Enterprise Contract Management: A Practical Guide to Successfully Implementing an ECM Solution

by Anuj Saxena

Overview

Globalization, increased economic and geopolitical uncertainty, technological advancements, and a rise in the number of regulations and legislations have led to a significant rise in the importance, volume, and complexity of modern contractual agreements. Yet, in spite of these profound changes, many organizations still manage the contracting process in a fragmented, manual, and ad-hoc manner, resulting in poor contract visibility, ineffective monitoring and management of contract compliance, and inadequate analysis of contract performance. The net effect of this has been a heightened interest in re-engineering and automation of Enterprise Contract Management (ECM) processes across industry sectors and geographies. Enterprise Contract Management: A Practical Guide to Successfully Implementing an ECM Solution addresses all the questions surrounding ECM, ECM solutions, and the project management, change management, and risk management considerations to ensure its successful implementation. This concise text will help your organization manage the challenges of the contract life cycle and the key success factors and pitfalls in a typical ECM solution. It is a must read for corporate executives, buyers, procurement and strategic sourcing specialists, contract administrators and procurement managers. There is currently no other book available on ECM solutions. All existing books on contract management focus on the legal aspects of contracts, but none describe the functions, features, and capabilities of technology solutions that support ECM, nor do they explain the key considerations for ensuring a successful ECM solution implementation.

Product Details

ISBN-13:	9781932159905
Publisher:	Ross, J. Publishing, Incorporated
Publication date:	02/01/2008
Pages:	256
Product dimensions:	6.10(w) x 9.00(h) x 0.90(d)

About the Author

Anuj Saxena C.P.M., MCCM (Cert.), CPIM, PMP, Six Sigma Black Belt, is an Associate Partner at IBM Global Business Services. Prior to joining IBM, Mr. Saxena was Vice President of Supplier Relationship Management (SRM) Solutions at Alti, Inc. — a management consulting firm where he lead multiple SRM and ECM Solution implementations in the US and Europe. Earlier in his distinguished career, he worked for several large consulting firms such as PricewaterhouseCoopers Consulting, IBM Business Consulting Services, and Deloitte Consulting. His domain expertise includes supply chain management, materials management, sales & distribution, and enterprise asset management. Mr. Saxena holds a Bachelor's degree in Mechanical Engineering, a Masters Degree in Information Systems & Decision Sciences, another Masters Degree in Industrial & Manufacturing Systems Engineering, and certifications in Purchasing Management, Contract Management, Production & Inventory Management, Project Management and Six Sigma. He is an active member of International Association for Contract and Commercial Management and National Contract Management Association. Over the last few years, Mr. Saxena has led over 25 ECM Solution implementations and has authored several journal and conference articles on project management, procurement, and plant maintenance.

Read an Excerpt

CHAPTER 1

CONTRACTS

IN THIS CHAPTER:

* Evolution of Contracts

* Definition of a Contract

* Types of Contracts

1.1 OVERVIEW

In today's business world, the phrase "the document drives the deed" might be well regarded as the maxim — or perhaps "the document should drive the deed" would be more apropos. Today's modern organization is formed by, operates under, and is regulated by an enormous and complex universe of documents we generally refer to as "contracts" — a term whose simplicity belies the nearly incomprehensible array of variety and form that such documents can assume. From the simplest of transactions (e.g., paying the electric bill) to the most complex transactions imaginable involving billions of dollars, scores of enterprises, and governmental agencies — both domestic and foreign, the single fact stands that success in today's world of commerce depends to a very great extent upon an organization's ability to effectively — and proactively — manage its contracts.

It is worthwhile to point out that in the past, the number of contractual agreements that any single organization had to manage was relatively low, and their level of complexity was not particularly daunting. As the cliché goes, "that was then." Today, it is not uncommon for there to be, at any point in time for a large organization, tens of thousands of legal agreements driving its operations, a situation several times more complex than in the past. At this level of complexity, one person, or even a skilled and experienced team, would find it nearly impossible to manage such a dynamic, complex, and critical population of documents without a set of sophisticated tools enabling an efficient implementation of contract life cycle management to the benefit of the organization. The first step in this process is to ensure that those involved have a clear understanding of the term contract itself.

Therefore, we begin by providing some background information and a high-level overview of the following topics in this chapter:

* History of the evolution of contracts

* Definition of the term contract

* Types of contracts commonly used in today's business environment

1.2 EVOLUTION OF CONTRACTS

Contracts have evolved over the centuries as a virtually universal method of forming lawfully binding relationships between two or more parties. The nature and scope of a contractual relationship can occur across a wide spectrum — from a small, temporary project to a full-scale corporate takeover or a treaty between nations. Generally, contracts are comprised of standardized tangible elements and codification and tend to be structured in accordance with the laws of the country in which they are written. While in some countries and cultures contracting parties elect to recognize verbal and handshake agreements that consist of informal promises or trades of goods and services, most contracts in modern commerce require documentation codified in legally binding language and terminology, consistent with all relevant statutes, regulations, policies, and laws, and duly signed and approved by the authorized parties concerned. Only then can a contract be considered valid and active, and even then it is subject to interpretation by the parties and the legal systems under which it is construed. Interpretation notwithstanding, contracts thus entered into by the parties involved are considered to be in full force and effect by their respective organizations.

As the needs of people, governments, and other institutions have become increasingly complex, contracts have evolved to reflect and codify these changing needs. During the past decade, contracts have undergone substantial transformations, in large part because of the use of computers and the Internet and the subsequent globalization of our economy. Add to this the increasing complexity of supply chains, outsourcing, and deregulation and the ever-increasing number and types of competitors. With all these changes, it's no wonder that agreements written a decade ago frequently seem simple and one dimensional compared with many agreements entered into by contemporary enterprises. This revolution in contract structure, content, and format has occurred within the broader context of the changing roles that contracts play in today's business world. What was once a relatively simple document designed to protect parties against worst-case scenarios has evolved into a dynamic and powerful tool with far-reaching implications for long-term business and personal relationships.

The rise in the sheer number of contracts under which a modern organization must operate was referred to above. As with any multiplicative process, this rise in number must be overlaid against the dimension of increased complexity of each individual contract in order to fully appreciate the new challenges that modern organizations must confront in their quest to remain compliant and competitive.

1.3 DEFINITION OF A CONTRACT

Given the rapid and dynamic evolution of contracts during the past several decades, it is not surprising that different experts and research organizations vary in their views and definitions of modern contracts. Gartner Research, for example, defines a contract as "the sum of all transactions and interactions that have taken place between the parties, both before and after the award of the contract." While other authorities and authors define a contract in a variety of forms, some of which are quite limited, for the purpose of this book a contract may be defined as follows:

A contract is a set of documents, governed and restricted by law, that clearly establish the boundaries, extent, and intent of the executing parties' relationship, along with the rights and responsibilities of the entities involved.

Purchasing agreements, sales agreements, service agreements, insurance policies, warranties, loans, mortgages, and rental leases are examples of contracts as defined for the purposes of this book. These may be priced agreements, but many contracts are not, examples of which are nondisclosure agreements, noncompete agreements, and teaming agreements. In the next section of this chapter, the different types of contracts that are commonly used in today's business environment are discussed.

1.4 TYPES OF CONTRACTS

There are a number of factors that influence the use of a specific type of contract on a particular job or project. Project scope, pricing, and scheduling would seem to be the "bottom line," but other factors are equally important over the project life cycle and must be addressed before deciding on contract type. Some of these factors include:

* Availability and accuracy of pricing data

* Accuracy in definition of project scope

* Flexibility allowed in delivery schedule

* Acceptable risk level for each participant

* Intensity of competition

* Relative strength of the buyer or the seller

The following are the main types of contracts in use in today's business environment:

* Fixed-price contracts

* Cost-reimbursable contracts

* Partially defined contracts

* Letter agreements

In the following sections of this chapter, a brief description of each of these types of contracts is provided.

1.4.1 Fixed-Price Contracts

Fixed-price contracts are usually favored by most buyers. Under such agreements, price does not vary from that agreed upon at the time of ordering, regardless of changing conditions. The seller assumes the risk involved and is, therefore, motivated to improve efficiency and minimize costs. There are several slight variations of the traditional fixed-price contract. These are:

* Firm fixed price: These are sometimes referred to as "turnkey projects," where the buyer agrees to pay a specified amount upon the delivery of a service. Such contracts require minimum monitoring from the buyer's side as the financial risk is transferred to the seller. Such contracts are sometimes used when the buyer is unsure of the exact amount of raw materials or effort involved in the delivery of goods or equipment and wishes to transfer the risk involved to the seller. Sellers usually charge a premium for entering such agreements to cover the risks/uncertainty involved.

* Fixed price with adjustment: Firm fixed-price contracts do not work very well in situations where the activity involved extends over a long period of time, during which labor or raw material rates may fluctuate considerably. Sellers also avoid firm fixed-price contracts in situations where the scope of the project may vary considerably once work is initiated. In such cases, an adjustment or escalation clause can be used, which provides protection to both buyers and sellers in the event of upward or downward pricing or rate changes over the duration of the project.

* Fixed price with redetermination: These contracts are very similar to the adjustment contracts described above. Both types of contracts allow for upward or downward change in price after the contract is executed. The difference lies in the initial understanding of a project's required time, materials, and effort. In adjustment contracts, these factors are known with a degree of accuracy, but with redetermination contracts these essentials are unknown. Redetermination contracts are also typically used when project scope is not yet well defined. For example, in the case of several information technology implementation projects, the exact time required for the job is initially unknown. The total duration of individual tasks, and of the overall project, may vary significantly depending on a myriad of factors such as the functional and/or technology landscape of the organization, level of maturity and complexity of business processes and current systems, quantity and quality of data, and level of skill, knowledge, and abilities and availability of resources. In such situations, a temporary fixed price is used to execute the contract, and as the team gains a better understanding of the scope of work involved through an initial assessment, the price is redetermined and may be changed upward or downward as appropriate.

* Fixed price with downward price protection: Downward price protection contracts are a variation of the adjustment contracts and 8 provide maximum protection to the buyer since under such contracts price may be adjusted only in the downward direction.

* Fixed price with incentive: As the name suggests, these contracts offer an incentive to the seller for accomplishing the awarded job within a preestablished target cost or ceiling price. Under such contracts, the buyer and seller share any savings at prenegotiated rates if the seller can keep the overall cost below the target cost. Such contracts are typically used in high-cost, long-lead-time projects, such as construction projects.

1.4.2 Cost-Reimbursable Contracts

With cost-reimbursable contracts, the buyer guarantees the seller a price that covers all, or an agreed-upon fraction, of the total costs, along with an agreed-upon fee, which may be a fixed fee, a fraction of the cost, or an award fee. The financial risk in most of these contracts falls on the buyer, and therefore such contracts require careful monitoring/administration.

One type of cost-reimbursable contract is the cost-without-fee contract. Cost-without-fee contracts are commonly used when financial profit is not the primary motive to enter into the contractual agreement and are, therefore, often used by such entities as nonprofit and research organizations.

Another type of cost-reimbursable contract is the cost-sharing contract. Under a cost-sharing contract, the buyer and seller share costs and benefits involved with the entire project. Such agreements are applicable in situations where the contracting parties are equal in strength and both parties stand to gain equally from the joint effort. For example, software vendors often team up with consulting firms to develop key functionality that ultimately becomes part of the end product that they sell. Software vendors gain from their consulting partners' subject matter expertise, adding critical functionality that may drive improved customer satisfaction and increased sales. On the other hand, involvement in such projects provides a competitive advantage to the consulting partners, since their resources gain knowledge and experience from implementing new functionality, which other consulting firms will not be able to offer to clients.

1.4.3 Partially Defined Contracts

Partially defined contracts are agreements where either the specific goods/services, the delivery schedule, or the quantity is unknown at the time of contract execution. The specification of required goods/services may be dependent on the production schedule or on the shutdown of equipment in a manufacturing environment. Manufacturing organizations often set up partially defined contracts such as value contracts (in which the maximum value of the contract is defined, but individual goods or services are unknown) or quantity contracts (in which the maximum quantity of goods or services to be procured is known). These are also referred to as blanket arrangements or blanket purchase orders.

Time and material contracts are examples of partially defined contracts. Such contracts only define the rate per hour for each type of service provided, but the exact quantity and/or schedule is usually unknown at the time of contract execution.

1.4.4 Letter Agreements

Letter agreements are sometimes used as a buyer's authorization for suppliers to begin work even before all details of the deal are finalized and before a formal contract has been executed. Such agreements are commonly used where the buyer and supplier have a preestablished working relationship from previous projects or where additional work is being assigned to a supplier that may already be working on a related project for the buyer at the time. The buyer should take care in such cases to clearly state liability limits in the event that the deal cannot be satisfactorily concluded and to assert the terms and conditions of the purchase.

1.5 SUMMARY

Over time, what is meant by the term contract has expanded from the quite simple handshake agreement to the multidimensional documents contracts have become today. The contemporary business organization often has a complex and ever-growing list of contractual goals and obligations that inform its activities and should therefore drive them. It is imperative that organizations manage the entire life cycle of their contracts in order to maximize contractual benefits, maintain compliance, and foster competitive advantage. Competitive advantage is particularly important when considering the number and types of contracts into which any organization might enter. As this chapter has illustrated, every type of contract requires a specific level of oversight in order to fully capitalize on the potential benefits.

It is obvious that for larger organizations, the burden of maintaining these contracts can be prohibitively complicated without the assistance of a more sophisticated system for managing all the stages in the life cycle of their contractual agreements. In the next chapter, we will discuss the different stages in the life cycle of a contract, the common challenges faced by organizations during these stages, and the impact of poor management of contracting processes within an organization.

CHAPTER 2

ENTERPRISE CONTRACT MANAGEMENT

IN THIS CHAPTER:

* Definition of Enterprise Contract Management

* The Contract Life Cycle

* Challenges in the Contract Life Cycle

* Current State of Contract Management

* Impact of Poor Contract Management

2.1 OVERVIEW

In the previous chapter, we discussed the evolution of contracts. A definition of a contract was presented, along with examples of the different types of contracts that an organization may enter into in today's business environment.

The volume, type, importance, and complexity of modern contractual agreements have significantly risen across industry sectors and geographical regions. A number of factors, such as the advent of global supply chains, increasing economic uncertainties, geopolitical instability, outsourcing, procurement and sales force automation, and new regulatory requirements, have led to this rise in volume and complexity within contract management. Yet, in spite of these recent profound changes in the business environment, many organizations still manage the contracting process in a fragmented, manual, and ad hoc manner, resulting in poor visibility into contracts, ineffective monitoring and management of contract compliance, and inadequate analysis of contract performance. The net result of such inefficient contract management is significantly higher costs, numerous revenue recognition delays, customer dissatisfaction, overcharges, erroneous payments, performance glitches, missed savings opportunities, regulatory violations, and increased risk. It is, therefore, not surprising that three studies conducted by the Aberdeen Group found that "enterprises rated contract management among the top business application investments prioritized for the next 24 months." However, before embarking on the discussion around contract management applications, we need to shed light on the topic of Enterprise Contract Management itself.

(Continues…)

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Excerpted from "Enterprise Contract Management"
by .
Copyright © 2008 Anuj Saxena.
Excerpted by permission of J. Ross Publishing, Inc..
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents

List of Tables,
List of Figures,
Foreword,
Preface,
Acknowledgments,
About the Author,
About IACCM,
Web Added Value,
SECTION I. BASIC CONCEPTS, FUNDAMENTALS, AND THEORY,
Chapter 1. Contracts,
Chapter 2. Enterprise Contract Management,
Chapter 3. Enterprise Contract Management Solutions: An Introduction,
Chapter 4. Enterprise Contract Management: The Vanguard of Sustained Compliance,
Chapter 5. Enterprise Contract Management Maturity Model,
SECTION II. IMPLEMENTATION,
Chapter 6. Implementation Methodologies,
Chapter 7. Change Management Considerations,
Chapter 8. Risk Management Considerations,
Chapter 9. Integrating an Enterprise Contract Management Solution,
Chapter 10. Metrics: The Catalyst to Achieve and Maintain Success,
Chapter 11. Sustaining Excellence beyond the Implementation,
APPENDICES Regulations at a Glance,
List of Abbreviations,
Bibliography,