Spreadsheet are used by many organizations to manage their sourcing contracts and supplier relationships. They are often seen as a quick solution to manage the information complexity involved with these engagements. Their use however is not without risk and can significantly undermine the effectiveness and efficiency of the way the relationship is managed.
Introduction
One of the biggest challenges of contract management is finding a solution for dealing with the complexity of sourced services contracts. Though cost-effective software solutions exist that help organizations seamlessly manage their contracts and supplier relationships, it’s also easy to understand why manual tools such as spreadsheets are so popular.
A spreadsheet is a powerful tool that in many cases is a viable alternative to lengthy software development cycles for users who require quick results. As a result, spreadsheets are everywhere. They enable us to quickly and flexibly store data and perform analysis that otherwise would be difficult or time-consuming. As a result, we tend to place undue trust in the capabilities and effectiveness of spreadsheets. But this popularity doesn’t always go hand-in-hand with effectiveness.
Though many say they use spreadsheets to manage their sourcing engagements, in most cases it does not deliver the benefits they need. A recent study by the IACCM (International Association for Commercial & Contract Management) found that 85% of companies is not happy with the tools – including spreadsheets – they use for contract management.
Here are 4 reasons why spreadsheet won’t cut it when it comes to managing contracts and supplier relationships.
Reason #1: It’s hard to keep track of data with a spreadsheet
With so much information to stay on top during the life cycle of a contract, it’s no surprise that some companies simply can’t keep track of them all, let alone know what they can expect from their service provider. Many organizations don’t actively manage their sourcing contracts and a study found that only 15 percent of the people that work with the contract have actually read it. While one of the key objectives inherent in your contract management strategy might be as simple as keeping contracts organized and keep track of the critical obligations, spreadsheets are unlikely to help you meet this goal.
This is because spreadsheets are typically difficult to centralize – they may live on different computers, be overwritten and saved as duplicate files, living in numerous different versions. This disorganization can also make the data within spreadsheets unreliable, as the user may have no easy way to check that they are working off the most recent or accurate file. Also spreadsheets don’t have alert mechanisms to inform people of critical service or contract events and different formatting or types of information tracked from spreadsheet to spreadsheet can further introduce confusion and complication to contract management processes. This is illustrated by the situation that most contract managers recognize; being in a meeting with your service provider and have conflicting data on the table.
Additionally, spreadsheets do not provide context with most data being kept in isolated files. One spreadsheets holds critical contract dates, the other performance, financial or risk data, while supplier meeting data may be somewhere else all together. This may pose a whole new set of challenges including poor decision taking and unintended consequences.
Reason #2: Spreadsheets are prone to error
The more manual processes you rely on to manage the contract lifecycle, the more opportunities that exist for error. While versioning issues, as mentioned above, can be one problem that affects the accuracy and integrity of the information in your contract-tracking spreadsheets, there are countless other ways in which spreadsheets are vulnerable. The problem is so bad that one study found that nearly 90 percent of spreadsheets contain errors; large spreadsheets may contain “dozens of undetected errors”, experts say.
Some frequently quoted examples are:
• “A cut-and-paste error cost TransAlte $24 million when it underbid an electricity-supply contract” (Source: The Register)
• “Falsely-linked spreadsheets permitted fraud totaling $700 million at Allied Irish Bank/Allfirst” (Source: EuSpRIG)
• “SEC 10-K filing reported a material weakness in its internal controls surrounding the preparation and review of spreadsheets that include new or changed formulas” (Source: Compliance week)
As spreadsheet users have become more proficient, their spreadsheets have become more complex. Spreadsheets however were never designed to be enterprise-level applications or support cross company communications.
Reason #3: Using spreadsheets can be a security risk
Whether accidental or malicious, data breaches – especially with the new European data protection regulations in place –, can be very costly for businesses. As such, security is likely top of mind for your organization, especially for documents as sensitive and important as contracts.
Processes for sharing spreadsheets between users, across departments or with service providers are often at odds with best practices for data security due to access requirements. If spreadsheets related to contract tracking are locked up tight on a restricted drive or some other secure location, those who need to access them may not easily be able to do so. But while storing such spreadsheets on shared drives or using free storage and collaboration tools may enable easier access for those who need it, this may also allow unauthorized individuals to also gain entry.
Reason #4: Spreadsheets don’t seamlessly integrate with the contract management lifecycle
Taking a proactive approach to monitoring contract performance helps organizations reap greater benefits at both the micro and macro levels. This can help organizations to better optimize contract terms at renewal time and can improve the effectiveness of the overall contract portfolio. But in order for organizations to extract actionable insights from their contracts, there must be a plan in place to monitor and review contract performance.
Once a contract is signed, it’s all too easy for this important next step to fall by the wayside – especially if your organization uses spreadsheets for tracking. The issue isn’t so much a fault with spreadsheets, rather the lack of a full suite of processes and features for managing the full contract lifecycle. In order to stay on top of all aspects and tasks related to contract performance management, you would need an additional system for keeping track of and taking action at each designated milestone; while not impossible, this adds more work and complexity to your day-to-day work.
Dedicated contract management software like TRAC, meanwhile, underpins all critical contract and relationship management processes, and contains built-in notification and reporting features, so there’s one less vital thing to worry about.