CLM 2020: The Third Decade of Contract Management Technology Begins

determine.com CLM 2020: THE THIRD DECADE OF CONTRACT MANAGEMENT TECHNOLOGY BEGINS

Table of Contents

Executive Overview ....................................................................................................................................................................................................................................................... 3

What is the State of Contract Management? ................................................................................................................................................................................................. 3

Impact of Ineffective Contract Management .................................................................................................................................................................................................. 4

Factors Increasing the Emphasis on Contract Management................................................................................................................................................................... 4

Roadmap Through the Third Decade of CLM................................................................................................................................................................................................... 5

Ongoing Low Adoption of CLM .............................................................................................................................................................................................................................. 6

Modern CLM as a Form of Knowledge Management ................................................................................................................................................................................ 6

Getting Out of the “Contract Silos” ........................................................................................................................................................................................................................ 7

Advantages of an “Enterprise” CLM ........................................................................................................................................................................................................................ 7

The Benefits of CLM to Strategic Supply Management ........................................................................................................................................................................... 8

Concluding Thoughts ................................................................................................................................................................................................................................................. 9

About Us ........................................................................................................................................................................................................................................................................... 9

Endnotes ................................................................................................................................................................................................................................................................................ 9

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CLM 2020: THE THIRD DECADE OF CONTRACT MANAGEMENT TECHNOLOGY BEGINS - 3

Executive Overview

While Contract Lifecycle Management (CLM) technology has been in play for two decades, it currently bears little resemblance to its past incarnations. The challenges of modern business have fundamentally changed what it means to manage contracts in terms of process and technology. Enterprise demand for near real-time transparency, auditability and accountability are not just driven by internal requirements — they’re mandated by shareholders, consumers and regulatory organizations.

The first decade of contract management technology was focused on bringing information online, getting documents out of hard copy filing cabinets and into online databases where they could be mined for metadata and tracked and accessed globally. The second decade was driven by the need to centralize, to break down the traditional silos artificially imposed by individual departments such as Human Resources, IT, sales and procurement.

The timing of contract management’s third decade is fortuitous, as it coincides with the ‘coming of age’ of emerging technologies such as AI, machine learning and advanced analytics, and their acceptance by procurement. Now that enterprise contracts are completely online and managed in a consistent, centralized platform, CLM is ready for yet another leap forward, one that will leverage improvements in product maturity and bring the discipline and benefits of contract management to the forefront of investments in corporate competitive advantage.

What is the State of Contract Management?

The most meaningful change to the practice of contract management in recent years is the addition of the “lifecycle” concept (Contract Lifecycle Management / CLM).

CLM recognizes that the management of contracts extends far beyond the “pages” each agreement is penned on. A contract is a relationship, and it contains sets of protections, obligations and/or opportunities for mutual growth. In most cases, these terms are not optimally acted upon because the humans responsible for contract management have so many other pressing tasks to which they must attend.

Taking an expansive approach to contract management is far from being the “managerial flavor of the month.” It makes good business sense, and will sustainably impact on the top and bottom line. According to the International Association for Commercial & Contract Management (IACCM), “Among top performers, a focus on contract and commercial management has yielded margin improvements as high as 2.5% in the last two years. That’s measured, verified improvement - not just wishful thinking.”

While evidence of margin improvement is always welcome news, there are as many cautionary tales of the opposite playing out across industries on a daily basis. In an example covered in a recent Harvard Business Review article, we read about contracts that – despite changing macro conditions - were written and enforced so stringently that they hurt all parties involved. In this case, Dell and FedEx were lashed together during a time of falling shipper satisfaction levels and plummeting carrier profits. Neither party was happy, but neither could find a way out due to the structure of their contract and its implications on the relationship between the two companies.

Today’s enterprise leadership teams have a far greater understanding of the connections between supply relationships, contractual obligations and business requirements, and they can avoid situations such as the one that befell FedEx and Dell. With the assistance of CLM technology that recognizes the qualitative as well as the quantitative impact of contracts, decision makers can finally seize the upside and protect against the downside at the same time throughout the duration of the agreement.

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“Contract lifecycle management (CLM) is the constant process of ensuring that a contract is structured properly and reviewed appropriately, its provisions enforced and intent realized, and its weaknesses recognized and corrected.”

– Julien Nadaud, Chief Product Officer, Determine

and SVP of Innovation, Corcentric

CLM 2020: THE THIRD DECADE OF CONTRACT MANAGEMENT TECHNOLOGY BEGINS - 4

Impact of Ineffective Contract Management

The fact that CLM platforms are hardly new does not mean that they have been implemented universally. In fact, according to research from Levvel Research (formerly PayStream Advisors), less than one-third of companies have a centralized, automated contract management solution – and the alternatives are hardly conducive to operational effectiveness. 73% of companies reported that they are either managing their contracts independently, department by department, or leveraging a team of employees to manage them for the entire company. Neither of those alternatives to enterprise CLM take advantage of available, market-tested, contract management technology. And, unfortunately, both put companies at risk of non-compliance, supply chain disruption, and inefficiency.

The direct costs associated with ineffective CLM and potential results of contract disputes are staggering:

• A study conducted by IACCM on the value of contracts management revealed some weaknesses in contract management cost the average company 9.2% of annual revenue.

• KPMG estimates that ‘value leakage’, when suppliers “up their fees or even change their terms because they’re still supplying, but out of the contract terms” can amount to 17 to 40 percent of a contract’s value.

Ineffective contract management costs businesses $100 billion per year in missed cost savings. – Aberdeen Group

• According to the 2019 Fulbright Annual litigation survey, 41% of corporate litigations are related to contract disputes, an increase from their 2018 findings.

• Fulbright also discovered that 74% of companies (up from 72% in 2018) planned to conduct a proactive review of contracts in the next 12 months as a way of reducing the volume of litigation faced by their organization.

• According to Thomson Reuters, the number of lawsuits filed for deals over $100M increased from 349 in 2009 to 602 in 2012, representing a 72% increase over a three year period (yikes!).

• The cost of legal discovery actions can run into the millions of dollars, averaging $1.8 million per lawsuit, according to a 2012 study from Rand Corporation.

• 70% of companies that have implemented a CLM solution report 70% improvement in their ability to manage contract renewals (PayStream Advisors)

• According to Ardent Partners research, 69.7% of Best in Class companies (63.2% of all others) store all of their contracts in a centralized, searchable repository.

• The direct costs of commercial claims resolved through litigation are estimated at approximately $870 billion globally, according to a US Chamber of Commerce study. (The US accounts for $306 billion.)

Factors Increasing the Emphasis on Contract Management

Four key areas demonstrate the increased complexities of modern business, and why contract management has become increasingly critical with each decade of evolution.

1. Contracts have more stakeholders than ever – Today, employees, customers, suppliers, shareholders, and other investors are all regularly involved in the contract lifecycle.i

The top challenge is that each person or group is looking at the parts of a contract that hold meaning for them. In many instances, the reviewer doesn’t have the time or ability to analyze and understand the wider commercial context or the risks associated with each contract.

2. Varied Business Relationships Means more Contract Types – From NDAs to MSAs to SLAs, the clauses and terms going into a contract must address a complex array of requirements. At times, requirements need to be altered due to changes in the business or conditions that call for those changes. As new service providers are engaged to support

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CONTRACT MANAGEMENT METHODS

Each department individually

sources, negotiates,

and manages contract creation and renewal.

42%We have an internal team that manages

contracts for all departmens.

31%

We use a centralized

automated contract

management

solution. 27%

CLM 2020: THE THIRD DECADE OF CONTRACT MANAGEMENT TECHNOLOGY BEGINS - 5

and deliver value to the business, new types of contracts may need to be put in place. Today, contracts need to be more expansive in how they define commercial relationships and more agile in response to the conditions and priorities that change over the life of the agreement.

3. Legal requirements from different jurisdictions – The increasingly global nature of business makes knowing what jurisdiction a contract falls under, from state, national, supranational (EU) to international (UN), critical. Having this information also provides a basis for understanding the context of the contract and its potential impact on the business, such as understanding the difference between common law versus civil law.ii Not only is it critical to understand different legal structures, it is necessary to revisit contracts as those structures change: such as in the wake of the United Kingdom’s withdrawal from the European Union.

4. Increase of regulatory requirements – Changes in regulatory requirements are often impacted by jurisdiction. These changes force organizations to take a closer look at how they draft contract language, especially in specific instances such as:

• Obligations resulting from the European Union’s General Data Protection Regulation (GDPR)

• Anti-bribery and corruption legislation such as the UK Bribery Act, US Foreign Corrupt Practices Act

• Anti-trust regulations such as the EU Competition law

These laws influence how business is conducted in and between specific countries and trading blocs, and if changes occur during the lifecycle of an affected contract, a framework needs to be in place to anticipate and execute those changes so that the agreement remains functional as intended on the day of signature.

Roadmap Through the Third Decade of CLM

CLM software was built to prevent contract failures and minimize risk while also leveraging the considerable strategic upside available to an enterprise that fully and actively manages its commitments. By building a centralized and searchable “single source of contract truth,” CLM users gain visibility into contract status, rates, and so on. The system can then automate the management of related business activity and linkages to other spend and supplier-involved data.

According to Aberdeen, the use of CLM has demonstrated benefits such as 10.2% increased rate of contract compliance and as much as 2.2% more identified savings, when compared to those not using CLM. To gain these benefits, organizations not using CLM must consider how automating contract management can benefit current processes by aligning technically with an existing infrastructure.

Deployment of CLM can be handled via a phased rollout, like any other enterprise technology. Often organizations start with a contract repository as their base. Then they deploy more

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FORRESTER’S MODEL FOR CONTRACT MANAGEMENT MATURITY

• Procurement CLM is optimizing

• eCLM is World Class and the next gen of CLM

• 100% paperless environment• Buy-Sell centralized in one tool• Suppliers drive collaboration/e-Signature• Ubiquitous access is made (i.e. mobile support)

• Red-lining/document native• Advanced workflow (serial & parallel)• Integrate with Sourcing / CRM / ERP• BI / Advanced Analytics available

• Authoring streamlined w/ terms/clause library• Word integration is leveraged by end users• Industrial-strength, free text search enabled• Serial contract workflow

• CLM tool is in place / used by Procurement• Basic repository of legacy contracts• Basic searching / reporting• Security-based access

• NO CLM tool in place• Paper-based processess dominate• 3rd party paper is primarily leveraged• Limited standards & templates

Maturity in CLM works up the pyramid to World class approaches

Best in Class

Optimizing

Enabling

Inhibiting

World Class

CLM 2020: THE THIRD DECADE OF CONTRACT MANAGEMENT TECHNOLOGY BEGINS - 6

advanced features such as contract authoring, approval flow management, and integrate their CLM with other systems.

As demonstrated by the model created by Forrester Research,iii the pyramid provides a contextual framework for understanding the evolution of CLM. We view this maturity model as an established guide for how organizations can adopt more advanced CLM capabilities as they evolve to the top of the pyramid. By offering users more functionality as they move up, CLM removes the barriers of antiquated contract management.

Ongoing Low Adoption of CLM

There is still a certain level of skepticism about the benefits of investing in contract management technology, from the corner office to the executive boardroom. In fact, lack of executive support for contract management and compliance initiatives remains a top challenge facing CLM adoption, which further prevents the ability to effectively manage contracts.

Many organizations today remain stuck with the “file cabinet” approach to contract management, even if they have moved their documents to the cloud. For the most part, contract management remains a manual and disjointed effort, forcing already overtasked users to search for terms, rates, dates, and other contract information. The results of this are missed deadlines, off contract spend, and a lack of process compliance.

Even for those that have looked to adopt CLM, it remains a challenge to improve or move beyond straight repository capabilities. According to Ardent Partners, “Although Best-in-Class procurement teams are more likely than other teams to have automated their contract management processes, automated contract management remains an under-utilized strategy and tool to drive greater collaboration and enhance enterprise performance. Opportunities for improvement abound for procurement organizations in all maturity classes.”

The degree of improvement each company realizes affects not only their ROI from contract management, but also the level of adoption they enjoy. As Laura Gibbons, Procurement Advisory Research Director for The Hackett Group, points out, “Given the amount of data held in unstructured contract documents that are often stored in disparate locations, managing against contracts may hold high degrees of risk and exposure associated with non-compliance. Many organizations have already established a contract repository, but today cannot link policy and compliance with broader sourcing, spend and supplier risk management efforts.”

In order to move beyond the entry-level benefits of CLM, process and mindset changes need to accompany the technology implementation. One Aberdeen Group study found that the leading functionality for both best-in-class and average organizations was repository functionality.iv Most organizations did not utilize advanced features like workflow, authoring, collaboration, and electronic signatures. In fact, best-in-class organizations were only marginally better at adopting CLM features and practices than their peers.

Modern CLM as a form of Knowledge Management

It could be argued that today’s contract management challenges stem not from the technology itself, but from siloed approaches to CLM deployment and utilization. Departments such as sales, procurement, legal, and others who have spearheaded CLM efforts have made the mistake of focusing on their piece of the contract puzzle without recognizing or addressing enterprise-wide needs. The lack of a holistic approach to contract management processes also results in disparate CLM systems deployed within one enterprise, further reducing access to comprehensive insights.

An additional, and often overlooked, complication from contract management fragmentation is the alienation of internal stakeholders. General Counsels, contract managers, and compliance officers may need access to multiple CLM systems to complete their objectives. This complicated process may result in missed revenue opportunities and/or increased risk exposure. Some examples of this include: the inability to make legal changes (i.e. name change, logo) en masse or the inability to easily recognize if a customer is a supplier based on the nature of its business relationships.

In the past, some of these stakeholders may have been only tangentially involved, or completely left out, when establishing enterprise requirements for contract management technology. CLM can hardly be considered an evolved discipline without meeting the information needs of all stakeholders.

Consider these examples of stakeholders who require frictionless visibility into contracts:

• CEOs facing an increased demand for visibility into company events due to contract management issues (e.g. M&A, Fraud).

• CFOs controlling costs and driving more revenue, which unquestionably includes the ability to manage contractual obligations.

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• Auditors (internal and external) who require access to and an understanding of a company’s contract obligations and where they reside.

• Chief Risk or Compliance Officers requiring better visibility into overall contractual obligations in order to funnel compliance issues for investigation and resolution.

• IT teams looking to achieve control over all contract specifics for the sake of improving insights and deliverables related to contractual relationships.

Getting Out of the “Contract Silos”

A strong argument can be made that the lack of collaboration in driving and implementing CLM has prevented its true benefits from manifesting themselves. The siloed approach causes several issues:

• Organizations face increasing compliance, regulatory, and litigation challenges. In-house counsel, who are under more pressure than ever, have less time and attention for thorough contract review and approval, and are further inhibited by fragmented internal and external CLM practices.

• Changes to contract language require vastly more time when common terms, conditions, and contract types are not universally stored and made accessible for application by procurement or sales teams that are trying to establish legal templates for quicker turnaround.

• Pressures to increase profits and decrease costs continue to mount, yet legal departments are being overrun with the need to manage contracts, which slows the business cycles and frustrates stakeholders and suppliers alike.

• Increasing quantities of unstructured corporate data such as PDFs, images, or even social media related to suppliers or customers exposes the business to unnecessary risks.

The example above illustrates how a siloed approach prevents common-sense access to contracts. For instance, Sales and Procurement processes that dictate the flow of the contract lifecycle are done independently of one another.

When organizations don’t have a single platform across many operational functions, they miss out on opportunities for data synergy that are naturally fostered by a common contract repository. In addition, one “single source of contract truth” gives

users the power to access standardized terms and conditions, leverage templates, utilize workflows, gain better insights through analytics, and empowerment through data integration.

Advantages of an “Enterprise” CLM

As the expectation grows that enterprise systems will stand up to audits of their organizational processes and data management capabilities, establishing a centralized approach to CLM becomes more essential than ever. This also seems to parallel the efforts of center-led / center-of-excellence approaches established by world-class procurement enterprises, something increasingly

CLM 2020: THE THIRD DECADE OF CONTRACT MANAGEMENT TECHNOLOGY BEGINS - 7

CO

NTR

AC

TQuote

Opportunity Analysis

Analysis

Revenue Recognition

Billing

Close

CO

NTR

AC

T

Sourcing

Supplier Information

Analysis

Supplier Performance

Payment

Purchasing

PROCUREMENT

EXAMPLES OF CONTRACT MANAGEMENT SILOS

• Contract Repository• Contract Data• Terms & Conditions• Templates• Workflows• Analytics / BI• Data Integration

Lack of an enterprise CLM prevents syneries in several areas:

SALES

The bottom line: important nuances fall through the cracks when there is no common oversight into CLM.

witnessed with those pursuing CLM technology. Using an enterprise CLM makes sense in a world that requires deeper insight.

In fact, the consolidation of CLM into one tool may ultimately provide the ROI that improves governance and process capabilities. Solutions based on achieving economies of scale help reduce the number of systems in which legal departments work, creating a more harmonious contract process across the entire enterprise.

The evolution of CLM requires change at the enterprise level. As Gartner points out, organizations that want to gain competitive advantage in a consumer-centric business world have to have contracts that are contextualized and personalized. CLM systems must span this hybrid business service environment; accounting for social interactions and the consequences of a digital economy.v

The Benefits of CLM to Strategic Supply Management

Based on the research findings gathered here, it is safe to conclude that CLM opens the flow of information between functional areas that were once “siloed” from a contract management standpoint. In fact, enterprise CLM is an opportunity for:

1. Better Repository & Clause Library - Improved access for managing contract data and centralizing contract document and clause requirements

• Broad visibility into all corporate contract obligations

• Understanding contracts in the wider corporate context

• Edit and upload changes in legal language due to jurisdictional nuances

• Legal can access a common system for collaborating with procurement and sales on contracts

• Legal can make mass changes that impact more than just procurement

2. Better Governance & Workflow - Improved control over contract process workflow and governance

• Contract governance and permission-based approach for approvers that need access to supplier contracts

• Legal can access a common system for collaborating with procurement on contracts

• Auditability of workflow for compliance and auditors monitoring contract governance procedures for contract award and fulfillment

• Authoring collaboration that involves both legal and suppliers

• Reduced contract approval time from sourcing to contract management

3. Better Analytics & Intelligence - Improved Contract Analytics for preventing potential losses and identifying trends

• Wider analytics for forecasting key performance indicators on an individual and aggregate basis

• Reduction of off-contract spend due to increased insight into contractually forecast demand and the suppliers/categories where it is occurring

• Improved ability to identify supplier who are also customers

• Procurement contracts become part of the wider enterprise compliance and risk management requirements

CLM STRATEGIES

Types of Users

Contract Type

Technology

Contract Data

Diverse

Supplier, Sales, HR, etc.

Advanced Features

Enterprise-wide Access

Few & Focused

Supplier / 3rd Party Only

Core Features

Procurement Access

Enterprise CLM

Procurment CLM

The table demonstrates how Enterprise CLM differs from traditional focus of a siloed approach with Procurement as the example.

Enterprise CLM by its nature is able to take on more capabilities and cover more ground for managing wider CLM needs.

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ABOUT CORCENTRIC

Corcentric is a leading provider of source-to-pay services and solutions for businesses in the

United States and Europe that optimize how they purchase, pay, and get paid. Corcentric’s

procurement, accounts payable, and accounts receivable solutions empower companies to

spend smarter, optimize cash flow, and drive profitability. Since 1996, more than 6,000 customers

from the middle market to the Fortune 1000 have used Corcentric to reduce costs and improve

working capital. Learn more at corcentric.com.

Concluding Thoughts

Based on the evidence we have gathered here, it is clear that contract management continues to mature, and therefore CLM technology has to evolve along with it. Although we are entering the third decade of CLM, adoption has not been as widespread as other aspects of supply management technologies such as eSourcing or procure-to-pay (P2P). Considering the challenges facing modern business, CLM has increased in importance as it relates to tracking and managing contracts, liabilities, and opportunities for the wider enterprise.

Beginning with a procurement view of CLM is a good start for organizations that want to optimize their contracts and contractual relationships. For instance, some organizations consider using contract-lite solutions in specific areas focused on procurement or sales when looking to introduce the idea of CLM, and then adopt an enterprise approach when the organization is ready for more advanced features.

Over time, the centralization of contract management creates a new opportunity to manage an enterprise’s contractual obligations from business deals and licenses to royalty agreements. The idea of contract management then becomes something that extends far beyond managing supplier obligations.

Today’s increasingly complex regulatory environment means contracts are growing more necessary and specialized every year for every size company. Whether dealing with third-parties, procurement, sales, finance or other departments, having a 360° enterprise-wide view of all your buy-side and sell-side contract assets is critical to mitigating risk, ensuring compliance and empowering users at every level to drive revenue opportunities.

Endnotes

i John R. Boatright. What’s Wrong—and What’s Right— with Stakeholder Management, Journal of Private Enterprise, Volume XXI, Number 2, Spring 2006. University of Chicago, Loyola

ii http://www.economist.com/blogs/economist-explains/2013/07/economist-explains-10

iii The Forrester WaveTM: Contract Life-Cycle Management, Q2 2011

iv Aberdeen Group. Procurement Contract Lifecycle Management: Assessing the Value of Contract Automation. January 2012.

v Gartner research study - eCLM