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Is a contract management system the best choice for managing rebate agreements?

Posted by Andrew Butt on June 18, 2018 10:27:34

Contracts are core to any business activities, regardless of size, industry, and region. They set out the prices, service levels, terms and supplier relationship and ensure that your company is regularly supplied with their direct and indirect supplies.

A study by the Institute for Supply Management uncovered that between 60-80% of all business-to-business transactions are governed by some form of written agreement, with a typical Fortune 1000 company maintaining 20,000 to 40,000 active contracts at any given time. Plus according to Harvard Business Review companies lose between five to forty percent of value on a deal due to inefficient contract processes. 

What is contract management?

Managing contracts is the entire process from contract creation to negotiation of the terms in the contract to recording all adjustments made from the original contract. For many organizations, managing contracts can be a very tricky and daunting task. If a contract is managed well this will result in reduced contract risk and enhanced commercial value, but poor contract management exposes the organization to high costs, lost revenues and liability for contractual and regulatory non-compliance.

As such, it would seem that investing in a system to manage these contracts that improves efficiency in creating, executing, and managing them while simultaneously reducing overall risks to the company would not be a difficult choice to make. But as we have seen in many organizations they still rely on manual processes such as filing them away in cabinets or spreadsheets for managing contracts.

But what is the alternative to manually managing contracts? We discuss in more detail below.

What is a contract management system?

A contract management system stores and manages contracts to streamline administrative tasks and reduce overhead by providing a single, unified view of each contract’s processes. The system can follow the contract as it goes through the review and approval process, providing documentation for digital signatures and execution of the contract.

Some benefits of implementing a contract management system means if contracts are produced faster, you’re going to be able to collect on them sooner. If they contracts are accurate, you’re going to have far fewer disputes. 

Rebates and contract management systems

If you’re responsible for procurement in a buying group, wholesale distributor, multi-site or large business (such as building materials, HVAC, plumbing and electrical supplies businesses or buying groups of all types) then it’s likely you have a need for a contract management system that can accurately deal with supplier rebates.

Rebates were originally designed to aid both the manufacturer and the distributor to grow product sales without resorting to a price war.  By maintaining a set price that is reduced by rebate income depending on actual sales, manufacturers can control margins and reward those who promote their products the most.

At any point in time, the net margin on a product is dependent on the total volume of sales to date and the detail behind the rebate agreement that is in place. Actually knowing the volume of sales and the rebate level that has been reached — particularly in a multi-site operation — can be difficult. As a result, estimates on available margin are commonplace and pricing errors are therefore inevitable.

Whilst most contract management systems and ERP systems can handle some aspects of rebate accounting, even big businesses come unstuck when the process of accounting for rebates is difficult — as seen in Tesco’s accounting scandal.  Cases like this, plus IFRS 15, is causing auditors to look at rebate management processes very carefully.

This need for an auditable process and the desire to use very creative rebates as a vehicle for growth has resulted in a new paradigm of business system — the rebate management system.

What system is best for managing contracts?

Simplifying the process of rebate accounting means having the ability to accurately reflect all the nuances of different types of supplier agreements (retrospective discounts, rebates for reaching volume targets, value-based rebates, product-specific rebates, distribution rebates, and so on) and being able to plot purchases against those contracts, in order to claim rebates and discounts at the appropriate time.

The decision to choose a contract management system is often driven by a need to model complex purchasing agreements that cannot be met using spreadsheets or existing ERP systems.

Do you operate in an environment where complex discounts and rebates are prevalent?  If the answer is “yes” then you may actually need a Rebate Management System.

 

Why a rebate management system will help you manage your contracts

  • Enable you to model complex contracts with a range of rebates and discounts
  • Report against contracts and manage rebate claims
  • Allow you to collate and project purchasing requirements
  • Help you to clearly identify and electronically approve the best deals
  • Provide visibility of targets about to be reached / rebates due / imminent discount tiers
  • Collate information and provide alerts

What can our rebate management system DealTrack offer your business?

All of the above can have a significant financial benefit for users after implementation but specifically DealTrack can benefit you by:

  • Controlling rebate accounting and never missing another claim
  • Providing clear visibility about net margins and true product costs for better sales deals
  • Providing full visibility for purchasing so they can create smarter deals in the future

So, if you think that instead of looking for a contract management system, you should actually be looking for a rebate management system. Hear from an existing user of the DealTrack software and hear about the benefits and ROI they have achieved by taking a look at this recorded webinar.

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Topics: Rebate Management, Contract Management