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AberdeenGroup
October 2005
The Contract Lifecycle Management Business Value Research Series
Executive Summary
Where to Begin
Despite such benefits, inquiries to Aberdeen indicate that line-of-business and informa-
tion technology (IT) executives are uncertain how best to approach CLM deployments.
Contract management spans and impacts all aspects of the organization; process and sys-
tem investments in this area can be politically charged and highly fractious issues. And,
following time-consuming enterprise resource planning (ERP) system deployments and
stalled e-marketplace initiatives, many companies remain gun-shy of large enterprise ap-
plication deployments.
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Table of Contents
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Figures
Tables
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Chapter One:
Market Factors Make CLM a Priority
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dures for creating, managing, and controlling contracts. In fact, the typical company con-
tinues to manage contracts with a mix of manual, paper-laden, and informal processes;
fragmented business systems; and ex post facto audits and analyses. This hodgepodge
strategy limits visibility into corporate contracts and performance, exposing enterprises
to inflated costs, diminished negotiation leverage, missed revenue opportunities, poor
compliance, and regulatory backlash.
Table 1 shows the impact inadequate contracting, administration, and compliance proce-
dures and systems are having on enterprise performance.
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In simple terms, a CLM solution automates and streamlines the creation, storage, man-
agement, and analysis of contracts from initial contract request and negotiation
through compliance and performance management. Most commercially available contract
management solutions provide the following capabilities:
A centralized and searchable repository for contracts, templates, and clauses;
Collaborative contract creation, redlining, and audit trail capabilities;
Monitoring and alerting of predefined agreement milestones (e.g., contract ter-
mination, volume thresholds, etc.) to drive improved compliance;
Integration into transactional systems for activation of key contract terms and
proactive compliance monitoring and management; and
Reporting and analytical tools for contract performance analysis.
Aberdeen benchmarks of more than 50 CLM automation deployments have quantified
significant benefits of CLM automation (Table 2). Many enterprise users have reported
full ROI from their CLM solution investments in less than a year thanks to improvements
in contract compliance, access to pricing discounts and rebates, and enhancements in
revenue capture and acceleration. Contract management solutions have also proven valu-
able in assisting companies in complying with regulatory reporting requirements.
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Chapter Two:
Where to Begin
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reporting requirements. After beginning the system deployment, which was part of a
companywide contract excellence initiative, the manufacturer soon realized that it
needed to better scope its requirements and modify its deployment approach. The com-
pany secured an experienced program manager and reset deployment expectations.
The result: quicker implementation, wider system adoption, and improved financial and
performance results1. One executive said, Too often enterprises rush into a [CLM] in-
vestment. We learned its important to slow down and fully assess your organization
structures, processes, and system requirements before evaluating solutions.
Enterprises must start by conducting an internal assessment of contracting, compliance,
and contract administration competencies. Aberdeen advises enterprises to holistically
assess contract management competencies across five areas: organization, process,
knowledge, technology, and performance measurement. Table 3 provides a first-pass as-
sessment enterprises can use to determine the applicability of CLM for their firm. Or-
ganizations lacking capabilities referenced could achieve measurable benefit from CLM.
Self-assessment is examined in further detail in Aberdeens Best Practices in Contract
Management report (September 2004).
1
Best Practices in Contract Management (September 2004).
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Technology Assess level of Which contracting and administration processes have been automated and to
automation and what level of effectiveness?
how well it is Are automation investments aligned and integrated across the contract lifecycle
integrated and across the enterprise?
across discrete What decision support and reporting tools does your procurement organization
contract lifecycle use, and how effective is it at meeting your analysis and reporting needs?
management
processes
Performance Assess level and What metrics and procedures does your company use to measure contract
Measure- consistency of compliance and performance?
ment measurement as Are metrics and procedures consistent enterprise-wide?
well as actual Are you capturing all rebates/discounts in supply contracts and all revenue of
performance sales contracts efficiently?
against each Does you company submit invoices promptly, accurately, and according to con-
metric tract milestones?
How does actual contracting and administration performance measure up to
industry peers and the best in class?
Source: AberdeenGroup, June 2005
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A solid business case is required for securing strong executive support and funding for a
CLM initiative. Executive support is critical for achieving successful and rapid adoption
of a CLM program, including alignment across functional groups and business units. In
fact, an assistant vice president at one company that implemented a CLM system told
Aberdeen, Sponsorship at senior levels is paramount. You need to have senior buy-in, or
the rest of the organization wont follow.
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Chapter Three:
Practical Approaches for CLM Success
A berdeen research has found that the enterprises reaping the greatest value from
their CLM investments were those that could simultaneously paint a grand vision
of an end-to-end CLM initiative but execute a practical and manageable set of
requirements and a moderated deployment schedule.
For example, after doing an initial analysis of the contract management automation mar-
ket in 2000, one large automobile manufacturer was wowed by the advanced functional-
ities and reporting capabilities of available CLM solutions. However, the automaker was
wise enough to realize that incorporating all these functionalities into its initial rollout
plan would result in elongated deployment cycles and greater internal resistance to sys-
tem adoption and process change.
Instead, the automaker began its CLM deployment by focusing on establishing a central-
ized repository for contracts to support procurement optimization activities and enhance
compliance. Where companies fail is when they allow new features to distract them
from their core goals, said one company executive. If you try to adopt [all the features
available in a CLM system] you defeat the purpose of what you really want to do.
The automakers focused CLM strategy yielded an estimated $14 million over its first
five years of deployment. Benefits came from improved prices, terms, and conditions
through enhanced visibility into contracts and compliance, resulting in 571% ROI. The
automaker has since expanded CLM deployment to other business units and has extended
functionality to include contract creation and collaboration and advanced reporting. (See
Best Practices in Contract Management, September 2004, for more details.)
Our benchmarks of CLM application implementations lead Aberdeen to recommend that
enterprises understand and embrace the long-term vision of an end-to-end CLM initia-
tive, but take a more measured and practical approach to solution deployment.
To demonstrate the cost and time-to-value impact of this approach, Aberdeen decon-
structed the case study referenced in Table 4 into the three primary phases of CLM de-
ployment:
1. Establish a central and searchable contract repository.
2. Establish integration and process workflows for improved transaction and com-
pliance management.
3. Adopt contract creation and collaboration capabilities for better productivity and
control.
Figure 1 illustrates the deployment cycles, costs, and actions required to effectively exe-
cute each phase of CLM deployment. It also quantifies the estimated value contribution
of each phase.
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$1,600,000
Fine Avoidance
$1,400,000
Administrative
$1,200,000 Rebate Capture
Re-Sourcing
$1,000,000 Compliance
$800,000
$600,000
$400,000
$200,000
$0
Phase I Phase 2 Phase 3
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trading partner name and contact information, pricing lists and breaks, and con-
tract termination dates) in a CLM system. This header information typically con-
tains a contract number that links or directs users to the complete contract stored
either in scanned or paper format. This segmented approach simplifies system
deployment and management. The header information can be used to drive con-
tract compliance and administration activities. However, this header-only ap-
proach limits the ability of companies to initiate performance and risk analysis
across contracts or at the clause or line-item level. Recent advances in OCR, con-
tent management, and pattern recognition technologies are beginning to enable
more sophisticated and efficient contract conversion, allowing companies to ac-
cess and search the entire contract at a detailed level.
Report development: The final phase of establishing a contract repository is run-
ning basic reports and search queries to track contract compliance, rebate cap-
ture, termination and renewal dates, etc. Most CLM solutions ship with standard
reporting capabilities or can export information to third-party reporting tools.
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all while mitigating the use of risky contract language. Templates are defined
for specific and generally highly used contract categories or types, such as con-
tingent labor agreements.
For example, Hewlett-Packard defined a library of contract templates for specific
product and service types. These templates also include variations that support
local requirements and business regulations. The result: HP reports shorter con-
tracting cycles and improved compliance. Advanced contracting solutions offer
predefined process workflows and contract templates to satisfy the unique con-
tract types (e.g., leases or physician agreements) or industry requirements (e.g.,
retail, life sciences). Some solutions also allow rules, permissions, and risk scores
to be applied at the clause level, reinforcing approved language and guidelines.
Aberdeen Conclusions
With continued corporate pressures to cut costs, boost profitability, and meet regulatory
requirements, the benefits of contract lifecycle management and supporting solutions are
highly compelling. However, successful program and system deployment requires a me-
thodical and measured approach to CLM. Enterprises employing such measured ap-
proaches reported significant and measurable value and ROI at each phase of deploy-
ment. They also found that success from early phases of the deployment helped secure
internal support and funding for expanded functionality and rollout. Success in these
phases, as well as on the project itself, can accelerate system deployment, allow an enter-
prise to realize value faster, and make it easier to secure later funding for system en-
hancements and upgrades.
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Author Profile
Tim Minahan
Senior Vice President, Global Supply Management Research
Aberdeen Group
Tim Minahan is senior vice president of global supply management research for Aber-
deenGroup, Inc. Minahan specifically focuses on total cost management (TCM), which is
an organizational and technological framework for managing the total cost of ownership
of supply relationships. Within TCM, Minahan tracks spending analysis, sourcing, pro-
curement execution, contract management, and supplier performance measurement tech-
nologies. Minahan also covers product lifecycle management (PLM) technologies and
their convergence with TCM.
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Appendix A:
Research Methodology
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Appendix B:
Related Aberdeen Research & Tools
Related Aberdeen research that forms a companion or reference to this report includes:
Contract Management Solution Selection Report (June 2005)
Secrets of Contract Management Leaders (May 2005)
Spend Compliance Management (December 2004)
Best Practices in Contract Management (September 2004)
Contract Management Benchmark Report (June 2003)
Information on these and any other Aberdeen publications can be found at
www.Aberdeen.com.
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About
AberdeenGroup
Our Mission
To be the trusted advisor and business value research destination of choice for the Global
Business Executive.
Our Approach
Aberdeen delivers unbiased, primary research that helps enterprises derive tangible busi-
ness value from technology-enabled solutions. Through continuous benchmarking and
analysis of value chain practices, Aberdeen offers a unique mix of research, tools, and
services to help Global Business Executives accomplish the following:
IMPROVE the financial and competitive position of their business now
PRIORITIZE operational improvement areas to drive immediate, tangible value
to their business
LEVERAGE information technology for tangible business value.
Aberdeen also offers selected solution providers fact-based tools and services to em-
power and equip them to accomplish the following:
CREATE DEMAND, by reaching the right level of executives in companies
where their solutions can deliver differentiated results
ACCELERATE SALES, by accessing executive decision-makers who need a so-
lution and arming the sales team with fact-based differentiation around business
impact
EXPAND CUSTOMERS, by fortifying their value proposition with independent
fact-based research and demonstrating installed base proof points
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