At approximately 175,496 pages (as of 2013), the Code of Federal Regulations (CFR) is not a casual beach read. So, until recently, I had never heard of Section 317.8(5)(ii) of title 9 of the Code of Federal Regulations. But I have experienced the impact of that rule first hand on many occasions. Specifically, in the bacon aisle of the supermarket.
Truth is transparency. That being the case, visibility into all available information at a given time is what empowers decisions. Apparently, in 1974, the federal government felt the same way about bacon packaging. Until then, supermarkets would tastefully arrange strategically-packaged bacon to show how lean and delicious it is. But consumers were only getting one side of the story – literally. The USDA stepped in to combat this “false impression of leanness of the product.” The solution? A rear window, with “a transparent opening…designed to expose, for viewing, the cut surface of a representative slice.” The whole story.
What’s in your contracts?
The parallel to contracts is less obtuse than it seems. Business runs on contracts. Simple one-page NDAs to complex multi-jurisdictional, global enterprise-level behemoths. What’s in them? How are they managed? Are they managed at all? Consider these contract facts:
- An estimated 80 percent of all business-to-business transactions are governed by contracts. (Gartner)
- Even medium to large organizations have about 20,000 to 40,000 contracts in effect at any given time. (PwC)
- More than 10% of all executed contracts are lost. (Faulkner Information Services)
- Ineffective contract management can cost businesses up to 9.2% of annual revenue. (IACCM)
If you could total up the dollar value represented by those contract assets and turn those percentages into real bottom-line numbers, there would be far fewer companies still avoiding contract management solutions. During a recent product demo webinar we hosted on CLM linked with SIM (Supplier Information Management), attendees (some very big companies) indicated what they use to manage contracts currently. 60% use Word, Excel and homegrown remedies. 20% don’t know. Don’t know.
Outgrowing homegrown contract management.
The specific reasons weren’t given, but our experience shows that organizations in the $2 – $5 billion range are often at a technology crossroads; organic and acquisition growth happened at a manageable pace, where existing process worked well enough. But suddenly, the enterprise need and business reality are quite different, and dictate a new approach.
For other companies, part of the problem is also the focus on the front-end of the process – getting the contract created, approved and in place. According to Forrester, that process can take almost three-and-a-half weeks. Without dynamic contract management in place, contract viscosity creates impatience, and in the lag-time other projects come up, other deals get made, business moves on. With practitioners just happy to finally get a signed contract, it gets shoved in a file and all but forgotten.
But if contract productivity is one issue, compliance and enforcement are a whole other problem. As we say often, you can’t manage what you can’t see. If you don’t have visibility into your contracts, there’s no way to effectively monitor (and leverage) their contents. And if no one is paying attention to all those clauses, attachments, terms, conditions and commitments, you create a big blind spot where risk grows.
A textbook example of that is a few years back when Powdr Corporation, owner of Park City Mountain Resort, missed a lease renewal by two days. The annual payment increase of nearly $25 million put the company out of business. How many other missed lease renewals – or auto-renewals – are happening every day without contract visibility?
From contract to social compact.
The operative word in Contract Lifecycle Management is “lifecycle” – that document isn’t sitting idly in a drawer or file, it’s a living thing designed to be used. As Tim Cummins, President & CEO of IACCM (International Association for Contract & Commercial Management), said in a recent OutLoud podcast, there is growing recognition that contracts are fundamental to not only trading relationships, but overall human endeavor. In fact, IACCM is working with the World Economic Forum on how to improve the role of contracts in building social trust.
This increasing importance of contracts has sparked a significant increase in senior executive leadership interest in better contract management. Technology is playing a key role. Along with transparency into contracts, access to them at all times, from all devices, is critical. Creating contract competence includes major self-service and wizard components – taking contract creation out of the hands of just legal and empowering the broader user base. Without an advanced contract management solution on a cloud platform, one that provides unified data and built-in controls, that possibility isn’t feasible (or practical).
The future for contracts is going from one of inherent complexity to ultimate simplicity and clarity, where visibility eliminates uncertainty and empowers decisions.