S-Business: Contract Management

With a typical contract containing, among countless other line items, provisions for service duties and obligations, representations and warranties, termination clauses, remedy clauses, arbitration clauses, and merger clauses, the complexity of the simplest contract can be daunting. In essence, contractual agreements are the de facto lifeblood of most businesses, and adhering to them is a fiscally paramount pursuit. Yet to date, few companies have automated contract management through enterprise software, and fewer still have tied such systems into their service management software applications.

The end result? Service organizations that are bogged down by manual and error-prone contract management processes, countless missed revenue-generation opportunities, and minimal adherance to compliance. And let's not forget the lack of the service organization's ability to provide personalized and targeted customer service. Automated and effective contract management should enable a service organization to live up to its potential, both in terms of achieving greater efficiency and lower operational cost, but also in terms of higher revenue-generating power.

Good Service: Is It All in Our Minds?
The theory of linking customer service and contract management software is that it functions to maximize customer satisfaction, employee productivity, and company profitability. Taken a step further and integrated with service and field service applications, contract management applications promise to ensure that all service and support activities, from initial contact with the customer to final issue resolution, are handled in manners that comply with contractual obligations. Being able to deliver on these obligations and enabling service agents to be skilled relationship managers draws heavily from 'true' interoperability between software systems that traditionally have been implemented as silos of information.

If your service department does not know what it's contractually obligated to provide a customer, or in other words, if the pieces of the system are not 'talking' to each other, how can you provide personalized service? You risk providing a service that a customer hasn't paid for, or worse, you could damage your customer relationship by not providing them with the level of service they have paid for and expect. And given that keeping an existing customer costs a company about one-tenth as much as acquiring a new one, damaging customer relationships is the last thing you want to do.

Preventive Maintenance for Your Contracts
By automating the service department's response to certain customer events, such as the upcoming expiration of a contract, companies can take advantage of the sales opportunities represented by service calls. If a customer calls in for service and a company's service representative can see that the customer's contract is about to expire, the representative can alert the customer to that fact, while providing them statistics on how much they have utilized their current service agreement over the past year, in order to entice service contract renewal.

This level of personalized service also addresses a service organization's constant need to proactively address and resolve every customer issue before the issue even arises. By alerting a customer to an expiring contract, the service agent can take care of an impending customer problem ahead of time as opposed to notifying the customer that he cannot be helped until the contract has been renewed. Proactive and targeted customer service goes toward improving service levels and quality and, ultimately, customer satisfaction and retention.

Tell Us Where It Hurts
The fiscal pain associated with lack of visibility into contracts comes in a variety of levels, including a particularly insidious type of pain CRM industry analysts refer to as 'contract leakage.' The realities of contract leakage are as unflattering as the name suggests, and it typically happens when a business lacks the ability to properly monitor, for instance, the specifics of a service agreement. Common scenario: A customer calls in for technical support services and receives assistance despite the fact that their support contract has expired. The problem? Manual contract management methods that literally could mean the support technician is manning the phones in one room, and the service contract is gathering dust in a filing cabinet three floors up. The result? Dollars lost by way of throwing away free support and missed opportunities to sell or up-sell to a new service/support agreement.

Brad Snook, vice president of client relationship management, United Asset Coverage (UAC), brings clarity to the pitfalls of attempting to manage contracts manually. UAC provides integrated telecommunications and networking maintenance services to major clients such as Verizon Wireless, Calvin Klein, Inc., Embassy Suites, and Mercury Insurance. As Snook explains it, the bulk of UAC's revenue comes from their ability to enter into and maintain fixed-cost service agreements. 'Gaining a long-term customer is about effectively fulfilling a one- to a five-year service agreement,' he says. 'We want to maintain and renew service contracts year over year so we have a renewable revenue source and, ultimately, a higher retention rate.' Higher retention rates point directly back to UAC's decision to dump the revenue-draining manual methods and go with automation.

After rolling out contract management software in August of 2001, Snook was focused on an early-stage goal of providing customers a clearer view into what their service contracts are buying them. 'Now that the Service contracts are tied to the financial side of the billing engine, we provide detailed equipment-level billing, right down to every single piece of equipment at every site, that shows exactly what everybody's being charged for their district. This has taken manual billing down to zero.' Ultimately, not only do UAC's customers have a complete view of the services they are receiving, but the time and efficiencies UAC gained through automating the billing also has translated into reduced headcount. 'Automation has helped us avoid hiring additional people,' says Snook. 'As we continue to grow, we remain much more efficient and can handle a much greater volume.'

Contract leakage swings the door open for a larger and interrelated pain point: lack of internal automation and high costs of maintaining and managing contract agreements. Like the technical support representative who unwittingly doles out free support due to lack of visibility into customer entitlements, the fact that most companies attempt to manage all or part of the service contract process manually is what sets them up to lose and makes the process very costly. According to global investment banking, securities, and investment firm Goldman Sachs, most companies spend 50 basis points of their revenue to manage post-deal agreements. This cost can be brought down to 10 to 25 basis points of revenue by using contract automation. In addition, headcounts can be reduced by 10 to 20 percent by moving away from manual contract administration.

Service organizations that move toward automating their contract creation and renewal processes will be operating at a higher level of head-count efficiency and greater agent productivity and will begin to experience lower operational costs. In addition, automation and housing all contract information in a single contract repository can give organizations a single view into all customer contract information, which increases visibility for key decision makers.

The benefits of greater efficiencies, better compliance, and increased visibility accruing from contract automation also is why experts like Daniel Burgwinkel, research specialist at the University of St. Gallen in Switzerland, feel the future of profitable contract management lies in electronic contracts and contracting. 'The negotiation and drafting of contracts is a challenging task from the legal as well as from the business point of view,' he says. 'The interrelation between internal and external obligations must be synchronized.'

Beware the Fast-Moving Waters of Streamlining
As Burgwinkel suggests, synchronicity (a.k.a., streamlining) through automation/electronic contracting is essential. Nevertheless, it presents its own set of potentially painful issues. 'Several hurdles have to be overcome to establish e-contracting as a new collaboration technology,' explains Burgwinkel. 'Studies on e-mail negotiation have shown that trading partners behave differently in electronic negotiation than they would in a face-to-face meeting. The negotiation of a contract has a social dimension that should not be underestimated.'

Still, early adopters like UAC and Soltre Technologies, Inc. offer credence to the fact that working through the cultural barriers are worth the uphill climb. An application service provider that focuses on servicing companies with annual revenue in the $20-million to $500-million range, Soltre Technologies, Inc., like UAC, saw the benefit of streamlining the process of collecting and sharing contract information across all business functions. 'We need to give our customers, employees, and partners access to critical contract information whenever and wherever they ask for it,' says Vivian Chow, CIO, Soltre Technologies, Inc.

'Whether it is to confirm a customer's entitlements, let them know that their service agreement is about to expire, or even let them know of price reductions, our contract management solution gives us the power to give customers every piece of information they want.' In terms of 'hard savings,' contract management, in conjunction with other e-business applications, has enabled Soltre to deliver its products and services in half the time it used to take. Key

While Burgwinkel suggests that the jury is still out on long-term adoption and cultural acceptance of automated contracting systems, the ultimate benefits seem to outweigh the squeamishness reluctant automation adopters may still be feeling. 'Further research is needed to analyze contracting patterns as well as what type of electronic or automated contracts are needed and acceptable by users,' he says. 'Still, the introduction of e-contracts will become an important component for conducting business in cyberspace.'

Facts Concerning Contract Management
Fact: According to the US National Association of Purchasing Managers (NAPM), Fortune 1,000 companies maintain working relationships with anywhere between 20,000 to 40,000 vendors at any given time, and that number is rising. The NAPM also indicates that companies are managing 20 percent more contracts today than five years ago. [Friedman, Jamie, Steven Kahl, Thomas Berquist, and Chris Debiase. 2001. Technology B2B software. Goldman Sachs report (February).]

Fact: Surveys show that 99 percent of companies still don't have electronic or automated contract management systems in place. [Caplan, Jennifer. 2001. Contract automation: Digitizing the party of the first part-Companies turn to web-based applications to better manage corporate contracts. CFO, CFO.com (October 17).]

Fact: Almost 80 percent of business-to-business sales are codified in contracts. [Nyberg, Alix. 2002. A little sanity comes to clauses-After the ink has dried, an expanding array of offerings helps cut down the tedium of tracking the deal. CFO, CFO.com (April 03).]

Fact: Gartner analyst Andrew Kyte predicts that the contract life-cycle management market will be worth $20 billion in 2007. [Kyte, Andrew. 2002. Contract life cycle management: A $20 billion market. Gartner, Inc. report (April 16).]

What You Need to Know
When considering your options for contract management solutions, there are a variety of factors to consider.

1. Does the solution offer a versatile set of tools to help sales managers, contract administrators, purchasing departments, support organizations, and executives effectively negotiate, create, manage, and renew thousands of different types of contracts? While realizing the connection between service departments and contract management is important, it is every bit as important to remember that the best contract management software solutions provide a view into contracting processes for any and all necessary parties within a company.

2. Does the software provide automated support for contract renewals and extensions? While it is important to empower service representatives to serve as contract renewal salespeople, companies should not lose sight of their service reps' main job: providing service. If up-selling and cross-selling contracts and contract renewals takes away from service representatives' ability to effectively do their jobs, then no competitive advantage is really gained from the system.

3. Does it provide constant real-time evaluation of profitability and performance? This is perhaps the most overlooked aspect of contract management, and for that matter, service management software. Far too often, automated systems are designed to gather all kinds of information, but little thought is paid to what information companies should extract from them. One of the biggest gains companies can realize from contract management software is a real-time view into contract compliance and leakage, enabling organizations to enact proactive measures to reverse undesirable trends before they hurt the bottom line.

4. Does it provide sufficient flexibility to support relationships with multiple customers and suppliers operating under partnership and sub-contract agreements? Today's world of business is not an exercise in managing a demand or value chain, as was often implied in the late '90s. Instead, reality has proven that business is actually an orchestrated effort of managing complex relationships between customers, partners, suppliers, and employees. Any contract management solution you deploy should be able to reflect that reality.

5. Does it provide accurate invoicing and contract compliance to maintain and expand existing relationships? As explained above, the most advanced service organizations are realizing that every customer interaction represents a sales opportunity. Only by ensuring that interactions are executed, recorded, and billed properly can companies unlock the selling potential service departments contain.