The Case for Contract Lifecycle Management in Your VMO

In today’s modern business world—where responsiveness to the customer and an ability to differentiate through innovation are key—companies are relying more and more on third-party suppliers, resulting in an increase in operational complexity. Against this backdrop, the importance of contract lifecycle management (CLM) within a vendor management office structure has elevated from mere paperwork processing to an active means of supporting enterprise objectives like speed to market, risk avoidance, and cost savings. A robust CLM program not only ensures contract-related documents adhere to an enterprise’s internal management processes, compliance requirements, and stakeholder reviews, but also actively governs these agreements to ensure clients receive a contract’s intended value and protections.

Contract documents are the foundation of all transactional business and govern every dollar in enterprise revenue and expense. They can be anything from traditional master service agreements (MSAs), contract amendments, and statements of work (SOWs) to purchase orders (POs), non-disclosure agreements (NDAs), consent and/or reverse consent and assignment letters, and even related correspondence between parties. Surprisingly, organizations spend significant time and resources carefully crafting third-party agreements, but then often let those efforts go to waste by not properly managing these contracts post-signature. According to KMPG research, the inability to have an effective set of CLM processes and procedures, with timely control of contracting documentation with suppliers, lessens negotiation levers resulting in value leakage typically between 17% and 40% of contract value.

IT Vendor Management Office

CLM programs are typically managed by an IT vendor management office and segmented into two phases, contracting and governance. During contracting, the client holds the “power of the purse,” so the procurement department controls the process as the enterprise and suppliers conduct bilateral discussions and authoring.

Figure 1 – Phases of Contract Lifecycle Management

Where enterprises tend to lose control of contract documentation is during governance. Most often, there’s no dedicated client team managing the contract post-signature, forcing enterprises to rely on the supplier for tracking and ensuring they follow through on commitments and obligations.

As they move from contracting to governance, (pre-signature vs. post-signature), procurement and IT organizations can put themselves at risk by gradually losing control of documents. This gap in document visibility creates a risk in both compliance (i.e., SOX Section 404, Third Party Risk Management) and the relationship, resulting in loss of direct or indirect saving opportunities. The below chart illustrates this change in the contract management lifecycle:

Figure 2 – Typical Enterprise CLM Phased Activities

The implementation and execution of a mature contract lifecycle management (CLM) program allows for the continuous visibility of documents and reduces loss of their control. A fully-integrated CLM lessens risks to the organization while addressing common challenges most CIOs and IT vendor management office leaders face:

• Unmanaged automatic contract renewals
• Surprise audits
• Contract compliance violations
• Lack of contract visibility and adherence
• Ad-hoc negotiation strategy
• Contract availability for reference

Each of these areas can result in the loss of saving opportunities, unfavorable contract terms and conditions, a weaker negotiation position, incoherent demand management, and internal or external compliance violations. If this sounds familiar, you might consider contract lifecycle management, as it unlocks value and savings by proactively maintaining IT contract to governance phases, compliance, and renewal. It’s a small investment that helps avoid considerable problems for the relationship—and your business.

Learn more about Wavestone’s vendor management office services.