Aberdeen article on contract management

In late 2004, Aberdeen reported on the Best Practices in Contract Management (Registration required) – Another Tim Manahan gem. Here are their ten tips for establishing a good contract management system:

1. Audit internal contract management processes, systems, and controls before investing in a contract management solution.
2. Create a compelling business case with both benefit and crisis.
3. Ensure proper executive and stakeholder support for both contract management initiative and automation investment.
4. Define detailed functional requirements for a contract management solution –
   and stick to them.
5. Dedicate and empower a contract management program champion.
6. Establish a contract management governance council to ensure support from
   functional and business unit leaders.
7. Clearly define and communicate procedures and protocols for the complete contracting and contract administration.
8. Where possible, use templates to streamline contracting cycles, minimize risk,
   and maximize compliance.
9. Measure program performance and market results.
10. Identify areas for continuous improvement.

Aberdeen identified the following business drivers behind contract management initiatives:

• Uncertain global economic conditions and continued pressures to reduce costs and improve financial and operational performance.
• New regulations – such as the Sarbanes Oxley Act – require companies to establish and document business controls, procedures for tracking and reporting material business information, procedures and systems for ensuring compliance and auditing.
• Globalization is increasing the types and complexity of contracts as well as the risks inherent in trading relationships.
• Outsourcing, licensing, and channel agreements are growing both in number and complexity.
• Insufficient human resources and systems infrastructure to effectively locate, execute, and optimize contract performance.
• Increased availability of packaged enterprise software applications designed to automate and improve contracting, contract administration, and contract compliance and analysis processes.

Aberdeen also outlined the components of a compelling business case:

“Most enterprises have gross misconceptions about their contract management competence. And in most cases, enterprise executives fail to understand the magnitude and impact insufficient contract management is having on their company’s financial and operational performance. An internal audit helps bring these issues to light. However, securing sufficient resources and budget for improving contract management operations will require development of a well-defined business case that accomplishes the following:

• Defines and baselines existing contract management performance, including both strengths and weaknesses the internal audit uncovered in the areas process, organization, knowledge/visibility, technology, and performance metrics.
• Quantifies the current “costs” of underperforming areas of your contract management program. Such costs include the costs of missed contract milestones (e.g., overpayment, penalties, inaccurate prices, missed revenue accelerators); costs of risky contract language (e.g., elongated payment cycles on customer contracts, short payment cycles on supply contracts, evergreen renewals, inadequate intellectual property (IP) or brand protection, maverick contracts); costs of inefficient processes and controls (e.g., long contracting cycles; lagging contract execution, missed renewals, and regulatory violations and fines).
• Details a blueprint for contract management improvements, including prioritization and timeline of actions, resource, systems, and budgetary requirements, protocols and governance requirements.
• Estimates the financial and operational benefits of executing such improvements. Such calculations can be developed by leveraging benchmark information from third-party sources, such as industry associations, such as the IACCM, industry analysts, like the Aberdeen Group, and contract lifecycle management solution providers.