The contract is dead, long live the contract

"This is the third time this month we've been sent the wrong parts; can't we change suppliers?" your procurement manager complains.

You advise him to get out a copy of the contract and check on why the supplier was chosen, what the exact terms and conditions of the contact are and when it comes up for renewal.

He comes back with: "Legal doesn't have it and neither does sales, what now?"

Does this scenario ring a bell?

These days there is almost not a single business interaction that is not contractually agreed, and for good reason, but keeping track of the contracts, and the information contained therein can sometimes present a challenge.

Many organisations think of contracts only as legal instruments that record relationships, commitments and the consequences of failure. As a result, companies generally don't have defined formal CM processes.

However, the business environment is rapidly metamorphosing, with ever-expanding supply chains, growing strategic partnerships and increased use of outsourcing. This means organisations require new and improved controls.

Contracts and contract management (CM) have a critical role in delivering these controls, and yet CM remains one of the most manual and undefined areas of business operations.

IACCM global research shows adoption of CM software has been slow worldwide, with only about 35% of respondents indicating they have some form of contract management automation in place. Of those, only 20% have implemented the system across their entire organisation.

The slow adoption relates to the fact that the CM environment requires a commitment from the business owner to define both processes and controls. This raises tough political questions regarding ownership, authority and accountability in the organisation.

CM automation is not really arduous and given the right software implementation, it can be quite rapid and hassle-free.

Paul Maddison is MD of Realyst Software.

On the other hand, the most popular reason for CM adoption is compliance. South African companies face a whole slew of compliance, criminal and regulatory risks, with new legislation being passed practically every year.

Government is improving its ability to enforce existing commercial law, and concomitantly good corporate governance is becoming increasingly important in determining corporate reputation.

For example, the Public Finance Management Act directly allocates the responsibility and accountability for the contractual obligations of publicly funded organisations to accounting officers, spelling out their duties in managing contracts.

Listed companies have to comply with the King II Guidelines on Corporate Governance, which specifies the responsibilities of a company's board of directors for BEE procurement practices.

Globally, similar laws and principles guide corporate procurement practices, such as the Sarbanes-Oxley Act.

Faced with hundreds or thousands of contracts in hard-copy format, a company might consider the task of automating its CM system as too onerous and would rather rely on its legacy ERP system.

Reconsider as negotiated contracts are complex instruments, with high levels of variability and elaborate interfaces between parties and this might not be the best solution for the business. In reality, CM automation is not really arduous and given the right software implementation, it can be quite rapid and hassle-free.

In addition, automated CM benefits not only the bottom line but reduces workload and manages risk. It provides executives with a single view of their company's contractual processes, contract types, obligations, activities, risks, performance, scope and costs.

Having said all that, would it not make sense to reconsider the necessity of automated CM?

* Paul Maddison is MD of Realyst Software.