Why is Contract Lifecycle Management Critical to Digital Transformation?

McKinsey found that many US companies did “not have full transparency in their supply chain,” and that understanding where they are exposed is going to be “an ongoing crisis.” Bain and Company agreed, noting that flexible supply networks can “help companies minimize the risk of disruption in times of stress,” and that cloud-based applications and collaborative platforms and tools that enhance information sharing are needed to provide greater visibility into the supply chain to ensure business continuity.

Many manufacturers are now looking at when they should “recalibrate their global production footprint” and how digitizing capabilities and speeding up digital transformation can help get more visibility into the supply chain. Modernizing contracting efforts fits into this equation as well.  The digitization of contracts and contract lifecycle management (CLM) processes enables manufacturing organizations to harness the data in their contracts to deliver actionable business insights. As the dynamics of the supply chain keep changing and diversifying, businesses need this contract data and the insights it provides more than ever; it’s a critical element to enabling the flexibility to renegotiate contracts and payment terms and deliver visibility into any unexpected renewals and expirations or hidden clauses that leave them open to liabilities.

Manufacturing organizations also need insights into the performance of their contracts and overall relationships with suppliers, partners, customers and more. Data and digital transformation hold the key to all of it.

What is CLM?

Contracts are at the heart of every business, but poor contract management continues to cost companies 9% of their bottom line. The risks of ineffective contract lifecycle management include overlooked penalties, missed obligations, lost revenue, lost savings, lost contracts, unexpected renewals and expirations, hidden clauses that leave companies exposed to risk and potential overall brand damage.

For manufacturers, traditional approaches to managing contracts such as spreadsheets, shared drives, and email can be time-consuming, insecure, and lack visibility when it comes to supplier, vendor and distributor agreements as well as customer, subcontractor and linked contracts.

Effective CLM enables manufacturing organizations to gain economies of scale throughout the contract-management process. It keeps manufacturing firms at the top of the supply chain by providing the ability to track detailed product, payment, delivery and rebate information, as well as operationally reducing the time required to manage contracts. It also gives them better visibility on where agreements are in their process.

A modern approach to CLM has numerous benefits for manufacturers on its own, but it can also play a foundational role in any digital-transformation strategy. Modernizing and digitizing contract management is called digital contract transformation (DCX). With DCX, businesses can harness the wealth of data in their contracts to benchmark and track the KPIs critical to optimizing business process management and uncover contract risk and opportunity.

CLM & DCX in action

Many manufacturers are leaving money on the table by not leveraging existing data in their contracts. Let’s take a look at how contract-management software can help manufacturers optimize their agreements and process, as well as tackle one of manufacturing’s biggest challenges: scope creep. 

Whether it’s setting expectations for change requests and orders, better managing SOWs, stipulating what is a new project request, controlling budget discrepancies, or optimizing vendor management, contract management can play a critical role in providing valuable insights into contract scope. With the right analytics and insights, manufacturing organizations can establish key performance indicators (KPIs) that enable them to optimize legal agreements with their supply chains.  These KPIs don’t have to just be about cutting costs; they can also uncover hidden opportunities. For example, if an organization is tracking time to contract execution, they can identify where the bottlenecks in the process are and use it to revise delivery schedules or payments with customers or suppliers. Or if they find that certain vendors are continuously missing dates, they can set up alerts specifically tailored to that contract and vendor. Being able to identify potential outliers gives manufacturers more control over risk, and helps demonstrate compliance to important contractual obligations like manufacturing processes and quality-assurance requirements.

Takeaway

Effective contract management is critical to any manufacturing company hoping to compete in a rapidly rebounding economy. Given the changing dynamics of today’s supply chain, digitally transforming contract management is an instrumental factor in any manufacturing company’s ability to accelerate business-process innovation. It’s also a foundational element to any manufacturing organization’s broader digital-transformation strategy, since contracts are the backbone of a business and define its relationships with suppliers, contractors, customers, partners and more.