Add commentApril 17th, 2008Agatha Degasperi - Iasta Europe
I took part in a webcast this week entitled “Bringing Contract Management into the 21st Century – 5 Principles Every Procurement Executive Should Know” sponsored by Procurement Leaders.
It is quite clear that Contract Management is starting to add real value to companies. Problem is, too many are still stuck in old practices that result in a lack of visibility, control and inability to manage compliance. I thought it would be worthwhile to highlight some of the key takeaways from this hour long webcast.
What is CLM:
CLM stands for Contract Lifecycle Management and refers to a technology platform(s) that can manage the full lifecycle of a contract (i.e. All governing activities of how contracts are used) which are:
a) Contract Drafting
b) Contract Negotiation
c) Contract Storing and Repository
d) Contract Compliance and administration
e) Contract Renewal
f) Contract Optimization
What are the advantages of implementing CLM (summary of presentation given by Andrew Bartels of Aberdeen Research)
Phase 1 - Contracts reside within one single repository – making it easier to search, analyze and increase visibility into renewals. Already here, there are major cost savings to be had!
Phase 2 - Ability to generate reports and analyze current data – this helps identify duplicates, inconsistencies, and any other potential risks/issues with ongoing contracts
Phase 3 - Automatic contract creation – this helps only use legal staff for critical tasks and shorten the contract cycle times.
Phase 4 - Contract repository integrated with existing transaction systems – this clearly is the ultimate, long term goal of CLM. Where there’s a real time ability to verify that pricing is compliant & meets agreed service levels every time purchases are made – leading to greater conformity of contracts.
Key considerations for successful implementation
a) Aim for some early wins. In other words, don’t try to take on too much in one go. While the ultimate goal is to get all contracts on the system, it is best to go with a phased approach. To prioritize, the key variables to consider are: contract size and degree of activity (start with the contracts driving transactions as these are the renewals you don’t want to miss!)
b) Have a clear system & tool in place for importing existing contracts: ensure the technology you choose accounts for this and establish a system for importing the contracts. Many companies opt to have temps work on this so buyers aren’t bogged down with low value tasks. Furthermore, this step tends to take much longer than expected, so it is good to prepare the resources!
c) Develop best practices around how contracts will be set-up, structured, the verbiage that will be used and the controls that will be in place to manage the contract templates.
d) Maximize buy-in by involving all regions, relevant business units and stakeholders early on in the process. Particularly those close tot he market who are being directly impacted by the lack of visibility and compliance with contracts. Having some early wins with these groups can help serve as a “pull” for those less willing departments.
e) Consider assessing the potential cultural/attitude obstacles to adopting the tool and tackle this early on.
Some other interesting stats presented were that geographically, US appears in the lead of implementing CLM, but Europe is close behind & gaining ground. While the ultimate goal is to reach this phase 4 of integration with transaction systems, the majority of the companies currently find themselves in phase 1: Document Repository. The good news is that there is already tremendous value & ROI to be had with just implementing the first phase, as the increased visibility given will already create savings by helping to not miss renewals and minimizing other possible savings leakage from a lack of contract compliance.
I am a little late getting to this report from AMR, which is reserved for members only (although SCDigest did provide a little insight, as did Spend Matters).
High level take aways stated that supply management technology is a key enabler for value chain success, reflected by an anticipated 14.5% increase in spending in 2008. Cost savings and procurement efficiency are two of the primary goals desired by purchasing respondents, and also, it was noted that the spend visibility and contract management were ranked 1 and 2 in the list of Most Strategic Investments.
Another interesting statistic showed that Sourcing tools were the most commonly deployed applications at companies over $1b in revenue, at 67%. That is a very strong show of acceptance of eSourcing. It also showed that an additional 27% of respondents intended to deploy sourcing application, which would total 94%. That seems a little odd to me and possibly I am missing the relationship between those two questions.
One of AMR’s key conclusions drawn was: Our study identifies a shift away from ERP platforms over the next three years for most supply management segments in favor of best-of-breed and custom applications that are expected to provide the greatest innovation, functionality, and transformational capability in supply management.
This was backed by: The largest supply management budget segment is internal head count. Tied with the ERP platform as the main supply management application, one definitely questions the use of technology and services to integrate and streamline processes in supply management. With high dollars in these three segments, the opportunity for integration, cycle time reduction, and savings is significant. This is good news for supply management technology vendors, service providers, and business process outsourcing firms.
…
While most of the 15 segments in the United States were sourced using ERP platforms, custom and best-of-breed vendors continued to be deployed and appear to be cutting into ERP market share, specifically in the areas of travel and expense, services procurement, supplier connectivity, SPM, supply visibility, supplier portals, and financial settlement.
Clearly, AMR is very bullish on supply management spending patterns, but also are touting the trend of BoB vendors digging into the ERP meat and potatoes.
(caused by NAFTA), was just supplemented by a new acquisition close to the border in Austin, TX. (I know, the money isn’t going to Mexico, but it was the best I could come up with). Last week, while all the noise about Procuri was at full throttle, Nextance went out and made one of my direct predictions golden!
I am not sure what to make of the acquisition, since it is not even mentioned on the company websites. Is it really that ho-hum, except for a little talk on Spend Matters? I don’t even know very much about Versata (formerly Trilogy), or why they took interest in Nextance. Based on their own description:
Versata partners with corporate IT departments to enhance and simplify critical operations, with a persistent focus on decreasing spending enterprise wide. Versata’s patented solutions cut IT expenditure by reducing hardware and associated maintenance, leveraging open source technology, and accelerating value delivery to business customers. As one of the only companies in the industry with a focus on total cost takeout, and with technology to back our claim, Versata has established a reputation as a true ally to the Information Technology department.
Within the press release, I notice some interesting details that normally are hidden from public announcements.
A “quote” from Nextance CEO, Kyle Bowker,”By joining the Versata family, we secure Nextance’s long term viability and ensure our continued commitment to leading products in an increasingly competitive space.”
That sounds really warm and fuzzy, but I read that as a distressed final move by Nextance. I could be wrong, but they burned through a lot of cash and this might have been all that was left to salvage shareholder value. By “securing long term viability” with Versata, does that infer that they would not have been able to otherwise?
Versata will consolidate Nextance’s operations at the Austin headquarters while ensuring seamless support for customers.
That sounds like a full blown take over and only a handful of critical employees will be asked to move to Austin. It also sounds like Versata is saying, “Thanks, we’ll take it from here.”
In all likelihood, this was a dirt cheap acquisition of very solid and highly leveraged technology, by a company that has shown the ability to deliver on multiple platforms. I can’t say I am surprised by it.
Contract Management, which can be defined as the execution and monitoring of a contract for the purpose of maximizing financial and operational performance and minimizing risks, involves tracking purchases against contracts to insure preferred suppliers are used, rates adhered to, and discounts and rebates collected. Contract Management is important, because, as mundane as it sounds, it is another part of the sourcing process that can bring a number of benefits to the organization.
Standardized Processes and Procedures
This helps to decrease maverick buying and decrease supply risk while increasing spend leverage. The net effect is that buys as a whole become less costly and more valuable and a much greater percentage of negotiated savings are captured by the business.
Spend Visibility
Probably the most valuable benefit of a contract management system - which lets you know if you are buying from the suppliers you’re supposed to be buying from at the right times, quantities and prices - it can also help an organization standardize on consistent contract terms and conditions. Furthermore, it also allows for easy identification of contracts with suppliers in high risk zones due to natural disasters, political unrest, or economic uncertainty, which is critical to the development of appropriate organizational risk management strategies.
Solid Foundation for Spend and Performance Analysis
With all of the contract conditions and negotiated prices and fees in a central location, it’s a lot easier to compare actual purchases against contracted buys. This allows policy or regulation violations to be caught and dealt with immediately and insures that all spend is known and available to be appropriately leveraged in sourcing projects.
Rebate Management
Contract Management systems make it easy to track rebates and insure that all of the savings negotiated in a sourcing cycle are captured.
Reduced Maverick Spending
With a contract management system, a buyer can immediately determine if a contract exists, who the contracted suppliers are, and what the contracted prices are. No longer is “I didn’t know we had a contract” or “I didn’t know I wasn’t supposed to do that” a valid excuse!
Evergreen Contract Elimination
Without a contract management system to automatically alert a buyer of contracts coming up for automatic renewal, many auto-renewing contracts are likely to go unnoticed and automatically renew, locking the buyer in for another buying cycle. With a system in place, the buyer can be alerted weeks or months in advance, depending on how long a sourcing cycle normally takes for that commodity or service, and take appropriate action.
For more information on the benefits of Contract Management, see the Contract Management 101: A Total Value Management Introduction wiki-paper over on the e-Sourcing Wiki. In addition to more detailed information on the benefits, as well as more benefits, it also defines contract management from a sourcing and enterprise perspective, outlines the basic requirements of a contract management system, and overviews some best practices to help you get the most from your contract management system.
I went through the Aberdeen research library last week and found an older study on Contract Management in the Mid-Market which had some interesting findings. At the high level, Aberdeen states:
Mid-sized companies tend to lag in terms of technology adoption; with regards to contract management this is certainly the case. Aberdeen research found that over 80% of mid-market companies on both the buy and sell-side are still using manual or only partially-automated and/or disjointed systems. Although approximately half the companies currently have formal contract management programs in place, they have found it difficult to achieve the following:
• Encourage usage of standard contract language (terms and clauses) across the enterprise
• Ensure sufficient levels of visibility into contractual commitments to both buyers and suppliers
• Actively monitor and track compliance to contract terms and conditions
Aberdeen was able to determine that on the buy-side, mid-market companies find the hosted model for contract management more appealing than their larger counterparts.
There was also an interesting breakdown of what functionality was deemed most critical from a contract management perspective:
Must Have Capabilities
Buy-Side
Sell-Side
Contract repository with search functionality
84%
76%
Clause and template library
74%
68%
Integration with MS Office
60%
79%
Integration to ERP/Finance solution
64%
59%
Analysis and reporting capabilities
88%
74%
I found this analysis very interesting, as it clearly shows that integration is not highly regarded and the most important functionality needed from a CM perspective is just having visibility and reporting. When it comes down to it, most companies (especially procurement departments) really need a way to find contracts and take action on their contents. With those basic abilities, you are accomplishing much of what you need to obtain value from contract management, especially if your organization currently has nothing in place.
This month, I received my copy of Contract Management Magazine and noticed an article written by a couple colleagues I know in Washington DC - Raj Sharma and Jim McIntosh. They are also pretty well known in procurement circles from the Freemarkets background and their successful consultancy, Censeo Consulting. I have had some extremely informative conversations with Raj in the past, so naturally, the article is very comprehensive.
The article begins, “While organizations have become increasingly sophisticated at sourcing direct and indirect materials, services spend remains quite elusive as an opportunity. Taking the lessons learned from sourcing of direct and indirect materials, while useful, will not adequately address the complexities inherent in services
sourcing.”
They outline the challenges that confront sourcing when dealing with service centric procurement:
Commodity Definitions: Developing a definition that all key stakeholders can agree upon is a critical step in the services sourcing process.
Identifying Expected Outcomes: Identifying expected outcomes requires a clear understanding of customer needs and priorities. Once outcomes have been defined, there is a clearer path for defining
requirements and metrics for measuring performance.
Determining Cost Drivers: A detailed cost structure analysis, both of internal costs and supplier costs, can help uncover many opportunities to drive down total costs.
Defining and Communicating Requirements: Writing requirements is perhaps the one part of services sourcing that needs the most help. Poor requirements begin with a limited understanding of customer
needs.
Supplier Evaluation Criteria: Evaluating suppliers begins with being as knowledgeable as possible about the commodity being sourced. Lack of knowledge means lack of transparency, which often means “smoke and mirrors.”
I recommend reading the article. Topics as complicated as sourcing services cannot be distilled into 4-5 glossy pages, but it can help start the proper thinking towards effectively sourcing complex categories. Censeo is a services company, so the article does not mention any technology usage. However, there is a significant place for eSourcing technology when these bids are properly planned and executed.
I had a quick call the other day with a procurement executive at a large company you’d probably recognize who asked me a question which I’m hearing more and more of these days. And that’s: what is the best course of action to take given a short-term solution need — in this particular case, it was contract management — but an IT-driven emphasis over the long haul on standardizing on their ERP providers procurement capabilities. In this case — as in many — the ERP provider in question had an inadequate answer with their current solution (despite their positioning).
I tossed out a few names including the usual contract management suspects to consider including Upside, Nextance, Procuri, Ariba, Emptoris, and even Iasta (with their new capability), but suggested that the solution he would chose might end up being a long-term one after all. And that’s because there’s a good chance that ERP will not catch up to the level they require, and even if they eventually did, why would you want to rip out a solution that was faster, better, and cheaper — not to mention completely separate from ERP in focus?
Seriously, I’ve had enough of companies wanting to standardize all buy-side technology on ERP because IT thinks it’s the easy thing to do. Sure, HR is a logical extension of payables. But Spend Management is not (because it touches so many points outside the enterprise, in addition to the system of record).
Going forward, in an ideal world where bloggers like me get their way, ERP will need to compete on its own merits in sourcing and procurement, rather than simply delivering a 60% (or 80%) solution that’s just good enough (good enough for whom, should be the question to ask). In my view, this level of achievement might be good enough for transaction processing. But it’s not when it comes to driving value through better sourcing and procurement where domain expertise, solution depth, and category knowledge are all critical to drive results.
At long last, Iasta has finally released our newest version of SmartSource. I generally do not discuss happenings in Iasta-land on E-Sourcing Forum but this is significant from my perspective because we have been so excited about unleashing this monster, and, because it changes the e-Sourcing landscape even more with our expanding breadth across supply management. Although none of our competitors will ever admit it, Iasta is now a player in end to end supply management and we did it with all of our own code. There was no cheating by acquiring technology (although we did partner for some). If you are interested, you can read the full press release here. As a summary, here is what changed:
Iasta has made the release of SmartAnalytics - a spend analysis platform that few can rival. Look for more blogs coming on spend visibility technology and best practices. This is the first new platform we have introduced to complement SmartSource.
Major enhancements to the Executive Dashboard and Management Reporting functionality.
New user enhancements to Decision Optimization, including better data loading capability.
A new, integrated module for Contract Management is available that allows users to close the loop on the sourcing lifecycle.
Over 200 client feature requests.
Iasta has been running well-attended group webinars for weeks now and been getting a very positive response from our user community. If you did not get a chance to view some of the highlights, please let us know and we would be happy to schedule some time to bring your company up to speed. Thanks for all the support and feedback that went into this release. We still have more surprises up our sleeve in 2007 as we will continue to embed huge amounts of functionality into SmartSource without pegging our clients with a seven figure smack-down. Some companies call them “modules”, we call it our product.
So, to highlight this glorious occasion, I have a tribute that I have always found enjoyable and strangely keeps getting funnier while simultaneously more disturbing:
As per a recent article in SupplyManagement.com, Intellect, the UK trade body for the IT, telecoms, and electronics industries and law firm Beachcroft just released the Contract and Commercial Guidelines (pdf, members only, link off of Intellect home page or e-mail sjyates @beachcroft.com.uk) to help buyers and suppliers when drafting or negotiating contracts for IT products and services.
This is because “the contract can no longer be divorced from the deal as something that only lawyers need to worry about” in today’s procurement operations. This is not only a good resource for European procurement professionals, but for American procurement professionals who need to draft contracts with European suppliers.
A good guide can simplify the negotiation phase of sourcing, streamline your processes and improve your efficiency, leaving you more time to focus on contract management, which is where the savings actually materialize from a sourcing effort. After all, planned savings are only realized from effective contract management.
We can all agree that there’s no replacement for contract management capability from a compliance perspective. The recent Emptoris / DiCarta deal highlights this. But many procurement organizations often forget how implementing strategic sourcing and category management approaches through the use of e-Sourcing applications can help generate savings while ensuring that standard vendor management processes are adhered to in the contracting and negotiating process. But e-Sourcing applications not only enable standardized sourcing processes, but they also create an audit trail of activities throughout the qualification, negotiation, and contract award phases of working with suppliers. Given the ease of implementing on-demand / software as a service (SaaS) e-Sourcing platforms these days, there’s no excuse for procurement organizations to not take the first step towards an end-to-end procurement compliance strategy by starting with eSourcing.
Its finally official…a few little birdies left me voice mails and emails over the last couple weeks about this merger/acquisition but I left Spend Matters to be the official bean spiller. I only knew the basics anyway and Jason’s site is more for news of this matter. Well done - breaking this early, Jason and skewering the lazy reporting on the issue.
So, what does it really mean to e-Sourcing and the industry? First of all, I think this is a real shot over the bow to SAP. diCarta spent a lot of effort trying to stay off SAP turf, specifically in SRM. Uhh…not any more. I do not believe the NetWeaver integration is meant as a good thing for SAP, merely an easier path to use Emptoris over them. They are clearly moving into a huge solution package with a lot of horsepower.
Next, I have heard good things about the Emptoris product. I also know diCarta to be a strong CM solution from people I know there and demos I have seen. Sounds like an awesome future for the industry as long as your name is GlaxoSmithKline or Boeing. You dont puff up to 320 employees and this much overhead to provide cost effective solutions (yes, I know about MSFT and Emptoris is not MSFT). This should be a very compelling piece of software, if you have the budget and resources to implement it.
There will be an interesting period that Emptoris will need to navigate during the transition. Of course, to the public it will all be sunny days and high fives, but I have seen many mergers and there is a lot of work to do, especially with technology integrations. It never goes as smoothly as planned and with two large scale, mature applications, the truly seamless nature of the solution is a ways out. I have heard about similar difficulties and talent departures regarding similar merger deals.
From my perspective: Does this effect Iasta? Well, of course it does, but I feel, in a positive way. The reason for this is because as more companies get pulled up into the large client profile, it leaves behind a growing vacuum of solutions that can be used by the masses. I can say for a fact that most $500m companies are not going to spend $250k for CM plus that much for SM. By creating this spend management “super company”, it will be very hard to make money in the lower markets. Hence…good for us with our considerably more reasonable price point and functionality.
It is all getting very interesting. SAP is the company that really needs to worry about Emptoris and Ariba. For that matter, will Ariba go acquire a CM company now? I know that they do not have comparable technology to diCarta and might be at a significant disadvantage now. For me, it is nice to just sit back and watch all the bloodletting. Those companies are making big bets with a lot to lose. There is plenty of room in the market for various strategies to be executed. I do not think either plan is wrong and both can be successful, but I do appreciate having virtually no competitors with the same functionality/price combination that we have and the growth potential that our position affords us.
A book called A Whole New Mind written by Daniel Pink and published last autumn argues that in order to be successful in the 21st century we need to develop “soft” skills which are prevalent with the right hand side of the brain. It outlines that traditional knowledge based professions which use the left hand side of the brain, like Banking, Law, management and engineering are likely to go the way of Blue Collar jobs. The internet is the common factor as we all have access to the same level of information and thus this knowledge now becomes a commodity.
How does this relate to esourcing I hear you ask? Well esourcing is a rapidly developing area and much of what is discussed in the book is happening in this space now. Take bid optimisation as an example, a new development that automates the analytical decision award process! Another example is Contract Management as it becomes more sophisticated there will be a less requirement for lawyers - Yippee I hear you say! (Maybe they can start to automate the conveyance process and reduce the cost of moving house - now there’s an idea)
I would like to avoid the over used term of Strategic Purchasing but those of us that are more creative will do well utilising the esourcing tools, spending our time on creative solutions rather than on the process.
This led me to think about how our future Procurement Professionals will be prepared for the task that lies ahead? Who else to refer to but the Chartered Institute of Purchasing (CIPS) so I approached the website expecting the worst and well…..I got it. I read through their courses and it concentrated on process, contracts, supply chain etc. I searched for auctions and got good links to local events where auctions had been discussed - saving 20% etc etc. But nothing on eRFX, Contract Management Systems, Bid Optimisation or even auctions.
I even picked up a leaflet on the “Introduction to eAuctions” where in point 3.2.2.1 it says that the customer is focused on price alone. In point 7.1 it gives examples of suitable eAuctions which to be frank were more relevant 6 years ago.
In the spirit of creative thinking let me propose an eSourcing module for CIPS or even a whole course for our Future purchasing professionals:
i. eRFX – Think creatively and propose how you would use your eRFX suite to tackle all your spend areas.
ii. Reverse Auctions & Closed Bids - Propose how you would create a strategy for each area of spend. When would you propose to use a reverse auction? What further tactics would you employ i.e. rank only etc. When would you use a closed bid?
iii. Bid Optimisation - how does it work? Propose an area where it would be suitable. How might this change the approach of purchasing department?
iv. Contract Management – How does it work? How can I utilize the benefits?
v. 21st Century Procurement Organisational Structures – Discuss……
The 21st Century certainly offers us challenges but with these challenges comes opportunities. Esourcing is becoming main stream, freeing our working day from laborious processes. Those who embrace this change will quite rightly as Daniel Pink suggests do very well in the 21st Century.
e-Sourcing does not equal reverse auction
After looking at all the survey responses, it became clear that many companies – Large, Medium and Small – wrongly assume that e-Sourcing means reverse auctions. By making this assumption, these companies often decide not to use ANY e-Sourcing tool. Strategic e-Sourcing is not about reverse auctions; it is about using the right tool, at the right time to get the right results. It is widely agreed that not every item/category should be bid through a reverse auction. However, there are other ways to leverage the power of e-Sourcing without using a reverse auction. Sourcing professionals can distribute bid information through online RFQs or RFPs. They can collect pricing information through online sealed bids or RFIs. They can make complex award decisions through online decision analysis tools. And they can track supplier issues – contract or performance – through online tools. These tools can either be installed or hosted. These tools can be provided by one vendor or multiple complimentary vendors. Regardless, Large, Medium and Small companies need to look beyond reverse auctions and embrace e-Sourcing technology. By using e-Sourcing technology, companies can:
reduce sourcing cycle times
improve collection and distribution of bid information both internally and externally
implement and capture greater savings
ensure compliance and consistency across the sourcing team
and maximize utilization of resources
create accelerated knowledge transfer throughout the organization
The data Iasta collected seems to indicate that if companies decide not to utilize reverse auctions on a regular basis, they also seem to reduce usage of other types of functionality. This is both a disappointing revelation (the baby is sometimes being thrown out with the baby water) and a promising revelation (there are still massive opportunities for companies and vendors to grow with e-Sourcing technology). It seems that all companies need to adjust their own perception of what the benefits are of e-Sourcing and the vendor community needs to evangelize the soft factors and the alternative cost benefits to reverse auction technology.
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Standard Operating Procedures
I mentioned in my last entry that we’ll be talking about the information Iasta discovered by conducting a Benchmark Survey in 2005. The first area I wanted to highlight was that of Standard Operating Procedures for sourcing. I emphatically believe that successful organizations need to use OPs. The tricky part is having the right number of OPs to aid consistency and performance across team members. With too few OPs there is maverick behavior, with too many OPs - individuals become too controlled and restricted.
Standard Operating Procedures (OPs): When examined across all respondents, it appears that slightly more companies (52%) have OPs than do not (48%). However, when reviewed more closely, this area demonstrates a great disparity between Large and Small companies. It appears that the larger a company is the more standardized operating procedures it is likely to employ.
It is logical to assume that smaller companies tend to rely more on informal teams and processes. Spend is usually centrally managed and communication can be easier in smaller companies. However, based on rapidly increasing inbound interest from SMBs (regarding the Iasta software) and analysts’ opinions, like Aberdeen, it seems that these mid-market companies are beginning to trend towards sourcing automation.
These procedures build the foundation for successful sourcing operations. Without having adequate and controlled operating procedures, it is difficult for any company to maximize its potential and be truly efficient. Smaller companies would greatly benefit from the implementation of such processes and incorporating strong sourcing automation functionality.
Tomorrow we will look at reverse auction usage patterns across business size.
If you are interested in reading the full report, please email survey@iasta.com and request a free copy of the e-Sourcing Benchmark Diagnostic. Please include your corporate email address only.
Check out E-Sourcing Forum all week, starting on Monday. We will be officially releasing the findings of our e-Sourcing Benchmark Diagnostic report. I am going to highlight a specific item each day that will be based on the data we collected in Q4 2005. The survey (which used Iasta SmartSource technology, of course) was created internally and covered a wide range of spend management/e-Sourcing issues. I think there is some very interesting insights that we discovered as a result of the data. The final report was created by our team led by Melissa Beuc and Jason Treida and each respondent received a custom benchmark report that focused on their own specific answers. This final report is a holistic view of the data covering over 40 detailed questions about strategic sourcing tactics, technology usage patterns, future plans and perceived vs. real benefits.
Below are some of the demographic details that were captured during the study.
