I was reviewing my notes from the Association of Corporate Counsel (ACC) Annual Meeting and the International Association of Commercial and Contract Managers (IACCM) Americas Conference, both held in recent weeks.
Coincidentally, and not surprisingly, a similar theme jumped out from both conferences: an undercurrent of frustration by commercial attorneys and contract professionals that they were not involved earlier in transactions and instead are brought in at the tail-end.
Being brought in at the end of the transaction requires these teams to memorialize all that went into the deal to that point, leading to delays that get pinned on the contracting team. I wondered: Was this frustration typical? For instance, in the sourcing process, when should contracting professionals or lawyers get involved? What would true collaboration devoid of frustration look like?
Which is why data from a survey by WBR (World Business Research) on integration between procurement and contracting teams was particularly interesting to me.
Earlier this year, Icertis teamed up with WBR to investigate how businesses are handling contracts during sourcing events. In a survey of 100 Chief Procurement Officers, we asked: “How deeply integrated are your sourcing and contracting processes?”
The responses run the gamut, from treating contracting and sourcing completely separately to treating contracts as a central part of the sourcing process.
Why the different approaches? One word: Maturity.
Analysts and business leaders alike agree that, ideally, contracting would be a central part of the sourcing process. After all, contracts are the ultimate output of every sourcing event and define the business rules that shape a company’s relationship with its suppliers.
Yet it is easier said than done.
Indeed, according to the survey, 23% of companies don’t involve contracts in the sourcing process at all. For the contract lawyers at these companies, you have my sympathies.
Typically, companies take this approach because their sourcing systems and processes do not support any contract management functionality. These teams evaluate bids based on price and technical specs (how much is the product, how good is the product), choose a supplier and hand the deal off to legal to work out the contractual details. Not surprisingly, these deals often get tied up in legal, since no work was done early on to determine what contractual conditions the supplier’s bid comes with. Legal ends up with a black eye when they delay or scuttle the deal, while the company loses time and money to wasted effort.
Another 31% of companies in the survey said they treat sourcing and contracting sequentially. For these companies, things look a little better—but just a little. These companies do treat sourcing and contracting as a single motion. They may use a basic contracting module within their sourcing software that can draft a standard contract based on a chosen bid. Yet, crucially, contract language is not discussed during the sourcing event. Contract negotiations still only start after a bid is awarded, with legal teams left to sort out contract details that could ultimately derail the deal and force the sourcing department to start over.
Bringing Contract Teams to the Table
On a brighter note, nearly half those surveyed say they are taking a different approach and bringing contracts and contracting teams into the sourcing process.
According to the survey, 29% of companies invite legal and commercial teams to actively collaborate in the process. These companies are well on their way to tackling the challenges above. Contracting teams can bring contracting best-practices into the buying process to advise sourcing managers on what kind of contract language helps the business. Still, though, collaboration only goes so far.
Finally, 17% of companies surveyed treat contracts as a prerequisite for closing a sourcing deal. While this may sound like a matter of simply adding a step to the buying process, it actually represents a major shift in sourcing philosophy. When companies treat contracts as a pre-requisite for a sourcing deal, contract managers aren’t only advising and collaborating with the buyers; they become part of the buying team.
Done wrong, this approach can add a lot of bureaucracy to the buying process, with all the delays discussed above simply shifted forward. In other words, there’s a reason that, historically, companies haven’t taken this approach.
But with the help of contract management software that features powerful sourcing capabilities, companies can leverage this approach to accelerate cycle times and optimize outcomes.
The Rise of Contract-centric Sourcing
“Contract-centric sourcing,” as we call this approach, makes contract redlines one of the factors by which companies choose suppliers. The buyer’s preferred contract language is sent out to vendors along with the RFQ, and suppliers submit their redlines along with their bids and other typical RFQ information. With the right contract management software, these redlines, even if not “tracked” in the Word doc, get surfaced within the sourcing portal, so buyers know exactly what kind of changes the supplier will require.
Icertis’ Sourcing app, built on top of the Icertis Contract Management (ICM) platform, empowers buyers to send and receive RFQs and contracts within a single system. Uniquely, the Sourcing app provides analytics on how redlines will affect the performance of the deal, so legal teams can quickly determine whether they are acceptable or not. From there, the buyer can either loop back around to negotiate redlines from within ICM or take the redlines as final and use them to weigh the overall bid. Either way, the contract quickly gets locked down during the bidding phase, so once a bid is awarded, the final contract is simply an output of the overall process.
Whatever your role–sourcing, legal, contract professional–this contract-centric approach offers clear benefits to both your role and your company in general. As shown by the survey, more and more companies are adopting this approach, which I hope will mean less frustration at next year’s conferences.
To learn more about contract-centric sourcing and how highly collaborative teams are revamping their processes and using technology to make their sourcing more efficient, check out this webinar from WBR featuring my colleague Vivek Bharti. Vivek has a long career in transforming sourcing processes at some of the world’s largest companies and offers a unique perspective on this critical role.