2020 Predicaments in Contract Management: Poor Adoption, CLM Market Fragmentation and Limited Imagination

(Editor’s note: Spend Matters’ analysts are taking on the new year by looking at their areas of procurement technology to see what’s broken and what can and should be fixed this year. Here, analyst Nick Heinzmann lays out problems in contract lifecycle management (CLM). In another piece also published today for our PRO subscribers, he lays out his predictions for 2020.)

Businesses may be trying to bring themselves into the 21st century on a wave of digital transformation, especially as it relates to B2B e-commerce, but this technological evolution has a major stumbling block — contracts.

Across industries and company sizes, businesses exhibit low maturity for their approach to contract management. They may have purchased a best-of-breed tool or module within an application suite like an a source-to-pay platform to digitize and automate contract lifecycle management (CLM), but their adoption and use of the digital capabilities that could unlock meaningful ROI from these investments is distressingly low.

Research from IACCM depicts a bleak state of affairs. The contract management professional body’s 2019 benchmark report found that businesses’ adoption and use of digital CLM centered on just a few capabilities: providing a repository of signed contracts, monitoring of reviews/approval status, and front-end contract request from other business units. Key capabilities needed to elevate contract management maturity — like obligation extraction, post-signature monitoring of compliance with contract terms, and contract analytics — lag considerably or remain unexplored in select industries.

Source: IACCM 2019 Benchmark Survey

This presents both a problem and a missed opportunity. It’s a problem because CLM systems are available today that can power advanced approaches to contract management, yet the majority of businesses find themselves unable to take advantage of the latest capabilities because of how they fundamentally view CLM — as a necessary evil focused on risk transfer via documents managed by the legal department. But it’s even more of a missed opportunity because contract management at its best can be a critical competency for procurement to influence everything in the businesses — a concept we capture in our framework called commercial value management (CVM).

So what’s holding businesses back from attaining contract management enlightenment? We see a few major impediments:

• “Enterprise” UX/UI and low usability. Across the source-to-pay spectrum that we evaluate in SolutionMap, we’re seeing a trend toward simpler, consumerized software that prizes ease of use and adoption over raw power. Yet while vendors in spaces such as sourcing and e-procurement are making their names on UX/UI strategies, CLM vendors, by contrast, are not known for their ease of use. To be fair, contracts present a lot of challenges that e-auctions and catalog management don’t — like exposing a business to expensive regulatory consequences if a contractual term is accepted but not monitored or complied with. There’s also the seeming intractability of “legalese” that makes up most enterprise contracts (although many sophisticated practitioners are working on drastically simplifying this commercial language). Still, there’s much more that vendors can do here to create an analog for the “Amazon-like” or “Google-like” UX narratives that other tech providers have advanced in recent years.
• Key capabilities are still the province of specialists. To maximize value from contracts, certain digital capabilities are instrumental. A key example is contract analytics. While some CLM specialists are making progress on the ability to “shred” agreements (i.e., break them down from large “dumb” documents to atomic-level data/metadata), extract key metadata/clauses and apply relative scoring for risk levels, the truly useful stuff — say, swift identification of all agreements in a contract portfolio containing LIBOR rate references (or various specific regulations in force) that may need amending — remains mostly the province of specialists. Further complicating the issue is that many contract analytics specialists target the legal tech market than the procurement tech market, so the development focus may not fit cross-industry buy-side needs very well.
• Narrow focus of CLM solutions themselves. Not all CLM providers are created equal. While some providers are merely solving tactical customer pain points of siloed functional departments, others are pushing the envelope of what digital contract management can enable for more complex supplier relationships (e.g., supporting strategic supplier relationships with literally thousands of contractual measurements per year), cloud-based contracts (with hooks into IT infrastructure and license management), traditional spend categories (e.g., energy, telecom, raw materials, etc.), and “overlay” mega categories (e.g., contingent labor, leasing, logistics, etc.). For example, we would expect that a modern contracts solution would have a clause library to automate the construction of new agreements beyond simple template storage/reuse, yet there are multiple vendors out there that don’t support this capability (although many are “working on it”).

To be fair, the largest impediment to transformation is legacy mindsets, organizational silos, job protection, turf battles (e.g., the “NIMBY” problem), distrust of functional partners, and a lack of commitment (and resources) to solve hard problems such as rationalizing contract clauses to help support a migration from tribal document management templates toward more formal and industrialized “guided contracting” processes.

Of course, these problems won’t last forever, and in fact, 2020 could shape up to be a pivotal year for the contracts space — with 2021 and beyond presenting some enticing possibilities for procurement organizations too.

To see where we think the CLM space is going, check out our PRO brief on the likely scenarios, vendors and capabilities that will drive a true CVM mindset in the coming years.