Plugging Revenue Leaks With Contract Lifecycle Management

CFOs looking to inject a bit of adrenaline into revenue might want to take a long look at their contract management practices and tools. Companies that excel at contract lifecycle management (CLM) -- a systematic approach to the development, approval, and execution of contracts -- realize a range of benefits, including lower revenue loss due to poor management of sales contracts, according to a new study from the Aberdeen Group.

The research firm examined contract management practices at more than 250 organizations using two metrics: percent of sales orders and revenue recognition compliant with contract, and percent of purchasing transactions compliant with contract. Aberdeen then compared best-in-class companies (those that scored in the top 20 percent) with industry average organizations (middle 50 percent) and laggards (bottom 30 percent).

The best-in-class firms achieved 67 percent overall on-contract spend (compared with 24 percent for all organizations in the sample), and 68 percent compliance by suppliers to service agreements (18 percent for all others). They also scored shorter cycle times for some core CLM processes; for example, they needed only about 20 days to create, negotiate, and approve a procurement contract, compared with more than 30 days for all other participants.

But perhaps the most striking result was that expected revenue leakage on sales contracts was only 1.7 percent for top performers, compared with 6.6 percent for average firms and 6.7 percent for laggards.

CLM is rising on the CFO agenda, notes William Browning, research analyst with Aberdeen. "On the sales side, the CFO's job is to minimize any leakage, and you don't want to lose any sales opportunities as a result of shoddy contracting," he reports. "On the procurement side, we're seeing more collaboration, especially at the better performing companies, between the CFO and the chief procurement officer's office as both see the benefits of saving the company money so that there are more financial resources to drive other strategic activities and investments."

But even companies that have formal contracting processes in place have trouble enforcing them, Browning notes. "Often what happens, especially in an unstructured environment, is that an individual will call up a supplier and say, 'I'm going to be buying 50,000 reams of paper this year, what kind of deal can you give me?' So they get a contract, and it's kept with that person, and no one knows about it. That's a maverick contract, and it's one of the biggest challenges."

So what are the high-performers doing right? Ninety-two percent have a central contract management organization that's responsible for all contracts. And a stunning 95 percent of these organizations have set up standardized and formal contracting management processes and methods, a step that Browning describes as critical. "What companies need to do across each contract type is to standardize their processes so that for sales contracts, for example, there's a standard way of developing a proposal. The more sophisticated companies may have a set of clauses that they can drag into or out of the contract, depending on the relationship or the type of product."

Best-in-class companies are more than twice as likely to use CLM software, whether it's homegrown, a stand-alone product, or a module from an ERP provider or other vendor. Some key features to look for:

• Automated workflow. In the document development stage, you need an automated system of routing the contract for approval processes. E-mail doesn't really cut it, says Browning: "Yes, it's an automated way of communication, but there's no way of tracking it, unless you actually go through your outbox saying 'OK, I sent it to this person on this date, to that person on that date, and on this date this person received it, and so on." Automated workflow streamlines the process and helps reduce cycle times.

• A central electronic repository. Once the document is executed, it's helpful to have a single location where it can be stored until needed. Browning recommends a keyword-searchable system so you don't spend a lot of time scrolling through all your files. About three-quarters of the best in class have created a central electronic repository for all contracts, Aberdeen reports.

• Analytical and reporting capabilities. CLM tools can help companies gain visibility into contract performance. "At this point you can really start to quantify -- for example, 'if I'd gotten this contract out 10 days earlier I could have sold on average $50,000 a day more, or purchased an additional $100,000 worth of items on this contract at a 6 percent discount.' "

The complete Aberdeen report "Contract Lifecycle Management: Views from Procurement, Sales, Finance and Legal" is available here. Requires free registration.