The Paradox of Contract Management

What makes channel, sales and service partnerships messy? Contracts, lots of them, for office leases, for equipment, even to prove the partnerships’ existence to local, state and national governments.

Problems coordinating all these commitments — buried in contracts that are stuffed into filing cabinets and forgotten — cost companies millions of dollars, both in fines for missed deadlines and in lost sales.

The paradox is that there is a huge upside sales potential. Companies need to start looking at contracts as a competitive advantage rather than as a burden.

Contract Management’s Maturity Model

Let’s look at a maturity model that describes levels of adoption for contract management. The model is based on examinations of companies using contract management in discrete and high-tech manufacturing, retailing and real estate.

One clear lesson emerged: While all of the companies started out thinking of best practices — that is, integrating all systems that are dependent on and contribute to contracts — only 5 percent achieved that goal. Coordinating financial, legal and service commitments can net major gains, but many companies stop their efforts too soon. Contract management is the emergency dentist of enterprise software: People go there only when the pain is too much to stand, and then they never go back.

Levels of Maturity

Here are the levels of a fundamental contract management maturity model:

• Level 1: Shrink-Wrapped. The majority of companies purchasing contract management systems today do so to get all their contracts out of filing cabinets — or out of Microsoft Excel and Microsoft Paradox databases — and into a system that is designed specifically for managing, updating, querying and canceling contracts. Typically the contracts department works with this application, and only manually-based integrations — if any at all– are included. Systems at this level are stand-alone and tend to stay that way. That’s because the pain of missing a deadline or messing up pricing discounts for a major customer forces attention to this matter until the system is in — and then life goes back to normal.
• Level 2: Barely Connected. Integrated with accounts payable and receivable, pricing and perhaps other ERP components, contract management systems at this level average two or three integrated systems designed specifically to handle contracts more efficiently. This is the level where the procurement side of contract management lives, including the ability to manage strategic sourcing initiatives, direct and indirect procurement strategies and other procurement efforts. There is, by the way, no dividing line between sell-side and buy-side contract management. It’s a matter of perspective: One company’s buy-side contract management is another’s sell-side.
• Level 3: Best Practices by Accident. Best practices implementations are those in which there are four or more systems integrated to contract management, and contracts have actually been turned into a competitive advantage. In most cases the companies that attained this level of integration tackled multiple initiatives at once, seeing cross-system integration as a way to support strategies in channel management consolidation or divisional order management. You get the picture: Best practices often happens nearly by accident.

Demand More

The truth is that contract management has more to offer than many companies know. The few and fortunate companies that have proper systems — created through the pain of legal compliance or lost sales opportunities — find that their ability to manage new partnerships and unforeseen channel events is magnitudes greater than their competitors who use lesser systems.

Bottom Line: Contract management can deliver measurable and financially significant results. Too many companies stop pursuing this strategy when the pain stops — and deprive themselves of competitive, financial and legal advantages.