

~Procurement Manager, Large North American Financial

Services Enterprise


Best-in-Class enterprises are 50% more likely to leverage a contract management solution offered by their current procurement or sourcing technology provider. This is reflective of the higher levels of alignment between contract management and sourcing efforts in the Best-in-Class and supports a more integrated exchange and use of data from contract management efforts for sourcing projects. This distinguishing characteristic of Best-in-Class enterprises contributes to their ability to realize higher savings on contract spend. Interestingly, though, only 15% of the Best-in-Class (compared to 35% of all others) indicated that investing in technology is a current strategy for improving procurement contract management. This demonstrates a level of maturity among the Best-in-Class where technology is no longer considered an emerging strategy. Instead, it has become a part of the fabric of contract management efforts.

The Best-in-Class are also differentiated when it comes to the specific functionalities they leverage for their success:

• A central, online repository for contracts and related documents enables all information to be stored electronically in a specific area within the enterprise. This repository provides an online, globally accessible “single point of truth” for a company’s business relationships and obligations. Developing a contract repository is the starting point for most contract management initiatives, providing enterprises with much-needed visibility into contractual obligations. It eases the administrative burden of searching for contracts in remote areas of the enterprise and any costs associated with mailing or faxing documents. However, enterprises must account for the amount of time and effort




required to convert legacy contracts. These documents must be prioritized; strategic relevance / importance, expiration date, spend volume, etc. are some of the criteria that can be used. Best-in-Class enterprises are 43% more likely to leverage a central, online repository. Tactically, they currently place 82% of their contracts in a central repository, which is 49% more than all others.

• Clause libraries facilitate a more streamlined contract creation process, enabling contracts to be implemented sooner for earlier capture of savings. Additionally, over two-thirds of all enterprises obtain pre-approval for contract language so these clauses, terms, conditions, etc. do not require additional review. However, Best-in-Class enterprises are over 50% more likely to have standardized the language of contracts and clauses, leading to further process efficiencies. Top performing companies can be reasonably assured that there are not language variances that will increase the risk associated with any contract.

“CLM automation has driven proactive contract renewal (and termination). It’s also Improved spend visibility into all contractions, since centralization has placed all contracts in a central repository.”

~ Contract Manager, Mid-size Utilities Company

• A system that automates routing and workflow for contract review and approval provides operational efficiencies to the enterprise. A standardized path can be defined, including exceptions or escalations for changes, removing subjectivity from the decision process about who should review the contract next. Additionally, cycle time performance can be measured and bottlenecks in the approval process can be identified using this functionality.

• A significant advantage enjoyed by the Best-in-Class is their level of contract compliance compared to their competitors. Twenty-eight percent (28%) of the Best-in-Class have automated analysis and reporting on contract compliance, partly facilitating their compliance advantage. Automation enables a more accurate account of compliance performance and eases the administrative burden of manually comparing transactional data to contracts.

Performance Management

Table 8: The Competitive Framework - Performance Management

Best-in-Class Average Laggards Ability measure enterprise compliance to contracts

56% 31% 12%

Ability measure supplier compliance to contracts

48% 32% 16%

Ability to review achievement of milestones / status of contracts within contracting process

Performance Management

44% 32% 22%





“We’ve generated extensive visibility across the organization as a result of automation; the system has generated reports on target/review dates, with a central record of all contracts.”

~ Director, Procurement, UK Government Agency

Critical to the success of contract management efforts is the ability to drive compliance. In order to pinpoint the value and calculate the returns on contract management, it is crucial that an enterprise demonstrate the ability to measure compliance. The Best-in-Class have more readily developed the ability to measure internal compliance to contract processes and utilization and also the ability to measure supplier compliance to pricing and service levels (143% and 85% more frequently than all others, respectively). On top of improved performance visibility, this allows Best-in-Class enterprises to identify deficiencies and take corrective action earlier to ensure success.

The visibility advantage of the Best-in-Class also extends to monitor achievement of milestones and status of contracts in process. This capability enables Best-in-Class enterprises to identify bottlenecks in the process, if any, and a more granular level of visibility into contracts during the creation / pre-implementation process. As noted in Chapter One (Figure 3), the Best-in-Class have leveraged this visibility into document creation and management processes to lower their cycle times.

Aberdeen Insights — Technology

Contract management automation is not an all or nothing proposition. Enterprises have a choice of not only what specific processes to automate, but also whether the best fit is a single- or multi-system approach. One of the factors contributing to Best-in-Class performance is tied to the fact that they are more likely to pursue a single-system strategy for managing contracts (Figure 9).

Figure 9: Contract Management Solution Strategy

44%

28% 28%30%35% 35%

Enterprise-widesystem

Multiple systems Completely manual

Best-in-ClassAll Others


continued




Aberdeen Insights — Technology

A single, enterprise-wide system for contracts delivers management efficiencies that translate into more effective compliance and savings performance. An enterprise-wide solution, whether it is leveraged for full or partial automation of the contract management lifecycle, enables oversight from a single source and does not require any additional effort to ensure that different solutions are compatible. All documents can be truly managed centrally and all analyses and reporting can be performed from a single point of reference and serve as the ultimate source of truth.



Chapter Three: Required Actions

Fast Facts

√ Best-in-Class enterprises are 37% more likely to store contracts and related documents in an central, online repository

√ 75% of Best-in-Class enterprises leverage contract performance data in their sourcing process

Whether a company is trying to move its performance in procurement contracts from Laggard to Industry Average, or Industry Average to Best-in-Class, the following actions will help spur the necessary performance improvements:

Laggard Steps to Success • Commit to a long-term plan for contract management. A

distinguishing characteristic of the Best-in-Class is the maturity of their contract management programs. Seventy-four percent (74%) of Best-in-Class enterprises have a program that has been in place for two or more years. Although 71% of Laggards have a program in place, only 48% have reached a level of maturity that is common in almost three-fourths of Best-in-Class companies. The commitment has paid off for the Best-in-Class, which have leveraged their experience and understanding of what should and should not be done to drive savings and compliance.

• Establish executive support for contract management initiatives. This is an important step to securing the additional resources (i.e. financial, human capital, etc.) necessary in support of successful contract management efforts. Additionally, top-down support facilitates change management, either by example or mandate. Laggards are 41% less likely than the Best-in-Class to secure executive support for contract management initiatives. It is crucial to present a compelling business case to justify support.

• Standardize contract language. Best-in-Class enterprises are 73% more likely to standardize contract language. Standardized language enhances operational efficiencies during the contract creation process by removing the need for additional approvals of contract content (unless changes were made or clauses / addenda were added). The use of pre-approved terms, conditions, clauses, and business rules reduce the possibility of inappropriate or missing language within the generated agreements, thereby mitigating, if not eliminating, many financial, operational, regulatory and legal risk considerations.

• Manage contracts and related documents and information in a central repository. Having a single repository for procurement contracts was a common theme of Best-in-Class companies, as 67% of these top-performing enterprises managed contracts from a central location. By consolidating contracts and related documents into a central location, the first step is taken to enabling action on these contracts. Situations where contracts are scattered across the business with little or no visibility into their location, let alone their content, handcuff the ability of an enterprise




to manage the pricing or service levels governed by these contracts and limit the returns that are normally available through these contracts. Additionally, local management and storage means that knowledge of that contract and the relationship with the supplier are often also lost if that contract leaves the company. Developing a contract repository is the starting point for most contract management initiatives, providing enterprises with much-needed visibility into contractual obligations.

Industry Average Steps to Success • Leverage contracts as part of the sourcing process. Best-in-

Class enterprises are 67% more likely than their peers to integrate and leverage contracts and associated information as part of the sourcing process. Reporting and analytics on contracts can be leveraged in conjunction with spend analysis reports to identify opportunities for future savings and also instances where savings were lost due to maverick / off-contract spending, incorrect pricing or discounts and rebates that were not properly applied. Contract performance data is a valuable tool for supplier negotiations as well. Additionally, contract documents can be potentially leveraged, with slight modifications, as RFx documents and vice versa. This creates an efficiency in the transition from a contract into a sourcing event and then back.

• Establish a formal process for dispute resolution with suppliers. Best-in-Class enterprises are 25% more likely than Industry Average enterprises to develop a specific dispute resolution process. Considering that 36% of enterprises indicate that supplier negotiations are expected to be more adversarial over the next year, enterprises must properly prepare themselves for more difficult discussions. Consideration must be given to the different types of disputes that may arise, whether they warrant escalation or can be resolved locally, and to what level escalation should occur.

• Develop the ability to monitor and measure achievement of contract creation milestones. Only 32% of Industry Average enterprises have visibility into contract creation milestones, compared to 44% of the Best-in-Class. On a related note, Best-in-Class organizations are also 56% more likely to be able to identify bottlenecks in the contracting process. Industry Average companies, therefore, give up efficiencies in the contract creation and approval process and are not able to as effectively measure contracting cycle times.

Best-in-Class Steps to Success • Invest in dashboards to further enhance visibility in

procurement contracts. Only 17% of Best-in-Class enterprises



currently leverage dashboards to gain deeper visibility into the management and performance of procurement contracts. Dashboards can provide executives near- or real-time views into the status of impending renewals, compliance and utilization and overall spend against contracts. Such visibility is can be leveraged to make an organization more nimble and responsive to market changes or supply disruptions.

• Improve the ability to identify supply risks. Considering the volatility of financial markets and the globalization of supply relationships, risk management should be at the top of the agenda for procurement professionals. Contracts can be used to mitigate some of the risks associated with awarded contracts, but risk assessment should be an integral part of the evaluation and negotiation process to ensure proper protection. Only 35% of Best-in-Class enterprises are currently able to identify supply risks with their contracted suppliers.

Aberdeen Insights — Summary

A global economic recession has taken hold and is forcing enterprises to squeeze every last dollar out of their operations. Procurement contracts are a prime opportunity for enterprises to prod their procurement organizations to contribute even more the bottom-line. Real value can be realized from improving contract management beyond just compliance. Contacts can be more effectively constructed, administered and reviewed to ensure savings are captured, rebates and concessions are given and cycle-time efficiencies are obtained. Simply putting a document together as a procurement contract is not good enough these days. Reporting and analytics are critical to gaining the visibility necessary into contract performance and the data to build the business case for contract savings.



Appendix A: Research Methodology

Between February and March 2009, Aberdeen examined the use, the experiences, and the intentions of more than 170 enterprises in a diverse set of enterprises regarding their management of procurement contracts.

Study Focus

Responding executives completed an online survey that included questions designed to determine the following:

√ The pressures, strategies, and organizational capabilities leveraged to effectively manage procurement contract activities

√ The structure and effectiveness of existing procurement contract management programs

√ Current and planned use of technologies and solutions to streamline current strategies for procurement contract management

The study aimed to identify emerging best practices for procurement contract management and to provide a framework by which readers could assess their own management capabilities.

Aberdeen supplemented this online survey effort with interviews with select survey respondents, gathering additional information on contract strategies, experiences, and results.

Responding enterprises included the following:

• Job title / function: The research sample included respondents with the following job titles: procurement, supply chain, or logistics manager (70%); business development (7%); business process management (5%); operations (4%); others (14%).

• Job title: Five percent (5%) of respondents are C-level; vice president (7%); directors (23%); managers (29%); contract managers (12%); staff, consultants, and others (24%).

• Industry: The research sample includes respondents from: finance (11%); mining / oil / gas (8%); technology / hardware / software (6%); manufacturing (6%); and 37 other industries.

• Geography: The majority of respondents (61%) are from North America. Remaining respondents were from Europe (17%), the Asia-Pacific region (13%), Middle East / Africa (8%) and the South / Central America and Caribbean region (1%).

• Company size: Forty-nine percent (49%) of respondents are from large enterprises (annual revenues above US $1 billion); 38% are from midsize enterprises (annual revenues between $50 million and $1 billion); and 13% of respondents are from small businesses (annual revenues of $50 million or less).

Solution providers recognized as sponsors were solicited after the fact and had no substantive influence on the direction of this report. Their sponsorship has made it possible for Aberdeen Group to make these findings available to readers at no charge.




Table 9: The PACE Framework Key

Overview Aberdeen applies a methodology to benchmark research that evaluates the business pressures, actions, capabilities, and enablers (PACE) that indicate corporate behavior in specific business processes. These terms are defined as follows: Pressures — external forces that impact an organization’s market position, competitiveness, or business operations (e.g., economic, political and regulatory, technology, changing customer preferences, competitive) Actions — the strategic approaches that an organization takes in response to industry pressures (e.g., align the corporate business model to leverage industry opportunities, such as product / service strategy, target markets, financial strategy, go-to-market, and sales strategy) Capabilities — the business process competencies required to execute corporate strategy (e.g., skilled people, brand, market positioning, viable products / services, ecosystem partners, financing) Enablers — the key functionality of technology solutions required to support the organization’s enabling business practices (e.g., development platform, applications, network connectivity, user interface, training and support, partner interfaces, data cleansing, and management)


Table 10: The Competitive Framework Key

Overview The Aberdeen Competitive Framework defines enterprises as falling into one of the following three levels of practices and performance: Best-in-Class (20%) — Practices that are the best currently being employed and are significantly superior to the Industry Average, and result in the top industry performance. Industry Average (50%) — Practices that represent the average or norm, and result in average industry performance. Laggards (30%) — Practices that are significantly behind the average of the industry, and result in below average performance.

In the following categories: Process — What is the scope of process standardization? What is the efficiency and effectiveness of this process? Organization — How is your company currently organized to manage and optimize this particular process? Knowledge — What visibility do you have into key data and intelligence required to manage this process? Technology — What level of automation have you used to support this process? How is this automation integrated and aligned? Performance — What do you measure? How frequently? What’s your actual performance?


Table 11: The Relationship Between PACE and the Competitive Framework

PACE and the Competitive Framework – How They Interact Aberdeen research indicates that companies that identify the most influential pressures and take the most transformational and effective actions are most likely to achieve superior performance. The level of competitive performance that a company achieves is strongly determined by the PACE choices that they make and how well they execute those decisions.





Appendix B: Related Aberdeen Research

Related Aberdeen research that forms a companion or reference to this report includes:

• Contract Lifecycle Management: Views from Procurement, Sales and Legal, August 2008

• Contract Lifecycle Management and the CFO, April 2007

• Sell-Side Contract Management: Opportunity-to-Order Optimization, December 2007

• Contract Lifecycle Management: The Quote-to-Cash Cycle, December 2006

• Contract Management in the Mid-Market, July 2006

• The Contract Management Benchmark Report: Sales Contracts, April 2006

• The Contract Management Benchmark Report: Procurement Contracts, April 2006

Information on these and any other Aberdeen publications can be found at http://www.aberdeen.com/channel/procs.asp.

Author: William Browning III, Research Analyst, Global Supply Management, [email protected]

Since 1988, Aberdeen's research has been helping corporations worldwide become Best-in-Class. Having benchmarked the performance of more than 644,000 companies, Aberdeen is uniquely positioned to provide organizations with the facts that matter — the facts that enable companies to get ahead and drive results. That's why our research is relied on by more than 2.2 million readers in over 40 countries, 90% of the Fortune 1,000, and 93% of the Technology 500.

As a Harte-Hanks Company, Aberdeen plays a key role of putting content in context for the global direct and targeted marketing company. Aberdeen's analytical and independent view of the "customer optimization" process of Harte-Hanks (Information – Opportunity – Insight – Engagement – Interaction) extends the client value and accentuates the strategic role Harte-Hanks brings to the market. For additional information, visit Aberdeen http://www.aberdeen.com or call (617) 723-7890, or to learn more about Harte-Hanks, call (800) 456-9748 or go to http://www.harte-hanks.com.

This document is the result of primary research performed by Aberdeen Group. Aberdeen Group's methodologies provide for objective fact-based research and represent the best analysis available at the time of publication. Unless otherwise noted, the entire contents of this publication are copyrighted by Aberdeen Group, Inc. and may not be reproduced, distributed, archived, or transmitted in any form or by any means without prior written consent by Aberdeen Group, Inc.

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