Contract Management Helps Ensure That Negotiated Savings Reach Bottom Line

With procurement and sourcing becoming major cost-saving targets at many companies, the number and complexity of supply and service contracts is proliferating. A typical Fortune 1000 organization has between 20,000 and 40,000 contracts and spends as much as 1.25 percent of revenue to manage them, according to investment banking firm Goldman Sachs.

Despite this expenditure, analysts say, enforcement of contract terms often is lacking and many cost benefits negotiated in contracts are never realized, leaving millions of dollars in potential savings on the table. A recent survey by the International Association of Contracting and Commercial Managers (IACCM) shows that companies are well aware of this failure. Sixty-three percent of the North American corporations queried rated their contract management processes as "poor."

Tim Cummins, IACCM executive director, attributes this to a "lack of ownership." Few corporations, he says, "have yet realized that contracting is a process, not a set of documents."

That mind-set is changing, according to Ashif Mawji, CEO of Upside Software, Edmonton, Alberta, which sponsored the IACCM survey. Companies increasingly are using contract management software, such as that provided by Upside, to manage the entire life cycle of contracts, he says. "Our software manages the complete process, from the point where the user in the field requests goods or services, through tender or auction, then the negotiation cycle and, finally, ongoing management and compliance." Several transportation and logistics companies are among Upside's customers, including a major U.S. railroad and a global 3PL.

Covigna, Mountain View, Calif., is another player in the emerging Contract Lifecycle Management (CLM) space. CTO Sanjay Rajagopalan acknowledges that CLM is in its infancy. "In most cases today," he says, "contract management is piggybacking on some other initiative." For example, a company may decide to consolidate its spend across all business units, he explains, so that it can purchase one big company instead of several small companies. "As part of this process the company may realize that one critical thing it needs to do is get a handle on its contracts." That means better systems to manage visibility and contract relationships, and standardization of contract negotiation and approval processes. "That is what leads to CLM-it is a natural offshoot of other organizational initiatives around procurement transformation," he says.

Rajagopalan believes that "pretty soon" systems for managing contract life cycles "will be identified as a critical cornerstone to achieving larger corporate goals." He is not alone in his optimism. Goldman Sachs estimates that the market for contract management software will hit $3.1bn by 2005, while Gartner Group predicts that enterprises will be spending more than $20bn a year on contract management software and services by the end of 2007.

In many ways, this emphasis on contract management is old news to transportation and logistics managers. The idea of contract life cycles may be fresh, but issues of procurement, negotiation and compliance are well understood in this sector, and supporting technology for creating and managing contracts is relatively advanced - though still underused. Solutions are largely specialized by mode, but many software developers believe the trend is toward a single system capable of managing all logistics contracts.

	"Visibility to current rates, and also terms and conditions, is essential." - Cindy Yamamoto of Descartes

"I will be surprised if in 12 to 18 months we are still talking separately about modal solutions," says John Murphy, director of product marketing at G-Log, Shelton, Conn. Murphy says G-Log's application is designed for global companies that have contracts with land, sea and air carriers and that the process of managing contracts among these "is not that different." He adds that it is important to be able to consider all modes when planning so that the appropriate carrier, regardless of mode, can be used in each situation.

Matt Menner, director of transportation sales at Manhattan Associates, Atlanta, agrees. The solution Manhattan acquired with its 2002 acquisition of Logistics.com "allows you to manage all flavors of truck as well as ocean and air and rail," he says. "We are already hearing the call for one integrated solution from companies that want to manage their transportation globally. So our objective and strategy moving forward is to have a tool that allows shippers to do that, not only in North America but also in Europe and Asia."

These specialists do not believe, however, that transportation and logistics contracts lend themselves to more general contract management solutions. "There are a lot of nuances in logistics that you don't have with other types of contracts," Murphy says. "Using a generic technology sounds good until you start getting into details of linking lanes together, creating tours, using Inco Terms associated with international movements, making tradeoffs between outsourcing to a 3PL or contracting directly with a carrier, and so on. It's been tried before, but the tools used to contract for products simply don't lend themselves well to logistics."

Still, logistics and transportation may be caught up in this movement. "The focus and trend, without question, is toward moving sourcing and contract management to the corporate level," say Paul Svindland, director of transportation and logistics at ICG Commerce, a procurement services provider based in Jenkintown, Pa. "What we are seeing is that companies will bring logistics people into their global sourcing organization to focus on those issues."

Contract Creation
Wherever they reside in an organization, logistics contract management tools typically cover four functional areas: control over the bidding and negotiation process; visibility and access to contract information; compliance management; and performance analytics.

The first step, contract creation, typically is a procurement process involving requests for bids, counter-bids and a final, negotiated agreement. While procurement technically precedes the contract, "It cannot be treated as an isolated event," says Adrian Gonzalez, director of the Logistics Executive Council at ARC Advisory Group, Dedham, Mass. "This is when companies implement the appropriate business rules, metrics and processes to ensure successful execution and maximization of benefits over a contract's life."

Greg Johnsen, vice president of products and marketing at GT Nexus, Alameda, Calif., envisions contracts at the center of a circle surrounded by various supporting processes, starting with procurement. "Procurement is the big first step," he says. "It allows customers to get specific pricing and services in place with each underlying carrier and to store those in a standardized fashion." To get the best end result, the procurement process should be optimized, he says, "so that users achieve the most beneficial price and service balance."

The GT Nexus platform primarily is used by international shippers and carriers, though it, too, is suitable for all modes, says Johnsen.

Keeping track of the negotiation workflow itself is important, particularly in an global enterprise that can have several groups involved in the process, says Cindy Yamamoto, vice president of ocean products and services at Descartes, Waterloo, Ont. A centralized, global bidding process may need to be broken down into multiple pieces to accommodate the needs of business groups in different geographic regions, she explains. "Just keeping track of the whole work flow - what has been quoted, what has been countered, how many requests have been received back - is very difficult without an application that can track it for you," she says. "Before systems like Descartes, this all had to be done manually, but with our application, you can easily see responses and set up alerts and reminders."

The trend in procuring truck transportation is to centralize procurement so that both carriers and shippers can leverage their entire network, a move that also requires good systems support. "Continuous tours are a big issue now and that means you have to be able to look at your network holistically," says Peter Stiles, vice president of LeanLogistics, Holland, Mich. "If facilities are allowed to manage transportation independently they never see the whole picture and miss opportunities for better asset utilization, better coverage and lower rates."

The end deliverable of the procurement process is a contract, which ultimately is loaded into a centralized database. Contract management solutions often are provided on a subscription basis to make it easier to keep the database current with all contract changes and amendments.

A Global View
Visibility and easy access to the contract database by all users is vital. "Think about a global corporation that is based in the U.S. but has responsibility for procurement for transportation around the world," says Descartes' Yamamoto. "Locations in Asia and South America have to execute against what was approved by corporate, so visibility to current rates, and also terms and conditions, is essential."

Where ocean rates are concerned, the many amendments that are filed each year, plus a wide array of add-on rates that are included only by reference to a separate tariff, are particularly troublesome. This issue was cited by several shippers, including Descartes' customer Oxford Industries, a leading producer and marketer of branded and private label apparel. Oxford moves freight between more than 100 port pairs, says Mark Kirby, director of global logistics. When coupled with its use of three different container sizes, the company has at least 300 base rates. "In addition, there are a large number of additional surcharges, and within the surcharges are some that are time-phased, such as seasonal peak charges, and some that are variable, such as fuel bunker charges," he explains. "Then on top of that you have periodic things that pop up like emergency security fees. The resulting rate database is so large it's difficult to get it into a useable format."

Oxford wanted its employees to be able to easily see all-in rates so they could give accurate quotes to their customers. In addition, easy access to rate information would enable better auditing of freight bills. "Prior to signing up with Descartes we spent hours and hours creating a giant Excel spreadsheet," Kirby says. "But finding the appropriate rate was still a very labor intensive process. And we also had the issue of updating it every time there was a change."

Maintenance of numerous contracts also was a big issue for Rogers & Brown Customs Brokers, says Tyler Smith, transportation manager. Rogers & Brown uses Rate Explorer software from Management Dynamics, East Rutherford, N.J. Even after moving from paper to an electronic spreadsheet, "being able to navigate the database to obtain accurate rates became almost impossible," says Tyler. "We couldn't turn rates quickly enough to meet our sales staff needs. Since timeliness is oftentimes the deciding factor as to whether or not we get the business, we were having major issues." Rate Explorer puts all contract information and referenced information in a central database and updates it whenever changes occur, making it easy to calculate all-in rates and compare carrier offerings, he says.

"You give us your contracts and we publish them into the system," says Nathan Pieri, vice president of marketing at Management Dynamics. "We also have a very sophisticated rules engine that allows us to express every contract term as a rule. Everything is described electronically to produce what we call 'calculable rates.'" When contracts are updated the old rates are retained so that users can easily check rates that were in effect on any given date for auditing purposes, Pieri notes.

Being able to easily calculate all-in rates also was a key issue for Honeywell, another Rate Explorer user. "We were having people commit business by just looking at the base rate, without having full visibility to what their total shipping costs would be, so orders that we thought were going to be profitable ended up in the red," says ocean specialist Felicia Puma Dinkel. "With Rate Explorer, users don't have to be experts. The software gets them to the bottom line and shows them what the full cost will be."

Honeywell's customer service reps have access to its ocean contracts via Rate Explorer, as well as its 3PL providers and freight audit company. It recently rolled out the software to Europe. "When our European units are shipping into the U.S., they have to operate under our contracts, so they are thrilled to get this visibility," Dinkel says.

Compliance Monitoring
Visibility to contracted rates and terms helps reduce "contract leakage," but companies still need to monitor compliance by integrating contract management with shipment execution. "You can have contracts that will save you a certain percentage, but at the end of the day, that is just a plan," says Gonzalez. "Realizing those savings is dependent on remote locations or suppliers using preferred carriers and on carriers accepting the freight. So there is a lot of emphasis now on making sure companies have execution capabilities to realize savings that have been planned for in the procurement process."

From a cost-saving perspective, tracking compliance is a key part of execution, says Gregg Lanyard, senior solutions manager at Manugistics, Rockville, Md. "Let's say you want to be sure that J.B. Hunt is given 50 percent of loads on a particular lane, as agreed to in your contract," he says. "There are all sorts of detail that go into building a daily plan that abides by that rule, and is also operationally feasible." Moreover, it has to operate in a real-time environment. "You don't want to get to the end of the year and then find out that you only awarded them 40 percent, because there could be penalties and future relationship problems," he says.

"There are a lot of nuances in logistics that you don't have in other contracts ... the tools simply don't lend themselves to logistics." - John Murphy of G-Log

Relationship management is another important benefit of compliance monitoring, says Ian Sehgal, director of marketing and strategic alliances at CargoSmart, a provider of solutions for ocean contract management based in San Jose, Calif. "If you make sure that everyone is in compliance along the way, there will be little dispute resolution."

Murphy of G-Log also underlined this point, noting that compliance monitoring is aided by having a single platform for planning and execution. "The reality is that contracts evolve continuously, but if you don't have a tool to automatically modify contracts and get those changes down to the execution level, service providers get frustrated because you are not adhering to what was negotiated," he says.

Monitoring compliance also allows companies to understand why "leakage" occurs, says Manhattan's Menner. For example, the reason could be that the carrier is refusing a high percentage of loads. "If you know that, then you have the ability to go back weekly, monthly or quarterly to correct it. That is one of the primary value drivers for this technology."

As more carriers move to dynamic, online routing guides, compliance monitoring can be used to make real-time adjustments, giving more business to carriers that perform well and less to those that fall short.

"Within our GC3 application, you can automate this process," says Murphy. "For example, if a carrier falls below an 80 percent accept ratio on a particular lane, his guaranteed percentage of freight may automatically be cut by 25 percent."

Similarly, carriers may be able to identify and refuse freight from shipper locations that, for example, repeatedly delay drivers or refuse to schedule appointment times.

Compliance information becomes the basis for performance analytics that feed the next round of negotiations, creating a process of continuous improvement.

"When all is said and done, the last piece of the wheel is analytics or business intelligence - using advanced reporting and analytical capabilities to report on the gap between what should have happened, according to the contract, and what actually happened," says G-Log's Murphy.

Historical data becomes the basis for the next round of procurement. Carriers that did a good job tend to get more business, while those that under-performed get less. Internally, companies can determine where they are experiencing problems and take necessary steps to fix the problem.

Manugistics' solution feeds this performance data directly into its RFQ Optimizer. "Clients use this tool to help them determine a new optimal allocation of carriers as well as what is truly the best network," Lanyard says.

Applications also should be able to provide important executive reporting, says Covigna's Rajagopalan. "You need to be able to roll up contract data and provide answers to questions like: 'How many contracts will expire within a certain time frame? What is my total spend by category or by lane?' That's the kind of data that helps corporations realize true value from this technology."