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SAN FRANCISCO -- On the surface at least, the word "contract" means "a legal agreement between parties on expected...
performance and behavior, and remedies in response to deviations."
But at the Apttus Accelerate conference, it soon became clear that enterprises are struggling with differences in what contracts really mean to different stakeholders. In response, they're implementing contract lifecycle management initiatives to bring more clarity and consistency across their organizations.
This is no easy task since CFOs, chief risk officers, legal teams, sales people and business app developers all look at individual contracts through different lenses, and their objectives and interpretations don't always line up. Things only grow more complex as enterprises look for ways to manage portfolios of thousands or millions of contracts -- and the revenue, risks and individual incentives associated with them.
As a result, when businesses look at contract lifecycle management, they approach it with questions like:
- How and when do we recognize revenues?
- What are our current risks, and how do they change in response to new regulations and economic trends?
- Why is one rep in Brazil selling 85% of all keyboards?
The underlying problem is that people with these different roles often use disparate tools to interact with separate parts of the business's software environment. Apttus, which hosted the conference, announced contract management software called Omni that is designed to address these problems by serving as a "middle office" repository for managing information across ERP and CRM functions, including contracts.
Revenue recognition a key CLM driver
One of the biggest reasons for contract lifecycle management initiatives is to improve revenue recognition processes, said James Misterman, managing consultant at Mainspring Consulting Group, in an interview. Large enterprises, in particular, are using contract analytics tools from vendors like Kira Systems to bring large volumes of legacy contracts into a common CLM repository on the Apttus platform.
Misterman said his company is seeing more interest in revenue recognition than in responding to changing regulations like GDPR. This may in part be due to surging interest in new as-a-service models, in which complex business products are packaged around recurring revenue streams. A CFO needs to make sure an upfront payment for these complex offerings is appropriately translated into a revenue stream that is realized in the appropriate quarter and taxes, commissions and royalties are paid out accordingly.
Vendors like Kira Systems are in the early stages of using AI to add metadata to large portfolios of contracts, which can make it easier to bring older contracts into an integrated contract lifecycle management repository, Misterman said.
In the long run, he believes more advanced AI tools will make it easier to translate the implications of individual contracts into plain English. In the meantime, enterprises will have to settle for tools that make it a little easier for legal and financial analysts to estimate risks and revenues.
The value of a contract maturity model
"The first source of value lies in getting all your contracts into a single repository where everyone can get access to them," said Andrew Bartels, vice president and principal analyst at Forrester Research. Many organizations are struggling with this. But once everything is in one place, they can start adopting a maturity model that streamlines the ability to manage the value and risks of contracts with less effort and cost.
This can include things like automated analysis, identifying conflicting contracts, automating contract creation and accelerating revenue generation. In a fully mature contract lifecycle management process, companies are in a better position to identify the characteristics of well-performing contracts, so they can make more of these and weed out the bad ones, according to Bartels.
But along the way, enterprises must navigate the complexities of how different teams view these contracts. For example:
- Legal is interested in contract creation, analytics and ultimately contract optimization.
- Procurement wants to ensure contract compliance.
- Sales wants faster contract approvals and to ensure clients automatically get promised discounts.
- CFOs are interested in the financial and risk management aspects.
"These different stakeholders make CLM one of the most complex systems to deploy," Bartels said. He recommends that companies include stakeholders from across the organization. One team like legal may initiate a contract lifecycle management initiative, but if the company does not get buy-in from across the organization, other teams might ignore or work around the system, thus limiting its value.
Streamlining the contract process
Hewlett Packard Enterprise (HPE) started working with contract lifecycle management as part of the process of separating out a large portfolio of contracts across two new companies formed when HP's hardware business was split out from the services wing, which became HPE.
"One of the surprising learnings was that contracting teams were spending more time than we thought on low-value transactions," said Molly Tynan Perry, vice president and COO in the office of the general counsel at HPE, in a conference session on creating a data-driven contract management process. In response, the company started streamlining its approval process for low-value transactions, which sped sales and reduced legal overhead.
A better CLM process also made it easier to identify bottlenecks in HPE's business processes for contracts. "In one case we realized a local team in Asia Pacific needed better negotiating guidelines," she said. HPE subject-matter experts worked with the team on this, resulting in a 30% improvement in turnaround time within a few weeks. Over time, contract approval cycles were reduced from 36 hours to under 20.
Focus on root causes
Analyzing CLM data can help experts identify where to look for problems, but they also need to analyze the underlying process to find the best solutions.
"We hear a lot about analyzing data but don't hear about analyzing process as much," said Michael Pisias, director of operations and technology solutions at HPE. Often multiple problems can be solved by sending subject-matter experts into the field to identify and rectify the root cause.
And what about that very successful salesperson selling 85% of the keyboards for HPE in Brazil? At first, managers suspected fraud. As it turned out, some local programmers in Brazil got hung up on a business process for provisioning orders that required a salesperson user ID. The requirement had been put in place to stay compliant with various HPE partner contracts. The programmers asked one of the sales agents working near them for her user ID, and unbeknownst to her, she became the most successful keyboard salesperson in Brazil. Once the problem was identified, subject matter experts were able to rectify the anomaly not only in Brazil, but for other groups facing similar problems worldwide.
This kind of root cause analysis can also help whittle down several issues in larger contract portfolios as well. HPE initially identified 17 suspect problems in government contracts, but when it analyzed the underlying processes, it was able to whittle them down to five root causes. Once the problems were cleaned up, they fixed all 17 suspect issues.
"Most problems are solved by process improvement," Pisias said. Ultimately the HPE improvements made it easier to find the value of the deals, produce quotes more quickly and reduce risk.