With procurement and sourcing becoming major cost-saving targets at many companies, the number and complexity of supply and service contracts is proliferating. A typical Fortune 1000 organization has between 20,000 and 40,000 contracts and spends as much as 1.25 percent of revenue to manage them, according to investment banking firm Goldman Sachs.
Despite this expenditure, analysts say, enforcement of contract terms often is lacking and many cost benefits negotiated in contracts are never realized, leaving millions of dollars in potential savings on the table. A recent survey by the International Association of Contracting and Commercial Managers (IACCM) shows that companies are well aware of this failure. Sixty-three percent of the North American corporations queried rated their contract management processes as "poor."
Tim Cummins, IACCM executive director, attributes this to a "lack of ownership." Few corporations, he says, "have yet realized that contracting is a process, not a set of documents."
That mind-set is changing, according to Ashif Mawji, CEO of Upside Software, Edmonton, Alberta, which sponsored the IACCM survey. Companies increasingly are using contract management software, such as that provided by Upside, to manage the entire life cycle of contracts, he says. "Our software manages the complete process, from the point where the user in the field requests goods or services, through tender or auction, then the negotiation cycle and, finally, ongoing management and compliance." Several transportation and logistics companies are among Upside's customers, including a major U.S. railroad and a global 3PL.
Covigna, Mountain View, Calif., is another player in the emerging Contract Lifecycle Management (CLM) space. CTO Sanjay Rajagopalan acknowledges that CLM is in its infancy. "In most cases today," he says, "contract management is piggybacking on some other initiative." For example, a company may decide to consolidate its spend across all business units, he explains, so that it can purchase one big company instead of several small companies. "As part of this process the company may realize that one critical thing it needs to do is get a handle on its contracts." That means better systems to manage visibility and contract relationships, and standardization of contract negotiation and approval processes. "That is what leads to CLM-it is a natural offshoot of other organizational initiatives around procurement transformation," he says.
Rajagopalan believes that "pretty soon" systems for managing contract life cycles "will be identified as a critical cornerstone to achieving larger corporate goals." He is not alone in his optimism. Goldman Sachs estimates that the market for contract management software will hit $3.1bn by 2005, while Gartner Group predicts that enterprises will be spending more than $20bn a year on contract management software and services by the end of 2007.
In many ways, this emphasis on contract management is old news to transportation and logistics managers. The idea of contract life cycles may be fresh, but issues of procurement, negotiation and compliance are well understood in this sector, and supporting technology for creating and managing contracts is relatively advanced - though still underused. Solutions are largely specialized by mode, but many software developers believe the trend is toward a single system capable of managing all logistics contracts.
|"Visibility to current rates, and also terms and conditions, is essential."|
- Cindy Yamamoto of Descartes
|"There are a lot of nuances in logistics that you don't have in other contracts ... the tools simply don't lend themselves to logistics."|
- John Murphy of G-Log
Timely, incisive articles delivered directly to your inbox.