• United States

IT contract management

News Analysis
Aug 09, 20045 mins
Data Center

Manufacturer’s homegrown system tracks thousands of telecom and product agreements.

Sorting through dozens of binders at multiple locations to find one of Flowserve’s 1,785 IT contracts was not an optimal way to access the company’s latest desktop software, hardware, leasing and telecom agreements. But that’s the process Flowserve relied on when the manufacturer of pumps, valves and seals grew from a $900 million company to a $2.4 billion company in just three years. A simple Excel spreadsheet acted as a table of contents for more than 30 binders that held copies of the company’s contracts around the globe.

“With the expansion we often found ourselves scrambling for information whenever IT contracts were due, needed renewal, or needed to be consolidated or put in place,” says Pieter Schoehuijs, IT director for Flowserve’s Flow Solutions Division in Irving, Texas.

About 18 months ago, a Flowserve programmer created an IT contract management tool based on Lotus Notes in a single day. “We documented our basic requirements, such as fields and functionality in a two-page design,” Schoehuijs says. The fields included information such as contract value; the name of the agreement; owner; contract length and dates; and supporting documents such as a PDF file of the contract and supporting attachments such as an Excel spreadsheet or Word document.

In February 2003, IT folks input basic contract information from the old Excel spreadsheet to the Notes application, along with electronic copies of many of the contracts. The database initially included about 300 contracts from the Dallas office, but after making some tweaks to the application , the tool quickly was made available to Flowserve’s 40 IT managers.

IT employees are responsible for entering into the system the contracts they oversee. “They really embraced using this tool because it has value,” Schoehuijs says. The system now holds 1,785 contracts from 373 vendors, and 1,107 of those contracts are active.

The system immediately paid off. “In the U.S. it only took one phone call to a local phone supplier of some of our locations to get a 15% discount [after] recognizing our total size rather than doing the best we can per location,” he says. Flowserve had five separate contracts with the carrier, which Schoehuijs prefers not to name.

Having contract data at their fingertips gives Flowserve’s IT managers leverage when negotiating new contracts. For example, if a contract owner sits down with IBM to renew a disaster-recovery contract, that owner wants to be aware of all the 55 contracts Flowserve has with IBM.

And because Flowserve is an international organization, being able to access contract information from the company’s overseas offices is an important negotiating tool.

Month-to-month hardware lease contracts also came to light after the system was up and running. “If a three-year lease contract for hardware lapses and goes to a month-to-month contract, you pay a premium,” Schoehuijs says, noting that a month-to-month contract costs 15% to 20% more than a multi-year deal.

The system sends an e-mail notification to a contract owner 100 days before a contract’s expiration date, 35 days before and finally on the expiration day.

Flowserve’s IT group now manages its portfolio of IT contracts proactively by managing its suppliers rather than having the suppliers manage the manufacturer, Schoehuijs says. “No more automatic renewals unless we choose to do so.”

Improved risk management  is another benefit of the system, which gives Schoehuijs and his team a better handle on who is managing which contracts. Among Flowserve’s IT staff there are 87 contract owners responsible for following up with vendors.

“The value of the application is obvious for us. We know we are quicker in recognizing end-of-contract situations, and we’re doing a better job of leveraging contract negotiations,” Schoehuijs says.

Market contraction

Contract management can be a stand-alone function or it can be integrated with ERP or CRM  applications. In Flowserve’s case, it is a stand-alone application, but Schoehuijs says he can see a time when it is integrated with other applications to further extend benefits.

While Flowserve built its own tool, off-the-shelf contract management applications provide the same function for all types of contracts in a company, not just IT. Vendors include a mix of well-known companies such as Ariba, Oracle and SAP, and lesser-known firms such as Deltek, I-many and Neoforma. On average, a midsize contract management installation and service package could cost between $40,000 and $80,000, according to IDC.

Last year corporate users spent about $496 million on contract management applications, says Scott Tiaztun, a program manager at IDC. The research firm forecasts spending on contract management applications to jump to $720 million by 2007.

Although growing in popularity, the use of contract management applications is far from commonplace. In a recent IDC survey of 500 IT executives, 21.1% already implemented contract management and 11% planned to do so this year. But 28.4% have no plans to implement contract management software, and another 23% aren’t sure. For some users, the benefits are just not compelling enough to push it onto their IT budget in the near future.

As Flowserve has experienced, however, IT doesn’t have to spend much to see benefits. Flowserve used its existing Lotus Notes platform and Dominos server. And because the database is not large, Schoehuijs didn’t have to deploy a new server. “A negligible investment will go a long way and pay off immediately,” he says.