Internal Controls audits and Contract Management

Infraco, the South African government-owned Broadband and long distance telecommunications provider, has been cited in a recent Deloitte audit report for a failure in internal control processes in the company’s procurement and contract management environments.

“Although there are set policies, procedures, guidelines and processes to effectively effect the contract management process, we noted in many instances that these are not complied with, unintentionally or otherwise”, stated the Deloitte report.

An increasing number of companies all over the world are failing internal controls assessments conducted by independent auditors as auditors become increasingly concerned over the lack of visibility and control that many companies have over existing contracted commitments and overall contract management procedures.

The majority of companies put most of their effort in to the negotiation of contract terms and conditions, but do not dedicate the same level of attention and oversight post contract award.   This is largely because legal and business executives still do not consider contracts to be mission critical or strategic to their businesses.  For many, a contract is viewed as an insurance policy for when things go wrong.  Clearly auditors and industry observers, like the IACCM, see this as an outdated view and one that will only lead to increased scrutiny by auditors and regulators.

Contracts are strategic documents that outline how two parties are to collaborate with each other and the terms and conditions that govern that collaborative relationship.  For those companies that are able to manage and control their contracting processes efficiently, greater competitive advantage can be achieved through cost savings in the pre-award contracting process and better exploitation of contract terms, conditions and obligations in the post award process.

Dolphin Software would argue that the most effective way to bring about total control of the contract management process and ensure that contract obligations are properly complied with is to follow clearly defined contract management procedures, to appoint a senior executive to oversee contract management from a strategic position and to automate inefficient manual processes and control contract milestones and commitments more effectively with technology.

CFOs will rapidly understand the strategic importance of effecive contract management if their auditors refuse to sign off their accounts.

**24 February 2011 – update**

Broadband Infraco CEO and Non-Executive Director resign

Dave Smith, CEO of Broadband Infraco, the South African state owned entity tasked with bringing down the cost of broadband, and Non-Executive Director Tumi Magasa have resigned with immediate effect as a result of their recent contract management woes.

In October last year audit firm Deloitte was commissioned to conduct an urgent internal audit “to review the controls in relation to the contract management function, evaluate the adequacy and effectiveness of key operational and financial controls, and test compliance with the applicable legislation, policies and procedures”.

Can legal do a better job at supporting sales contract management?

The International Association of Contract and Commercial Managers (IACCM) are currently polling legal and contracting professionals to record their thoughts and opinions on how contract management is handled in the companies that they work for.  One of the early conclusions of the survey (which can be accessed here:  https://www.surveymonkey.com/s/StateofSalesContractManagement), is that many sales and commercially focused staff still view Legal as being too risk averse and a cause of inertia in the commercial or sales process.

Perhaps, Legal would argue, that if they are not going to be risk averse and cautious, who else in the organization is going to be?  On the other hand, with quarterly sales targets to meet, it is faster (but thorough) contracting that is required to facilitate risk managed, but commercially optimized deals.

Contract Management software solutions, like Dolphin Contract Manager do have a key role to play here.  The contracting process for many companies can be manual and inefficient.  Technology based solutions that support the contracting process can reduce contract cycle times and allow key stakeholders, like Legal, to add value in the right places and at the right time, instead of having to become involved in all transactions that tie up limited legal resources.

Self-service contract authoring, where non-legal users, like sales teams, are able to create tailored contracts and agreements by completing intelligent questionnaires is a major development in corporate contract management systems.  Previously technology that was used by law firms to automate the creation of standardized contracts, is now available to free up legal resources so that they can focus on the exceptions and non-standard contracts.

Legal clause libraries that allow legal language to be formatted in to reusable objects and then used to speed up new contract drafting or to be inserted in third-party contracts during contract negotiations, also play a significant part in empowering key business stakeholders in the contracting process, while legal maintain an oversight role.

Providing a central electronic repository for contract documents with version control and security profiling would seem obvious, but it is surprising to see how many companies exercise little or no control over where contract documents are stored.  Without strict control mechanisms in place, an organization will soon lose control over contracts and commitments contained within them.

Post-award contract milestone and obligations management is typically lax in many organizations, and it has been suggested that perhaps legal advisors take an overly conservative and risk averse stance when the focus of the contract is on its worth as an insurance document in preparation for when there are breeches, rather than as an outline document detailing the commercial relationship between the two parties.   After all, over 60% of commercial litigation matters now relate to contract disputes.

If legal resources can be freed up to focus on non-standard and exceptions and if there is an efficient and effective way to proactively manage contracted milestones and obligations, then perhaps we will be able to see the legal team being able to spend more time overseeing the contracting process and adding value where it is most needed.

Dolphin Software has recently published a new white paper entitled Why contract management should be a strategic imperative for your business, which can be downloaded here: http://www.dolphin-software.com/lp_cm_whitepaper.htm

Post-award contract management becoming more adversarial

In a recent blog post by Tim Cummins of the IACCM, he observes that members of the international body of Contract and Commercial Managers that the IACCM represents, have noted that contract negotiations are becoming more adversarial and relationships between customer and supplier, increasingly one-sided.

This is despite efforts in recent years by the IACCM and others to promote win-win based collaborative commercial relationships.  It would seem that when economic times get tough, buyers of goods and services will revert back to old practices of pushing for the lowest cost for the highest quality.  Contracts that were negotiated before the recession, with long term goals in mind, are now being amended and changed to incorporate changes in payment terms, early terminatation clauses and other buyer-centric conditions.

Recent research by US law firm Fulbright & Jarowski would appear to back this observation up, as new research published by the firm, now indicates that over 60% of corporate litigtation is related to contract disputes.

Technology cannot change human behaviour, but contract management software solutions can have an important part to play in the development of long term win-win relationships between customers and vendors.  Contract Management systems provide key business stakeholders on both sides of the commercial relationship with the right data and information to make sure that contracted commitments and obligations are adhered to; and if they are not, how to go manage amendments to contracted terms in the least disruptive way.

Visit www.dolphin-software.com to read more about how best-in-class contract management software can improve the management and productivity of relationships with your key customers and suppliers.

Download a free whitepaper on why Contract Management should be a strategic imperative for your business here: http://dolphin-software.com/lp_cm_whitepaper.htm

Contract Management becomes top priority for the White House

Daniel Gordon, procurement policy administrator at the Office of Management and Budget

Dan Gordon, administrator of the Office of Federal Procurement Policy, has announced a range of initiatives to improve contract management practices between suppliers to the US Government and the way that Government Agencies administer and manage contract performance and obligations.

“Contract Management is front and center in our focus”, Gordon declared at a recent meeting on procurement reform.  Gordon and the Obama administration intend to root out negligent behavior in government acquisition by having agencies better manage the contracts they award.

“A company will no longer get a contract and then never again hear from the agency about the work”, Gordon said.  “Further the government won’t turn a blind eye toward schemes or well-known shady business partnerships”.

There are many examples of poor contract management practices in Government and organizations like the Project on Government Oversight (www.pogo.org) have made a significant impact in raising awareness of the need to not just negotiate contracts with third party suppliers, but also to track performance and monitor compliance to contracted obligations once the contract has been signed.

As contracting becomes more complex and more litigious (a recent study by Fulbright and Jaworski showed that the majority of corporate litigation matters now arise from contract-related disputes), it is crucial to keep track of what has been committed to in a contract.

The old world of throwing more resources at the problem of  contract oversight will not work anymore.  Qualified contract management resources are hard to find and manual tracking of contract milestones and obligations was too error-prone anyway.  What is required is a balance of technology solutions that support the contracting process and human oversight to enforce contracted terms and conditions.

Choosing the right technology solution is critical. Many Finance or ERP based contract database solutions fail to realise that government contracting demands automation and control at every stage of the contracting process from the creation of the contract, through to the tracking of obligations and the tracking of vendor performance. 

Some contract management software solutions, like Dolphin Contract Manager, automatically integrate with the Federal Acquisition Regulations (FAR/DFAR) list and allow government procurement managers to efficiently create contracts and ensure that commitments and obligations are effectively managed once the contract has been executed.

We believe that true transparency in government contracting can only be really achieved when you have total control over your contracts and obligations.  It is time for government agencies to embrace technology solutions to help them to achieve this.

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UK coalition government looks to improve contract oversight in public sector

One of the first actions of the new coalition government in the UK led by David Cameron in May 2010, was to enact new legislation to compel central and local government organisations to disclose details of all expenditure and contracts worth in excess of GBP 500 (USD 800).

In an environment where contract commitment management has been lax and almost non-existant (the National Audit office claimed that the central government wasted GBP 300 million each year on IT and Telecom contracts alone in 2009), this will prove to be a major challenge for local and central government organisations.

There is much fear at the local government level that this new legislation, aimed at “Labour’s secretive and wasteful contracts regime”, will add significant cost and workload at a time when budgets have are being cut as part of the Government’s austerity measures.

Proper contract oversight is always recommended, but never has there been a greater need in the Public Sector to get a handle on contracts and commitments.  A Freedom of Information search relating to contract search should take a matter of seconds to comply with, if an organisation has proper control over contracted milestones and commitments.  With more and more public services being outsourced (the BBC claims that Capita has gained outsourcing contracts worth in excess of GBP 3 billion in the public sector), it is becoming more and more difficult to adquately manage contract spend and obligations.

Now is the time for public sector organisations in the UK to evaluate the benefits of using technology solutions to manage and control contracts more effectively, so that adequate funds are put aside in the new financial year.  Contract Management software solutions play a key part in an organisation’s governance, audit and compliance regime.  In the public sector, there is a real need to extract more value out of contracts with external suppliers and service providers as budgets and tax revenues decline; as well as the requirement to avoid costly reputational damage when poor contract oversight is exposed through Freedom of Infromation requests or via the media.

Dolphin Contract Manager from Dolphin Software provides best-of-class contract management functionality across the entire contracting process to allow organisations to keep track of supplier performance, contract spend and control over contracted obligations much more effectively than can be achieved through manaual means or managing contracts by spreadsheet.

Download BearingPoint Consulting’s authoritative 2010 Contract Management study from www.dolphin-software.com to assess how contract management software can benefit your organisation.

Sir Philip Green highlights UK government procurement and contract management inefficiencies

Sir Philip Green, the billionaire boss of UK retail group Arcadia and Top Shop, has this week announced the results of his study in to UK government procurement.  The conclusions, he says are shocking.   His main conclusion is that the UK government is failing to take advantage of its position as a strong buyer with a top notch credit rating.

Sir Philip said that no business could survive the level of money that was wasted from the GBP 191 billion (USD 305 billion) of spending he reviewed.

The report suggests that billions could be saved by doing simple things like managing supplier contracts and spending more diligently.  “The process is shocking; there is no reporting, there is no accountability”, says Sir Philip.

So is this an issue of better contract management or an issue of management and the fostering of a culture oversight?

In reality, a successful outcome will involve a bit of both.  Contract Management software solutions, like Dolphin Contract Manager, can help to provide greater control over contracted commitments and spending by allowing business managers and procurement professionals to keep track of terms and conditions that were negotiated and agreed in the contract and then capturing performance related data (like obligations tracking, KPI management as well as invoicing and deliverables tracking) against expected behaviour.

Capturing your legacy contracts

It is the question that every Chief Financial Officer wants to know, but the issue that every General Counsel wants to avoid:  How many contracts does your organisation have and what is your total risk exposure?

This is such a hard one to answer because once signed, contract documents often end up in a variety of paper and electronic formats and in a multitude of document repositories (Windows file shares, document management systems, employee’s computers, paper filing cabinets, to mention a few) and the terms, conditions, obligations and commitments that were negotiated as part of those contrats are hidden from the Finance, Legal and Contract Management teams who need to keep track of them in order to avoid costs and maximise value from contracts.

While Contract Management software solutions have brought a great deal of automation and control to the contracting process, they often rely on contract milestone data to have been extracted at the point of contract creation or to already exist in some kind of structured format (ie a spreadsheet or database) in order to provide the alerts and actionable reports that  allow contract professionals to manage contract milestones effectively.

If legacy contract documents have been stored without this structured milestone metadata being captured, then organisations have two stark choices to make about their legacy contract archives:

• Leave them as they are
• Manually extract the milestone data (and scan paper contracts, if necessary)

The first option clearly leaves the organisation open to any potenial risk that may exist within the contract environment – a point that is increasingly being identified by financial audits as a failure of internal control mechanisms.

The second option is often seen to be complex and costly.  Scanning and manual profiling of contracts can be a time consuming and expensive option.

So what is the solution?

In September, Dolphin Software will change the way that legacy and third party contracts are managed on an enterprise scale forever.  A revolutionary artificial intelligence-based module to Dolphin Contract Manager, called Dolphin AutoCapture, will allow companies for the first time to be able to discover where contracts have been saved throughout the enterprise, auto-capture key contract milestone data and upload legacy contracts and metadata in to the Dolphin Contract Manager system – all at a fraction of the time and cost of doing this work manually.

For a preview of Dolphin AutoCapture, please contact info@dolphin-software.com

Aligning Legal with the business

Last week, Dolphin Software attended the Corporate Counsel Exchange event in Brussels, Belgium.  Despite the logistical difficulties of getting to Brussels as a result of our volcanic ash-laden skies, the event was well attended by the General Counsels of Europe’s leading companies.  We wanted to highlight a number of the key themes and issues that arose from the event.

The loudest and clearest message was that the Legal function should aim to become more aligned and integrated with key business processes.  We find this slightly ironic as an IT software vendor because we have been hearing the same message coming from industry analysts and business leaders to align company IT functions with the business for the last ten years – Some may argue whether this has been truely achieved or not.  So, now it is the turn for Legal to be in the business spotlight.

The second key theme to emerge from the Corporate Counsel Exchange event was the issue of staff morale and motivation in the legal department.  Perhaps the issues of business alignment and staff morale are inexorably linked?  It may be argued that if the corporate legal function was less reactive and took a more positive and proactive approach to embedding legal best practices in to core business processes, then the issue of business alignment and staff motivation could be improved.

The third theme to arise from the event was the adoption of legal technology solutions to improve legal operations.   Legal Spend Management and Contract Management software solutions were high up on the shopping lists of the delegates.  When you think about it, other legal-orientated technology solutions, like Matter Management, Legal Spend Management, and eDiscovery solutions may make legal operations more efficient and cost effective, but do little to align the legal function to business processes.  

Given that the contract process touches so many internal departments and stakeholders, we would argue that General Counsels should embrace the new generation of Contract Management software solutions and begin to ‘own’ the contract management process to demonstrate the proactive and positive impact that Legal can have on the business.

The IACCM and other commentators have long argued for a single ‘owner’ of the contracting process, since many organisations have not been able, until now, to identify a central influential authority figure to own this business critical process given the large numbers of other stakeholders in the process, like Procurement, Sales, HR and Finance.

How can contract management software help align Legal functions to the business?
In some regards, the contracting process has become the last key business process to be automated.  Contract management for many organisations remains manual, disjointed and inefficient.

Dolphin Software recently undertook some market research in to the way that organisations handle the contracting process today.  We found that the majority of companies followed a process similar to this:

• Business users call or email the legal department when they want a new contract to be drafted
• Internal legal staff spend 5-7 days on average extracting further information from the contract requestor and drafting the first version of the agreement using MS Word based templates or by copying terms and clauses from previously created contracts
• Draft contracts are sent via email as a rudimentary workflow system for internal review and approval.  This creates multiple copies of the contract document and elongates the contract cycle time.
•  Contracts are stored in a variety of storage locations: paper filing cabinets, user desktops, Windows file share drives, or document management systems
• Contracts are managed by spreadsheets, when they are managed.

Contract Management software solutions are able to automate and streamline much of this process by providing legal and business stakeholders with the tools to be able to create contracts in a rapid and efficient way, to speed up the contract review process through the use of workflow, to provide a central electronic repository for contract documents and a central database for contract related data and then to provide managers with real-time alerts, KPIs and management report to ensure that all terms, obligations and commitments are adhered to.

With an efficient contract management process, reinforced by the use of Contract Management software, the legal team can control, but delegate much of the work associated with contract management, but importantly, show the business how legal based solutions can have a direct and positive impact on the operations of the business.

Are you still managing your contracts by spreadsheet?

According to research conducted by Dolphin Software, over 80% of organisations manage contract milestones and critical dates by spreadsheet.

I am sure that Microsoft will be delighted to know that Microsoft Excel has become the de facto contract management tool in the market, but Dolphin Software’s research also indicates that this is not the only interesting fact about the way that the contract process is handled in many organisations and that there is much room for process improvement.

Dolphin Software’s research shows that contract managers, legal counsels and procurement professionals use Microsoft Word more often than not to draft new contracts, they use their email client as a rudimentary approval workflow tool, they save contract documents in a variety of locations (Windows file share folders, desktops, paper filing cabinets, or in content management repositories) and if they keep track of the terms and conditions that have been negotiated in their contracts, they use Microsoft Excel spreadsheets to keep a record of key contract data.

This ‘Word>email>file share>spreadsheet’ process for contract management is not always the most efficient way to manage the contracting process and could expose organisations to unnecessary delays, costs and may mean that contracts are not being managed to optimise their value.

Spreadsheets tend to be maintained by a small number of specialist contract manager users, and even when they are made available to other business users, this research shows that spreadsheets are seldom reviewed frequently by users outside of the contract management group and therefore have limited value as an enterprise contract management tool.   Another issue with spreadsheets is that they are excellent at capturing structured data, like contract milestone data (dates, locations, values, currencies, etc), but not so good at capturing unstructured data, like contract obligations or commitments –that are present in most contracts.

Dolphin Software’s research clearly shows that organisations that are looking to streamline and control their contracting processes more effectively through the use of software solutions, will look for a central electronic repository for contract documents and a central database for contract data first, before looking at more advanced features and functions.  High up on the priority list is the ability to create proactive user alerts on contract data and the ability to run management reports to analyse and manage milestones. 

Additional functionality like automated contract authoring, legal clause libraries, workflow, external collaboration, advanced reporting and integration with third party systems is seen as important, but secondary to getting the basics right.

Contract Management software solutions, like Dolphin Contract Manager,  have the propensity to significantly streamline and improve contract processes, particularly if they are managed in a manual and disjointed way today; and should be seen as a critical tool in a contract manager’s quest to extract the greatest possible value out of contracts.

“Only 50% of contracts are counter-signed” …

This staggering claim was made by the General Counsel of a global Marketing Services agency that Dolphin Software met earlier this week and highlights the very real issue facing legal teams and contract managers around the world.

Perhaps this is a statistic that not many General Counsels will admit to, but it is a well known fact that, despite all of the time and effort that goes in to the drafting and internal approval process for contracts and agreements, once a contract is sent to a third party (customer, partner, supplier, etc) you lose almost all of the control that you had. 

For many companies, contracts are drafted manually in Microsoft Word, emailed as attachments to internal colleagues for reveiw and approval and then emailed to the external party.  This is where things can often go wrong.  The process is inherently inefficient.  By emailing contracts outside of your organisation, you are effectively giving up any hope of controlling the contracting process.  You are dependent on the external party following your guidance on timelines, information security and amending drafts – not to mind the administrative burden of having to deal with mutiple versions of draft contracts been sent back to you via email.  In fact, the external contract negotiation phase in the contacting process is one of the biggest causes of delay in contract cyle times.

Lets face it, it is inconvenient to print out contracts, sign them, and scan them.  Many signed paper contracts sit on the desks of managers for days, and in some cases, weeks before they are forwarded on in an email or uploaded in to a contract repository.  This is bad news for commercial contractors who are looking to conclude business and bad news for purchasers who are looking to bring a new supplier on board.

A new generation of contract management software solutions, like Dolphin Contract Manager, aim to make this process easier for contracting parties and more efficient.  Rather than attaching draft contracts to emails for internal approval, many contract management solutions facilitate this process through a managed approval workflow process, where managers access a single copy of the contract that is stored in a central repository; and rather than emailing external parties, secure external workspaces can be created so that contract documents can be uploaded and external parties can collaborate and negotiate amendments to contracts in a secure and time-controlled environment.

Digital Signature solutions, like CoSign from Arx, can also play a big part in reducing cycle time by allowing both internal staff and external parties to review contracts electronically and digitally sign them without having to print, scan and upload.

It is no wonder then, that contracts that are sent to third parties are often not counter-signed and returned.  The current way of doing things is just too inconvenient. 

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