Optimizing the contract management process
Many think of the contract management group as playing an administrative role within any organization. However, a structured and efficient contract management process can serve as the backbone to other processes such as business development and financial management. An effective contract management process is now essential to building an organization's corporate strategy and ultimate vision. Organizations that have a successful process in place have a clear competitive advantage over others that do not.
The Issues
Sixty to 80 percent of transactions within an organization are governed by contracts, and these contracts inform and drive an organization's daily business and have a large impact on their bottom line. Managing contracts manually, and in an ad hoc manner, results in higher risks and costs.
Many organizations wish to move from an ad hoc stage to a more mature stage of contract management but may not realize the current challenges and inefficiencies that must be overcome to successfully implement a continuously improved contract management process. Disconnected procedures and time-consuming processes can result in poor visibility, compliance risks and missed opportunities for analytics.
The Opportunities
An organization must take a step back and fully analyze its current situation and determine where it wants to be. An organization must list out the dimensions that are most important such as risk management, compliance, continuous improvement and strategy in order to define the gap between current and optimal stages.
Once the organization has an idea of its current situation in comparison to its ideal situation, steps can be taken to realize benefits.
The Benefits
When an organization implements a continuously improved and successful contract management process, the changes will impact the effectiveness and competitiveness of the organization as a whole. Results will be seen from such benefits as:
Streamlined Processes: With one streamlined process that involves the several functional groups, communication between all parties is more effective and efficient, reducing wasted time and redundant work. As a result, approval times, payment cycle times and negotiating cycle times can all be significantly reduced.
Increased Revenue: With a successful process in place and cycle times reduced, more time can now be focused on negotiating better contracts and identifying opportunities. In addition, with a seamless contract management process, all functional groups involved in the process are more aware of the necessary tasks due to better communication. For example, accounts receivable can be notified when to invoice all services rendered and collect penalties and charges where applicable, and on a more timely basis.
Reduced Revenue Leakage: In an inefficient and manual environment, typically, 15 percent of rebate submissions processed have some degree of error associated with them. For example, when dealing with a mid-sized pharmaceutical company whose rebates equal $344 million, there is a potential exposure of $51.6 million that could be in error. If even 10 percent of this exposure is realized and goes undetected, this would result in $5.16 million of annual revenue leakage.
Reduced Costs: With a process in place, organizations can reduce costs in several ways. An appropriate contract management process includes the use of a single repository, therefore reducing material/service costs. A more efficient process reduces maintenance costs, which in turn can reduce administrative costs.
Compliance: Contract management processes provide a systematic approach for improving contract compliance, including compliance with both internal and regulatory guidelines.
Taking a structured approach to reviewing the organization-wide contact management process against best practices can identify the gaps with the greatest opportunity. As a result, an organization can establish priorities, and implement a process improvement program to realize and sustain substantial benefits. Once the new enhanced platform is established, a continuous improvement program can be implemented along with sophisticated analytical tools to result in differentiating company performance.
Laszlo Fabriczi is vice president of contracting and pricing solutions at Alliance Life Services. Monica Rodriguez is a consultant with the firm.
