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Technology Revolution in Contract Management to Deliver Bottom Line Value
I recently had the pleasure of co-authoring an article for IACCM’s Contracting Excellence magazine in collaboration with Kai Jacob, Head of Global Contract Management Services at SAP and Tim Cummins, CEO of IACCM. The article is titled ‘Contracting technology revolution – here today, but are we ready?’ You can read the full article on IACCM’s website.
As the title alludes, the article talks about how technological advancements in contract management can enable businesses to translate their contracts into bottom line value. While this is not breaking news to the contract management community, the article questions our preparedness and willingness to embrace the opportunities created by technology in this space. And why single out the contracting function? Other functions such as strategic sourcing, operations, IT, finance, legal, etc. stand to gain significantly by embracing this new wave of technology. So in my opinion, alongside the contracting organization, the CEO, CFO, CIO, and the CPO need to evaluate if and how technology innovations in this space are going to transform their world.
Technology in contract management is not new and there have been multiple waves of technology developments over the last couple of decades. Traditionally, these developments were limited to making the process of putting together a contract more efficient, thereby reducing the impact on the organization. Most of the technology that we see in contract management today was developed in the 1990s, and was designed for procurement of goods. While such technology made the contracting process quicker and more streamlined, the benefits were limited to the pre-signature phase of the contracting process. This worked well for procurement of commoditized goods, but sourcing of services and complex products is a different ball game.
Most of the value leakage in strategic services/outsourcing services engagements (such as IT outsourcing, BPO and Facilities Management) happens after the contract is signed. Therefore, the governance of outsourcing contracts and suppliers in the post-signature phase is as important, if not more, as drafting the outsourcing contract in the first place. A survey conducted by the International Association of Outsourcing Professionals (IAOP) found that 63 percent of the companies surveyed believe that they lose an average of 25 percent of the annual contract value due to poor governance. For a $100 million outsourcing contract spread over 5 years, this represents a loss of $5 million annually. Your ability to reduce this value leakage in your outsourcing contracts will have a direct impact on your company’s bottom line.
For quite some time now, we have had this gap in the market where the available technology is skewed towards goods procurement and the pre-signature phase, while the increasing significance of strategic services in the Fortune 500 sourcing portfolio (services account for 35% of the total sourcing spend) demands technology designed to handle the post-signature governance of outsourcing engagements. The new breed of technology that is coming up today recognizes this shift in the market and is ready to address this whitespace.
While this is an emerging area, the early movers are already embracing products like Sirion to drive higher value (up to 15% of ACV) in their outsourcing services engagements in a way that still seems like utopia to many organizations. As I see it, the following key factors differentiate the new breed of technology from the earlier tools.
- It is focused on integrating contract management with other disciplines of the business creating a collaborative ecosystem. Such technology allows different parts of the organization such as procurement, contract management, operations, finance and legal to work off common data and with each other towards the common goal of creating bottom line value.
- It acts as a bridge to connect the different technologies across the enterprise that traditionally operate in silos – such as ERP (SAP, Oracle), ITSM (ServiceNow, Remedy), Contract Lifecycle Management (Ariba, Zycus) and Risk Management (Archer, Hiperos) – hence allowing businesses to view and assess their sourcing engagements in totality rather than focusing on a limited view.
- It recognizes that most of the value leakage in services engagements takes place after the contract is signed, and hence focuses more on the governance of contracts in the post-signature phase. This technology offers granular visibility into the service provider’s performance starting with the contractual obligations (what was supposed to happen), the performance data (what actually happened) and the invoice data (what am I being charged for). Traditional ERP and contract management systems do not allow these elements to be compared as they were never designed for this task.
- By allowing buyers and suppliers to have access to the same data through a shared platform, it improves transparency and trust in the relationship. With sophisticated capabilities for centrally capturing and managing minutes of governance meetings, issues and action items, owner and current status, etc., such technology facilitates a healthy buyer-supplier relationship.
- By capturing raw data (contract, performance, relationship, invoicing etc.) from different sources across the enterprise and translating it into structured data, combined with detailed metadata and attributes, such technology enables unprecedented level of analytics into the performance of the outsourcing engagement with detailed comparisons across different services, regions, suppliers etc.
In conclusion, let’s revisit the question about preparedness and willingness to make a difference. Are you going to be part of the early majority that is building a new layer of competitive advantage for their businesses by embracing this new way of managing complex contracts? Or are you going to let others march forward while continuing to forfeit the benefits of this new technology-enabled approach? I would love to get your feedback on what you believe is the right approach for your business. You can leave a comment below or write to me at firstname.lastname@example.org. Also, if you found this article relevant, you might want to read this whitepaper on transforming supplier governance in your outsourcing engagements.