There are measurable direct and indirect benefits associated with the application of contract analytics to financial processes such as procure to pay and order to cash. There are specific areas where finance organizations stand to achieve cost efficiencies and realize incremental profits.
Invariably, contracts include price, volume and discount terms. By gaining better visibility to these contractual terms finance departments may, for example:
- Match contract pricing and performance obligation clauses against purchase orders and invoices to ensure that suppliers are meeting their performance obligations;
- Extract Contract entities (e.g. volume discounts, payment, terms, expiration, delivery, price, rebates quantity and match them against ERP master file;
- Properly capture supplier contracts in ERP, CLM and Document management systems;
- Identify inaccurate supplier billing which may result in overpayment; and
- Exercise better leverage with suppliers, identify any potential gaps to extend early payment discounts, thereby improve returns on invested capital and achieve improved supplier relations.
Contract analytics enables organizations to realize as much as 30% savings in contract administration costs and 20% cost reduction associated with terms and conditions compliance analysis.
A particular challenge for finance organizations is to maximize billing opportunities associated with Service Agreements. A study by Genpact found that organizations may “experience as much as a 10 percent increase in deal-specific revenue and 15 percent higher profits through contract analytics.” The study identified several areas throughout the service agreement lifecycle where revenue optimization may be realized. For example:
- Having better visibility across the portfolio of service agreements can enable organizations to improve win rates;
- Better insight into service contract terms relating to service level commitments may prevent scope creep and increase revenue by 3 percent; and
- Proactive review of the performance of the portfolio of Service Agreements enables management to identify non-performing contracts and take steps to negotiate more favorable terms.
A separate study by Genpact found an “8-10% improvement in service revenues through strong T&Cs compliance to avoid missed billing opportunities and enhanced understanding of contract risk.” In fact, in our discussions with companies looking for better insights and returns on their contracting, we have often found simple solutions in easily-overlooked areas. Just one example would be for Purchase Order Receiver documents, also called “Databooks” within certain high-precision manufacturing industries such as pressurized boilers and nuclear containment vessels. We found from our discussions that the purchase order documents from the buyers of such equipment routinely provided for substantial bonus payments for strict compliance with the “Databook” terms. Yet, because these documents typically ended up sitting on a shelf, un-looked for and un-used, far too many suppliers either failed to comply with the terms or never bothered to request the bonus if they did comply.
So, while they may indeed be complicated analytics that can – and even should – be run on potential contract opportunities, companies need to keep in mind the smaller and simpler steps that they can take before taking the big leap into a full-scale analytics program.
In our next installment we will look into some of those steps, in specific use cases.
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