What Is Contract Management: Buy-Side Versus Sell-Side
Businesses are facing increasing pressure to streamline contract processes. Blame it on digital; blame it on competition; fact is we are seeing more deals and more complex agreements taking shape, no matter the market or geography.
If M&A is an indicator, if large-scale dealing is an indicator of small-scale dealing, then the number of deals has approximately doubled since 1992 (Institute for Mergers, Acquisitions, and Alliances, 2017).
There is reason to believe that the complexity of deals has increased by much more than that. B2B software and service vendors have taken a land-and-expand approach to selling, which requires more active handling of contract agreements and cultivation of existing agreements. But even in manufacturing, contracts are taking on more complicated structures, involving data exchange and monitoring agreements.
The acceleration of dealmaking pressures B2Bs to process contracts more quickly, at the very least rewarding better contract management processes with critical vital stats. According to Aberdeen, Best-in-Class contract management businesses claimed over twice the annual savings by sourcing team (12.8% versus 5.6%). On the sales side, contract processes from request to signed deal were 20% shorter (Aberdeen, 2015). The results suggest a significant upside to contract proficiency.
This series looks at contract management from the beginner’s perspective, intending to help sales and procurement professionals understand contract management as a process and as a market. This article starts by looking at the full scope of Contract Management (CM) and Contract Lifecycle Management (CLM), defining buy-side versus sell-side processes.
Scoping the Contract Management Process
Software vendors can mince all the words they want; technology can automate every manual function from request to signature; a B2B needs to understand the scope of contract management first, only then identifying where the greatest value could be gained by a change initiative.
Typically, in contract management the opportunity is measured by pain, by poor contract renewal rates, by poor vendor management, by angry customers, lengthy sales cycles, or employee complaints. Understanding these pains can be useful in building motivation for a change initiative, but shaping a contract management strategy requires that the viewpoint shift from putting out fires to managing business capabilities:
- Revenue discovery (contracts currently unpaid)
- Service discovery (services currently unperformed)
- Tracking/controlling risk
- Establishing/improving service levels
- Forecast revenue
- Manage third-parties/relationships
- Protect intellectual property
Businesses tend to choose contract management software to help build the first two capabilities; however, these are only the beginning. Once a more holistic view of the company is taken, contracts will be seen as more integral to strategy execution.
Buy Side Versus Sell Side Contract Management
Contract Management covers a broad cross-section of company activities whenever these are marked by engagements with third parties. One of the largest sources of confusion when conceptualizing contract management is the tendency to focus on one silo of of the company where many of these contracts reside, probably the location of the reader of this article within the corporate structure. But there are up to seven or more different practices of contract management within any given business:
- Intellectual property
- Facilities management
- Other licensing agreements with contractual obligations
Early in the development of contract management software, vendors recognized a wide discrepancy between each of these separate functions. They quickly focused on two primary sources of contract value, Operations and Sales. A vendor would typically develop a solution for one of these. Operations contract management, with outsourcing and procurement, was called “Buy-Side;” Sales was “Sell-Side” Contract Management.
More recently, this “duplicitous” approach to software development has come into question. Technology has moved from a siloed approach to a more cross-functional one, in general blurring the lines between departments and lines-of-business. This has unlocked strategic value for many technologies that span the corporation, such as Configure-Price-Quote (CPQ) and CM.
Buy, Sell, or Both?
As digital technologies have evolved and forced businesses to evolve with them, the concrete wall that used to divide these two contract management disciplines has sported a few holes. Now it is an enterprise best practice to combine buy- and sell-side contract management (Gartner, “Contract Life Cycle Management Market Guide”), though whether or not mid-market B2Bs should apply this best practice is still a matter of conjecture.
Upper mid-market businesses are in a tough spot; they can be nearly as complex as enterprises but with limited budgets for change initiatives. Additionally, mid-market also tends to require documentation and formalization of current processes, significantly more workload than enterprises that have already been there, done that. We estimate that mid-market process control initiatives can cost between 2-6X what enterprise would pay in terms of profitability.
The hefty pricetag does not deter mid-market companies, but it does impact the approach. In fact, middle market is the largest segment for contract management (Gartner). Many projects begin with either sell-side or buy-side and then expand after the CLM has started to pay for itself. Other projects contain the scope even further to one line-of-business (LOB) before expanding the prototype to the rest of the company. These CLMs will design for long-term potential in order to maximize resources.
Contract Management Takeaways
In the beginning stages of a contract management initiative, before contacting a vendor, mid-market B2Bs should:
- Consider the scope of contract management - whether there is or will be significant value on either the buy-side and sell-side
- If both buy- and sell-sides are valuable, seek a services partner that is willing to commit to a stair-step implementation, one that will return some of the initial investment before investing in the next phase
- Determine an ideal roadmap with services partner, beginning with priority functions and lines-of-business and ending with non-priority segments
- Create a list of desired capabilities, ordered from “must-have” to “nice-to-have”
- Understand why in this market, the services partner determines more of the final value of the solution than the vendor
The primary differentiating factor in successful versus unsuccessful change initiatives is whether the initiative aligns with corporate strategy. Even if the initial stages of a project are designed to capture value on a superficial level, the project needs to be designed to link up with corporate strategy later, possibly paying for itself at each step along the way.
For the mid-market, this stair-step approach can be the optimal means of achieving competitive advantage, and sometimes the only realistic option.
Dickow, John. “2016 State of Contract Management Report.” SpringCM: 2017. https://www.springcm.com/hubfs/Collateral_PDFs/Report/2016_State_of_Contract_Management_Report.pdf?hsCtaTracking=5a0268ee-4218-4f62-abe7-2469ac80e740%7C794ab4fa-9e05-42da-8cb4-b5d9b612667e
Nigel Montgomery and Deborah R Wilson. “Market Guide for Contract Life Cycle Management.” Gartner: July 16, 2015. https://public.dhe.ibm.com/common/ssi/ecm/uv/en/uvl12391usen/UVL12391USEN.HTM
Proviti, “Sarbanes-Oxley Compliance Survey: 2016” https://www.protiviti.com/sites/default/files/united_states/insights/2016-sox-compliance-survey-protiviti.pdf