Most CFOs know only too well how arduous it can be to negotiate contracts. But far fewer may realize that the pain doesn’t end once the ink has dried on the dotted line. Common features of contracts, such as contingent discounts, rebates, and tiered-pricing agreements, require continuous — and costly — monitoring. In a 2001 report, Goldman Sachs estimated that companies spend nearly 50 basis points of revenue to track agreements post-deal, while a joint study by PricewaterhouseCoopers and Provato Inc. says that in contract-intensive industries, such as high-tech manufacturing and consumer packaged goods, an average of 12 percent of a company’s total annual costs may be devoted to such tasks.
To the rescue comes an expanding array of contract management software. I-many Inc., diCarta Inc., and enterprise-oriented vendors like Oracle are trying to wrangle contracts into a central digital workspace where common clauses can be reused, new contracts can be automatically routed for approval, and old contracts can be tracked for compliance and analyzed for profitability.
Sticking With It
Industries that rely heavily on contingency-laden customer contracts, like pharmaceuticals and food services, have been using the technology for years. The $5.7 billion dairy giant Land O’Lakes, for example, pays grocery stores to market their products via credits to the stores’ invoices. With 92,000 deductions churning through its systems each year, though, determining which credits are justified and which aren’t is daunting. Since 1989, the company has been using a deduction management system developed by ChiCor Information Management Inc. (which was acquired by I-many in November 2000) that tracks the actual deductions a customer takes against agreed-upon credits, and flags any “mystery” deductions for manual intervention. John Kieffer, credit business systems manager at Land O’Lakes, says the company has been able to reduce head count because the software automates much of the process, and that the company believes it might be possible to use the system in other situations. “Anything where you need to do follow-up or send reminder letters could be filtered into it” with minimal effort, he says.
Because there are so many different kinds of contracts, vendors tend to specialize. Accruent Inc., for example, has spent seven years installing software that analyzes clients’ variable real-estate expenses against their agreements, which Accruent maintains in a digital “warehouse.” CEO Mark Friedman says customers typically see a 2 to 3 percent reduction of overall spend when they first sign on.
“It’s more about cost-avoidance than cost-savings,” says Cheryl Howard, who oversees 1,800 leased properties nationwide as vice president of real estate for Wells Fargo & Co.’s home-mortgage division. For example, the software can sound an alert about lease expirations, enabling the company to negotiate new leases without having to pay holdover fees.
With almost 80 percent of business-to-business sales codified in contracts, according to the Goldman Sachs report, vendors see a huge potential market — up to $5 billion within five years, according to Credit Suisse First Boston. By the end of this summer, both I-many and Oracle say they will roll out products that will make collaboration easier, include more sophisticated analytical tools, and offer more in the way of procurement contracts management. DiCarta, originally known for its ability to track contract fulfillment for, among other things, revenue-recognition purposes, has also released a new version of its product that promises all of the above.
Deciding whether all those bells and whistles are truly worthwhile will be critical, according to analysts. “Companies implement something like this to make sure they’re not getting ripped off, so the analytics around compliance and the visibility you get by having all your contracts in one place are really valuable,” says Jupiter Media Metrix Inc. senior analyst Jean-Gabriel Bankier. He’s more skeptical about the other pieces, though. “Both the upfront workflow and the back-end analysis are valuable, but they’re likely to cost a lot of money, and the question is, is it worth it?”
Persistence Software Inc. CFO Christine Russell agrees. She signed on with diCarta two years ago and hasn’t upgraded since, primarily because of budget constraints. “We find the software incredibly valuable as a customer database, because it allows us to see what projects a customer has used our software for and when the license is due to expire,” she says. But as for document creation, revenue recognition, and other functions, “automated systems cannot possibly capture every situation.” Vendors agree that the software will never achieve the ultimate — eliminating the need for CFOs, attorneys, and others to scrutinize the details of every deal. But they vow to eliminate as much of the repetition and tedium of tracking the deal after the ink has dried as they possibly can.