Manufacturers Rethink Contract Management Process

Contract management processes are shifting from a silo-centric to a process-centric approach in order to accommodate the new speed of business.

Mike Kephart

Contracts are more complicated today than they were twenty years ago. To compete, manufacturers need to launch new products quickly and while taking on as little risk as possible. Companies have moved from the vertically integrated model to a more agile, collaborative supply chain: sellers do less of the actual product or service work themselves now, preferring to manage an integrated supply chain.

This is causing supply chains to explode with a richness and complexity never before experienced. Managing this new level of complexity requires more advanced contract management processes, expedited strategy-execution through buy-side and sell-side contracts, and in many cases the destruction of silos.

Silos Are Too Simple and Too Slow for Modern Contracts

Each business function must be recognized and managed properly. When cross-functional management does not happen, silos will independently optimize contract management processes with systems, resources, and skills, which might boost intra-unit performance but in the meantime damage other functions. It is all too possible to increase performance locally while causing inefficiencies and ineffectiveness at the global system level.

Nowhere is this divided-house mentality more damaging than in the contracts a business creates with third-parties. From a Marketing and Sales standpoint, reputation damage can occur when silos behave or brand inconsistently. Many companies might even offer different prices for the same products/services, competing with themselves unintentionally.

Further damage occurs between business functions when changes made in one silo are ineffectively communicated to adjacent functions, resulting in costly errors. The primary pain for sell-side contracts occurs when Sales and Service lack coordination, and Sales signs contracts that are attractive to the customer and then throws these contracts over to Service, which then faces the challenge of executing the contract as promised and on-budget. The most egregious and yet common errors occur when a service clause is added, and the supplier does not execute, forgetting to uphold its side of the bargain.

The same happens on the buy-side when buyers will also forget what they have paid for and will not have the coordination to ensure follow-through. The buyer cleans house years down the line, and discovering service contracts paid for and unfulfilled, decides to terminate an otherwise gainful relationship.

All of this strife is the result of contract management failing to keep pace with changes in the business environment. But the solution is not contract management software. Software could become part of the solution, but the first step is to see over silo walls and envision a new, more efficient and effective contract management process.

Solving the Silo Problem with a Better Contract Management Process

It is impossible to ask silo leaders to see eye-to-eye without an objective way to measure overall performance. Sales needs to be held accountable for long-term profitability, and Service needs an “effective means of communication” with Sales. It is true that people perform according to how they are measured, so measurement must account for global benefits to overcome the typical silo error of local improvement to global detriment.

Aligning measurements of each silo with the corporate strategy is one step to an adequate solution, but the link between Sales and Service is only one linkage that manufacturers should consider. Best-in-class contract management companies are combining buy-side and sell-side contract management systems in order to improve supply chain performance.

Even silo-level contract management initiatives should consider whether a single contract management system should be an eventual goal early in the reappraisal of contract management processes. Many CLM systems have originated from either buy- or sell-side solutions. Customer Relationship Management (CRM) and Enterprise Resource Planning (ERP) systems often sell CLM solutions in accordance with the business function, and while these solutions might be effective in one hemisphere, they can also deter a holistic solution. Again, we run into the problem of local efficiencies at the expense of sustainable change.

Mid-market B2Bs will often want to prioritize one hemisphere of development first, but any CLM initiative should start by outlining a complete contract strategy, with short-term and long-term needs to execute. The buy-side versus sell-side decision is only one example of the many decisions that must be made before any software or services partner comes into play.

Contract Management Takeaways

Without taking a proactive stance toward the annihilation of silo walls, without actively addressing business process and changing process to enable cross-functional collaboration, without considering near-term necessities and long-term goals first, any system a vendor implements will only build taller walls and deter sustainable change.

Approach to business process is similar to any empirical science. Business models are effective to describe the way the world works in a certain environment, but as business environment changes, we must resort to different models. Newtonian physics is perfect for describing the actions of bodies near Earth. But under extreme conditions, at terrific speeds and gravities, Newtonian computations will be useless. We will need to use a different formula.

In the same way, silos do not compute contracts correctly - not at the new speed of business. We need to take a new, process-centric, cross-functional approach in order to make quick, good decisions for the company and for its buyers.

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