In the fall of 2002, John L. Lewis, then director of treasury services at Cummins Inc., wanted to buy software to help the company improve data-gathering on its more than 2,000 leases for its 10-K. Eventually, over years perhaps, he expected a substantial savings from the improved data collection.
So just think how elated Lewis was to be able to report recently to the Columbus, Ind.-based engine manufacturer that, after less than a year on the job, the contract management system from Determine Software Inc. has already paid for itself.
How? By letting Cummins stay a jump ahead of its leases, the software allowed the company to take advantage of low interest rates by doing some early buy-outs of leases. Having the lease data readily available also reminded Cummins to make lease payments that it otherwise could have missed, incurring penalties, and to cancel leases before expiration to avoid being forced to buy high-priced equipment. None of this is saving a fortune, but it represents opportunities that might have been overlooked.
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Next project for the new system: reviewing auto leases, which Lewis expects will save $150,000. "The most helpful thing is having all the contracts digitized and imaged," Lewis says. "You don't have to dig through a lot of paper. You just click on it, and the contract comes up."
Like Cummins, most large companies have tens of thousands of contracts that, in many cases, are moldering away in filing cabinets. Analysts say companies generally do a poor job of tracking their contractual obligations and rights, and given this level of disorganization, implementing a contract management system can have an immediate impact on related spending and a company's risk management.
A recent study by Boston-based AMR Research found that companies embarking on well-designed implementations of contract management systems can realize a 150% to 200% return on investment. AMR puts the average cost of a system at $275,000, but notes prices "vary widely" based on "scope and services."
Although some ERP and supply chain system vendors offer basic contract management features, analysts say the best systems are those from the pure-play providers. Some focus on a company's contracts with suppliers and others specialize in its sales contracts.
The best of breed systems can store the entire texts of contracts. But Pierre Mitchell of AMR Research says companies implementing new systems generally start by picking an area, like real estate, and inputting the basic data on each contract in that area. "Most of the value is derived from the visibility of the basic information around the contract, so you can find price noncompliance, internal user noncompliance or visibility of an auto-renewing contract," Mitchell contends. "That's what the hard-dollar ROI is coming from."
Lockheed Martin Corp. took that approach when it implemented Accruent Inc.'s contract management solution. With about 600 real estate leases, Lockheed found that the system made it easier to figure out where space was available on its 200 campuses and also helped it pinpoint which property tax assessments to challenge. The company hasn't calculated its savings so far, but Jeff Troan, director of real estate, says it has projected that over the next decade, it can pare its $1.1 billion of annual facilities-related expenses by 5% to 10%, adding five to 20 cents to its earnings per share over that period.
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