EMC PERSPECTIVE. Creating the Business Case for Enterprise Contracts Management

Transcription

1 EMC PERSPECTIVE Creating the Business Case for Enterprise Contracts Management

2 Introduction The recent emphasis on corporate transparency and compliance with government regulations has drawn increasing interest in Enterprise Contracts Management (ECM). While the fear factor may be substantial enough to prompt ECM initiatives, it is the business case for ECM which drives corporate action. Companies that implement comprehensive ECM initiatives may reasonably expect to achieve benefits totaling upwards of $30M over five years. This total is achieved as the result of application rationalization, resource reallocations, vendor management and consolidation, outside counsel spend reduction, and greater contract effectiveness. This whitepaper provides insight to and guidance for deriving a financially compelling business case to help secure senior executive sponsorship for implementing ECM. Input parameters Benefits Costs Business case ECM benefits Contracts management: On the critical path for improving B-to-B processes Contracts management cannot be viewed independently of other business processes; only by taking a holistic view can a company attain the maximum ROI from ECM. Effective contracts management is a key aspect of both sell- and buy-side contracts. In both procure-to-pay and contact-to-cash transactions, Contracts management is a critical aspect of the overall business-to-business process. Since data collected during the contracts management process serves as the source of truth for business transactions, implementing efficiencies at this step of the transaction means realizing efficiencies throughout the entire business process. And standardizing data collection provides a basis of comparison for a more effective review and analysis of contracts. Companies can close the loop in the business-to-business process and determine whether transactions comply with contract terms. This results in better contract performance, vendor performance, and customer satisfaction. Supplier metrics Expense item prioritization esourcing Order entry Order fulfillment Invoicing, reconciliation, and payment Spend visibility 1 Procure to Pay Buy-side contracts Contract management Sell-side contracts Contact to Cash 1 Market share visibility Invoicing, 8 reconciliation, and payment 7 Order fulfillment 6 Procurement 4 CRM 3 Deal modeling and structuring 2 Customer and pricing analytics Figure 1. Contracts management in the buy-side and sell-side business process. Improvements in ECM frequently enable a company to: Reduce average cycle times by 33 percent Standardize 90 percent of contracts Minimize non-standard language by 20 percent Reduce turnaround times of Special Pricing agreements to two to four days When assessing each B-to-B process by contract category, one can find differing degrees of value, efficiencies, and business benefit, whether the focus is on buy-side, sell-side, or Intellectual Property (IP) contracts. The ECM Benefits table below compares the source of benefits accruing to the respective buy-side, sell-side, or IP processes of effective contracts management. The derived benefits fall into three categories: cost reduction, revenue enhancement, and risk mitigation. 2

3 Table 1. ECM Benefit Benefits for buy-side contracts Improvements in buy-side contracts management tend to drive cost reductions that are directly proportional to an organization s annual spend. For example, analyses of annual spend and contract data may reveal that a portion of commodity spend may not be covered by contracts. For one organization, analysis of contract data showed that, while only two percent of annual spend was not covered under contract, the amount not covered, was equivalent to over $100 million/year. Enhanced visibility and proactive monitoring of T&C s yield additional cost reduction benefits: Spend can be monitored to ensure compliance with purchase discounts Advanced notification of expiration dates and payment milestones provides time to renegotiate terms to eliminate interest payments and late fees Data can be used to compare vendors and evaluate new vendor terms Companies may consolidate spending with fewer suppliers to gain steeper purchase discounts or better payment terms Finally, the last two items under cost reductions span all contract types since they involve extracting cost efficiencies in technology and resources. The benefit calculation for rationalizing application technology assumes that a single ECM application can displace all the organization s disparate repositories as well as any workflow applications used for contracting. For example, one organization that maintains nearly 40 separate applications could significantly decrease TCO when those systems are replaced by a single ECM solution. Process efficiencies are related to streamlining the contracting process by removing bottlenecks and minimizing handoffs so that more contracts can be generated in a shorter timeframe, providing greater throughput without the need for hiring additional resources essentially, doing more with less. 3

4 Benefits for sell-side contracts Improvements in sell-side contracts management result in revenue enhancements that are directly proportional to annual revenue of an organization. Improved contracts management practices enable the company to be more proactive in renegotiating contracts. The impact of new business and regulatory conditions can be considered. Pricing structures can be reviewed. And the overall performance of the contract can be understood prior to renewal. Proactive, timely notification of expiration dates results in three quantifiable benefits: Increased throughput of contract renewals Increased occurrences of implemented rate increases Improved contractual deals so that both parties mutually benefit from the business transaction and are inclined to continue the relationship Benefits for risk mitigation Lastly, because risk is common to all types of contractual arrangements, benefits surrounding risk mitigation apply across all contract types. Some of the risks outlined in table 1 include, but are not limited to: liability, warranty, contract compliance, standards and regulatory compliance, errors, and omissions risk. Although it may be difficult to assign an overall value to this category of benefits, the dollar amount can be quite significant. Organizations may be sensitive to admitting instances in which poor contractual compliance led to errors amounting to millions of dollars. Yet public examples of fines levied, litigation awards, or settlement values may be used to determine a reasonable dollar figure to assign to risk. The risk reduction benefit that an organization may derive from a contract management solution can be expressed as a fraction of these dollar amount samples. A few examples taken from contract assessments of client organizations emphasize the significance of risk reduction in establishing the business case for ECM. $10MM of IP royalty payments not collected because contract was not entered into any system or source of record i.e., zero visibility An internal audit found the contract which was on the desk of an employee who left the organization six months prior $20MM of penalties paid due to late payments (six months) of contractual obligations percent of company annual profit at risk due to underestimating contractual obligations A/P understated Underestimated budgets for future liabilities $4MM overpayment for a service procured without being aware of an existing preferred supplier contract with lower prices 4

5 Costs The second important part of the equation is the cost of an ECM solution, a cost which is independent of any contract type. Table 2. ECM Costs Technology represents another important area for consideration. An organization may choose to have the ECM solution internally or externally hosted, or may even choose to leverage ECM as a service on an as-needed basis or as a subscription-based service. Best-in-class ECM solutions today offer services to support all options and provide the ultimate flexibility to support the strategy and constraints of any organization. With the hardware-to-software cost ratio typically running at a 1:1, it is probably less costly over the long term for an organization to internally host an ECM solution. The costs of implementing a comprehensive ECM solution in an integrated environment can run between one and two times the costs of the hardware plus software licenses. Application integration and system testing require a significant portion of the total ECM investment. The logical breakdown of a typical implementation is listed in Table 2 along with the approximate percentage of total implementation costs.

6 Input Parameters: The scope of the implementation as indicated in the table below are the main drivers that affect the benefits, work effort and costs associated with an ECM implementation. The values reflect the range from a fairly straightforward implementation to a more complex deployment. Table 3. ECM Benefits and Cost Drivers The number of contract types and number of contract templates have a large impact on the total project. Many activities such as configuration of wizard functionality, workflow, notifications, and metadata definition are derived by contract type. Therefore, the greater the number of contract types, the greater and more extensive the implementation work effort. Next steps With most organizations generating between 20,000 and 40,000 contracts per year, the business case for implementing ECM is compelling. Yet, it is important to remember that establishing the business case is only the first step. Success in realizing the expected ROI is not automatic. It relies on: Creation of a detailed implementation roadmap Phased deployment Ongoing evaluation of progress against business goals and established metrics Ongoing executive commitment The cost of a full-scale ECM solution which can total as much as $10M over five years may be only $20/contract when spread over the high volume of contracts. About EMC Consulting As part of EMC Corporation, the world s leading developer and provider of information infrastructure technology and solutions, EMC Consulting provides strategic guidance and technology expertise to help organizations exploit information to its maximum potential. With worldwide expertise across organizations businesses, applications, and infrastructures, as well as deep industry understanding, EMC Consulting guides and delivers revolutionary thinking to help clients realize their ambitions in an information economy. EMC Consulting drives execution for its clients, including more than half of the Global Fortune 00 companies, to transform information into actionable strategies and tangible business results. EMC Corporation Hopkinton Massachusetts In North America Take the next step For a more detailed view of how your organization can benefit from our expertise along with a complete listing of our capabilities and solutions visit EMC 2, EMC, and where information lives are registered trademarks or trademarks of EMC Corporation in the United States and other countries. All other trademarks used herein are the property of their respective owners. Copyright 2008, 2010 EMC Corporation. All rights reserved. Published in the USA. 8/10 EMC Perspective H734