Cut Down on Contract Stress

How can the company’s financial managers be sure that accounts payable is keeping track of how much the customer owes and is billing accordingly? Creating a central repository for all of a company’s contracts is one way to keep all the details straight. By automating their contract management systems, corporate CPAs and companies can cut expenses, increase revenue and manage business risks.

IMPLEMENTING THE SOFTWARE

Automation will embed any contract within the company’s operations using technologies such as e-mail, electronic document exchange and instant messaging. The process of installing and implementing automated contract management systems is “no more complicated than putting an enterprise resource planning (ERP) solution into place,” says John Miles, a senior manager at Andersen, who helps clients implement technology. The level of difficulty depends on the volume and complexity of a company’s contracts and the variety of modules or functions the vendor offers and the client selects (see the exhibit at the end of this article). Modules may range from rebate management to financial reconciliation, adjudication of incentive or chargeback claims from a trading partner to payment services (following through on payments due the company through the life of the contract).

Most vendors offer automated contract management systems with this modular structure, and as the products have matured, they can be more easily tailored to the needs of individual client companies. The result is most systems can be adapted to the needs of companies ranging from small or midsized to those in the Fortune 500.

Here’s one company’s implementation experience: Red Gold, a large, privately held agricultural processing company in Orestes, Indiana, has 960 employees across the state. It supplies grocery stores with private-label and brand-name tomatoes and has been using an automated system for two years supplied by I-many, a Portland, Maine-based software provider. The system allows Red Gold to better track clients’ deductions and cash discounts. Linking directly with the terms of the contract itself, the system accumulates documentation in an orderly manner “so that if the company wants to dispute a discount, it has the evidence to do so,” says Mitch Rader, CPA, vice-president of finance at Red Gold.

Under its previous, paper-based system, the company was only partially successful in pursuing invalid cash deductions and would get the money back infrequently because it was difficult to pull the documentation together. Rader notes that last year, using its new automated system, Red Gold was able to trace documentation to original invoices in 97% of cases. As a result of these efficiencies, the software paid for itself within a year.

Red Gold chose I-many because other companies in the food industry used this vendor, it liked I-many’s procedures for tracking and resolving discount and deduction issues and found it could easily integrate I-many’s product into its existing ERP system. Red Gold needed only two months to get up and running with its new software. Rader credits this partly to the assistance of I-many’s customer support team, who were available off-site to answer questions, and partly to the procedural steps in Red Gold’s manual contract management system, which closely paralleled those in the new system. Red Gold also had previous experience installing other companywide automated systems.

Rader found a consultant who had installed the system at another company. She helped Red Gold to diagram the workflow it wanted to direct through the new system and oversaw the implementation from beginning to end. Having someone aboard who had already gone through the process helped Red Gold complete its implementation without missing any important elements, so that about a year later, when the company reviewed the procedures that were in place, it did not need to make any major changes. By that time, Red Gold’s staff had enough experience with the system that they were able to make needed modifications—mainly to create more reports for management—without bringing the consultant back or asking I-many to make the changes.

HERE’S HOW

Although the details will vary, Rader breaks down the process of implementing an automated contract management system into the following steps:

Identify the transactions your contracts need to cover. Determine the key elements your agreements need to track. In Red Gold’s case, the critical items were deductions customers are entitled to take on the company’s pricing and those they are not.

Input your company’s present contract archive. Scan in all paper-form contracts. Red Gold also scanned in check remittances, proofs of delivery and other documentation to create PDF files to attach to e-mails to correspond with clients about deductions or other matters. In each case, Red Gold had to decide how far back it wanted to go—issues involving discounts or deductions more than six months old are difficult to resolve, Rader notes. Scanning documents is now an ongoing practice at Red Gold.

Integrate existing systems. Establish Internet (or intranet)-based links between your contract management system and other relevant in-house systems, especially ERP and CRM (customer relationship management).

Set up workflow. Determine to whom various contract terms must be routed and how long each stage of the process must take. This may be a critical step since it can turn up internal procedures that need fine-tuning, for example, ensuring that the sales force, offices in different locations and clients are uniformly aware of how often certain problems occur and the amounts of money involved.

Design reports for key functions. Determine what types of reports the system must generate to measure your company’s performance and how to customize them for certain situations, such as resolving pricing disputes quickly and successfully.

Take a step back. Assess where things are and what opportunities exist for reengineering or simplifying procedures a year after implementing a new system. Automation may not immediately reveal ways to streamline the entire contract management process. Red Gold found it wanted to tweak the aggressiveness of its timetables after learning some clients needed more or less response time to notifications before another area in the company took over the matter.

According to I-many’s Mark Christiansen, executive vice-president of marketing and strategy, the vendor’s most complex program, which tracks rebates and chargebacks, can take anywhere from three to nine months to implement because it must be tied into electronic data interchange links with the client’s distributors. Tasks include importing and modifying contracts, training contract management staff, resolving errors and creating interfaces with the company’s existing ERP and CRM data systems. “Some of our customers have 10,000 contracts covering 50,000 products with different prices,” says Christiansen. “The really daunting thing is to make sure that the 100,000 orders against that contract are being executed on time, without fail.”

Rochelle Rubin is manager of the strategic legal solutions practice at Deloitte & Touche in Chicago, which offers information technology consulting—including implementation of automated contract management systems—to the law offices of large corporate clients. She notes that the actual size of the client has little to do with how complicated an implementation turns out to be. “It depends mainly on how much of the operation and how many locations are involved,” she says. “If it’s only one small department, it could take as little as a month and a half; if it’s a huge department that handles everything from claims litigation to intellectual property, implementation can take up to a year.”

BETTER THAN SPREADSHEETS

Persistence Software, a San Mateo, California company, uses automated contract management software from diCarta to manage its support and maintenance agreements. “I can’t emphasize enough the importance of support and maintenance revenue,” says Persistence CFO Christine Russell. “It’s great to go into a quarter knowing that a certain amount of your revenue is already achieved because it’s defined by those agreements.”

For a long time, the most sophisticated software used in contract management was an electronic spreadsheet, which Russell found wasn’t the most efficient way to monitor contracts. “The new system tracks renewals of these agreements and can even indicate when contracts concluded by different Persistence offices can be modified to terminate simultaneously, further rationalizing the company’s contract management process,” observes Russell. This means Persistence finds it easier to handle multiple contracts covering each of a client’s different offices, sometimes as many as 20 for a single client. Now Persistence can send out renewal notifications which automatically offer to adjust the contract end dates to make them all conclude simultaneously. Clients can accept by visiting a Web site the vendor maintains for Persistence. The result, Russell says, is to consolidate more of the billing for each client. “All of this eliminates a major drain on the time and energies of the company’s sales force, allowing it to concentrate more on developing new business,” she says.

GET THE RIGHT PEOPLE INVOLVED

Making sure all the appropriate people are involved in choosing the vendor, structuring the workflow and deciding which functions to include in the automated system are crucial to a successful implementation. Donna Ireton, director of acquisition management consulting and training at Advanced System Development (ASD), an Arlington, Virginia, consulting firm that provides information management and technical support, including contract management processes, says, “You get problems when important people were not part of the selection or implementation processes, sometimes resulting in the purchase of an out-of-date system or one that does not meet all the right people’s needs.”

A company should form a committee including a senior official from each department affected by the new system, such as finance, technology, property/inventory and supply, “plus a couple of worker-bee types to make sure it all works on a practical level,” Ireton says. They should then pick an implementation team and decide how many people to interview in mapping out the new system, who should be responsible for getting or inputting information, and who should work with the vendor on design. Ireton stresses not to leave too many tasks to the “techies,” who may have the technical knowledge but may not be familiar with the work processes the software package must serve. A company’s contract management team—those who are in charge of tracking, filing and issuing notifications based on the company’s contracts—has a vital role in communicating the committee’s decisions to the implementation team and making sure its work consistently reflects those decisions.

WHAT’S OUT THERE?

Software developers offering contract management applications range from large diversified vendors to a few smaller companies that concentrate exclusively on this area. ERP and CRM software vendors such as Oracle, SAP, Siebel and i2 offer programs containing some portion of the contract process. A few smaller companies have also emerged that concentrate entirely on this area, including diCarta, I-many and MyContracts.com. Large and small, each of these vendors pays a great deal of attention to what features and services its rivals offer and strives to equal or outdo them. “Rapid evolution is going on in this marketplace,” says Rick Ressler, CPA, partner in the risk consulting group at Andersen in Houston, “so I don’t like to say there’s one vendor out there that’s better than another because that might change tomorrow.”

MyContracts.com, a Web-based vendor, focuses on buy-side contracts. Redwood City, California-based diCarta concentrates on both buy- and sell-side contracts, including supplier and service level agreements. “Say a certain type of company is being investigated by the SEC,” says Ressler, who is now implementing a diCarta system at Andersen, “and we want to do a review of all our legal agreements with that type of company. In the past we couldn’t because our contracts were not centralized for all of our firm’s offices. This situation will no longer be a problem with the new system.”

The modular structure is a plus for firms that want to automate contract management piece by piece, rather than by adopting a single comprehensive system, points out ASD’s Ireton. “Not everybody will need an auction system or an order aggregation system all at once,” she says. “As you integrate more capabilities, look around and see what more you can use.” ASD does not select vendors or implement automated contract management systems for its clients. Ireton says some clients have started out by creating automated, preapproved catalogs for routine purchases that they can update electronically and integrate with their accounting side.

Traditional ERP or CRM programs do not generally include a contract repository or modules for monitoring pricing, rebates and chargebacks or compliance with the revenue recognition rules of the SEC’s SAB 101 (see “Automated Contracts Make Revenue Recognition Easier,” below). Goldman Sachs estimates ERP systems cover only 20% to 30% of the needs of most enterprises. “What’s evolving now is much more customized to individual company needs,” says NCMA’s Couture, “and not just an add-on to ERP systems.”

Pricing varies greatly from one vendor to another and depends on the client’s size and the extent of its contract relationships. Vendors generally charge for their products through a licensing fee, which allows the customer to try out elements of different systems. Some providers also offer contract-hosting arrangements for midsized and smaller clients that do not want to maintain the hardware and software in-house, a service known as application service provision, which runs the client’s contract data on the host’s own systems for a monthly fee.

I-many, for example, typically charges in the $125,000 to $130,000 range for projects with midtier to smaller companies, while a large company with a high volume of sales typically pays $1 million to $2 million—and as much as $4 million if it purchased a a full set of product suites or modules. DiCarta’s average pricing is roughly in the same range—about $150,000 for a small company with perhaps 10 users to license the software, and as much as $1.5 million to $2 million for a Fortune 1,000 company that plans to use the software enterprisewide. Both companies calculate maintenance costs—instances when the vendor makes modifications or adjustments to fix glitches—at about 20% of the licensing fee. I-many also offers “value-based” deals in which the company pays a reduced licensing fee and I-many receives a portion of whatever savings the company achieves by using the system.

EFFICIENCY AND COMPETITIVE ADVANTAGE

Automation forces companies to carefully analyze how they negotiate and implement contracts—a process that by itself can help the organization create better, more efficient procedures. Contract management systems tie executives and negotiators directly into the negotiating process and give them access to contract language the company considers standard and acceptable. Negotiators do not have to sit in the same room; they can hash out contract terms in an instant messaging environment. Afterwards, the system can initiate a series of notifications to ensure the terms of the deal are carried out according to the contract’s timetable.

Some companies like their systems to contain “version control,” which allows them to keep multiple versions of the same agreement from circulating while it’s making the rounds, notes Rubin. “If more than one party has access to the contract, you can lock it down so that no one else can make changes while you’re working with it,” she says. “And the system maintains all previous versions, so you can see all changes up to the final version.”

Companies can purchase another modular component, called revenue manager, with the ability to highlight wording that might trigger revenue recognition, such as acceptance clauses, exclusivity and extended payment terms. Some automated contract management systems make calculations showing the seller when it can recognize revenues under SAB 101. The software can check for specific types of revenue recognition fulfillment, such as whether the seller was able to make a reasonable estimate of the probability of nonpayment.

An automated warning system can also alert a sales rep who may be about to make a deal with one client that disrupts a relationship with another before it’s too late. “A slight change in price could easily cause you to give a new customer a lower price than any of your other customers,” Christiansen says. “You may then have violated a pricing status agreement with another, much bigger client.” An Internet-based link to a company’s library of contract terms and conditions can prevent such a situation from arising as soon as the wording hits the page and before a handshake with the new customer—instead of later on, when your company’s lawyers review the deal and a lawsuit may be coming.

Besides creating greater efficiency, automation may offer a competitive advantage by reducing cycle time to completing the contract negotiations, says Andersen’s Miles. By making the company’s contract library accessible and facilitating messaging and notifications between the negotiator and key executives, automation shortens the cycle. That makes companies that have learned how to do so more attractive as negotiating partners, Miles says, because standard clauses are automatically included in the contract or are available from the contract library. Sales reps and executives can then spend less time wrestling with the basic parts of the agreement.

Several vendors offer a database module that gives sales reps the ability to mine the company’s past contracts using word or category searches to compare the terms they are discussing with those used in past deals. The negotiation module contains standard contract clauses the negotiator can use to assemble the contract. Any of these clauses can be tagged so that if one of them is added, the CEO—or another officer—is automatically e-mailed to authorize its inclusion. Instructions can be attached, such as “for negotiation” or “accept/decline only.” The module can also contain examples of similar language from other contracts the company has signed, noting when and if such language is acceptable.

NO PACKAGE IS PERFECT

One of the goals of integrating the contract management process into a company’s operations through automation is to eliminate human error. But these systems can just minimize errors by assuring that each person who needs to approve an aspect of a contract, or make sure one of its obligations is fulfilled, is kept in the loop.

For those who think the software can do everything, it’s possible to build a workflow that is too elaborate, cautions Rubin. “If your system has so many ticklers for so many people that you tickle them to death, they may start to ignore their notifications,” she warns. When companies’ automated contract management systems don’t run smoothly, it’s usually not the software causing the problem but the workflow process it was built into. “If a company has no firsthand knowledge of how this kind of system works, a successful implementation will depend on how well the company prepared for it and tailored it for its internal use,” says Ireton. “That’s why bringing all the departments that will be affected by the new system into the implementation process is crucial.”

If a company brings in an outside consultant to implement the system, that person’s understanding of the company’s internal procedures will be critical as well, Ireton adds. Otherwise, the company can end up having to retool the basic workflow that the automated system is supposed to follow or add modules that should have been installed in the first place. If the former situation occurs, the additional time and effort can mean refitting the system from top to bottom, at heavy additional cost.

Once an automated contract management system is in place, however, it becomes much like any other piece of software—an intellectual asset over which the company has only partial control. Companies that use them are vulnerable to the vendor’s going out of business and no longer being able to support the software. While no disasters have occurred yet, Rubin says some companies are asking their vendors to place a copy of the source code for their system in escrow, so that the company can retrieve it should the vendor close its business.

Automation cuts costs and improves revenue. Savings can come from reducing pricing errors, mistaken payments, operating and processing costs and personnel. Revenue rises when companies streamline claims processing and improve vendor and customer relations and compliance, according to “Technology: B2B Software,” a Goldman Sachs report released last February.

Corporate CPAs and financial managers know efficient contract management can be a key to a better bottom line. Automating the process empowers companies and their workers and takes the guesswork out of managing business agreements.