Companies lose 9% of revenue annually from poor contract management, according to the IACCM. Fifth9 and Clause have developed the Price Manager solution to address this problem.
The time to make “smart” pricing-related clauses a commercial reality has arrived. It is now a commonplace that contract management is a resource-draining responsibility for all businesses. The above figure is the leading statistic in this narrative — and rightly so. It is a staggering one that amounts to the loss of $2.5 trillion for Fortune’s 2016 Global 500 companies. Contracts are costly: there is the direct cost of managing contracts to ensure the value of a commercial agreement is realized — labor, software, systems, and other overhead (average $7000 for a basic contract; $23,000 for a mid-complexity contract (IACCM)). Then there is the cost of missed revenue or missed potential savings.
While even the most basic contract management tool can at least begin to improve the direct costs of administering contracts, the massive loss of contract value remains a significant problem that contract management does not address. This is especially the case for large and growing companies with complex and dynamic value chains across a diversity of industries such as retail, telecom, and consumer goods, as the experience of Clause and our partner, Fifth9, attests. Fifth9 has recently spoken to three multinational organizations who have all expressed that this problem has resulted in millions of dollars of value loss.
True contract automation addresses the problem of value leakage. Contract automation is possible when the natural language of contract terms finds tight linkage with the digital realm so that commercial data can flow from contracts into core business systems and vice versa. Smart legal contracts facilitate this.
Value leakage is defined as the difference between the agreed contract price and the amount invoiced to and paid by the purchasing party.
Value leakage occurs because companies are not strictly enforcing contract terms and because contract enforcement efforts are riddled with errors and oversight. This means a purchaser can miss out on the financial benefits of penalties owed by a vendor that failed to meet quality requirements. Or it could mean that a vendor was paid significantly later than the payment terms of an agreement provided for, in effect decreasing the contract price for which it bargained. Vendor and supplier managers also report having to contend with invoices that state the payment terms are earlier than the minimum allowed by master supply agreements.
Fifth9’s Price Manager solution, powered by Clause technology, solves these problems. It covers the full range of capabilities needed to run smart commercial contracts:
- Create new contracts
- Digitize contract terms
- Automatically compare contracts to invoices
- Flag and action value leakage
The offering also includes integration to existing software thus providing companies an end-to-end contract solution fully embedded in their IT infrastructure. The solution can integrate with DocuSign, PeopleSoft, SAP, and much more. The implementation approach spans the entire project journey, from analysis and design to implementation and support.
For early adopters of smart contract automation, the most compelling benefit is the ability of new technology to improve status quo workflows while enabling more efficient and more strategically sustainable commercial relationships. Relational contracts are an example of a new contracting model, as explained in this Harvard Business Review article. They incorporate shared goals and focus on building the underlying commercial relationship as compared to traditional commercial agreements that are built on — and can thus break down due to — the lack of trust. Relational contracting and other types of improved strategic relationships are enabled by contract automation.
The point is simple: because contract automation offers strict and accurate enforcement of commercial clauses and advances transparency, parties to contracts can design more mutually advantageous agreements based on confidence.
By helping ensure contracted value is realized value, Price Manager is important for all stewards of commercial relationships: contract managers, procurement, and business leaders. Price Manager is a comprehensive solution that bundles category-defining technology with best-in-class consulting and services, and so is not to be confused with conventional contract lifecycle management software.