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Automating contracts: Will companies sign on?

Some upstart software companies want to automate the thorny issue of managing a company's legal contracts and agreements, though industry buzz about the idea has yet to be generated.

A handful of upstart software companies are seeking to automate one of the thorniest issues for many businesses: management of legal contracts and agreements.

Though software makers long ago revolutionized how big companies handle daily tasks, such as payroll management or tracking raw materials on a production line, dealing with the fine print and legal entanglements of routine contracts still requires the human touch.

Contract-management software automatically tracks contract terms and conditions, including renewals, obligations, the profitability of a certain contract and the financial aspects of a deal. Some systems even prompt people through contract-negotiation steps and automatically issue checks to customers and suppliers when contracts are in force.

There is hardly any industry buzz surrounding contract-management software yet, but there will be, analysts say.

"There are about 150 companies that use contract (management) software and tens of thousands that are candidates," Goldman Sachs analyst Jamie Friedman said. "We're still at such an early stage of adoption."

Goldman Sachs forecasts that the market will grow from essentially nothing to more than $3.1 billion in sales by 2005. Credit Suisse First Boston predicts the market will top $3 billion and could reach as much as $5 billion in revenue within the next five years.

A line is forming
Companies are already jockeying for position. Just last week, I-many, one of the early players in the contract-management market, acquired rival Provato to expand its product line. I-many, along with rivals diCarta, MyContracts and Webango, are being joined by some of the biggest names in business software, including Oracle, SAP and i2 Technologies, as they each strive to secure a foothold in the market.

The emergence of contract-management software reflects the changing business technology landscape. The growth of outsourcing arrangements and application service providers, as well as the birth of private business marketplaces--and the complex legal arrangements they involve--mean more contracts and dates to track.

Contract-management software, in theory, can save time and money by prompting managers to cut the best deal possible and ensuring that deadlines and terms of contracts are met.

Software terms and licenses, in particular, can be difficult to track and maintain, especially since most contracts are stretched out over time with different payment periods, said Joshua Greenbaum, an industry analyst who heads Enterprise Applications Consulting.

Greenbaum said one aspect of contract-management software is the ability to help companies track and manage revenue from a software license agreement. He sees that feature as especially attractive to many companies that make and sell software because it helps ensure they receive payment consistently under the contract terms.

Old way is time consuming
Intuit, the maker of personal finance software, is placing its bet on a new contract-management software system. The company, which sells the popular Quicken line of finance software, is installing a sophisticated software system that manages and automates the complete life cycle of a contract--from outlining negotiations, terms and conditions to being able to track revenue, clauses and the like.

For a software company like Intuit, obtaining revenue from a sale that is spread over a certain time frame can be complicated to track and extremely time-consuming, according to Ken Mudge, vice president of procurement at Mountain View, Calif.-based Intuit.

"We've done it manually," Mudge said. "We used different analysts who looked at the transaction very carefully and categorized it in that way," but having an automated system in place can ensure that "if revenue should be spread over time, you do recognize it appropriately."

The new system, which is being developed by diCarta, will "allow us to do it more quickly and consistently," Mudge added.

One roadblock on the horizon for contract software sellers: a slowing market for technology spending. Contract-management systems can cost anywhere from around $50,000 to more than a $1 million.

Demand should remain
But analysts said demand for contract-management systems should remain strong, since the software can help cut costs and even prevent companies from overspending because of late fees and broken contractual terms.

For consumer goods conglomerate Procter & Gamble, tracking which contracts are more profitable is a top priority.

The company, which manufactures household name brands such as Tide detergent and Pringles potato chips, is installing I-many's software. The new software will move the company out of the dark ages of a paper-based system to a fully automated one that can even write checks to the company's distributors.

"We put in a very detailed system," said Derek Christian, account executive for P&G's commercial products group. "This will make managing contracts more efficient and allow us to grow without having to staff up."

In the near term, analysts say, the players will need to focus on spreading the word and increasing marketing efforts. For the most part, companies have dedicated few marketing dollars to help fuel the adoption of the software, but analysts expect much more noise--and bigger revenues--in the future.

"This is just the beginning," Goldman's Friedman said. "It'll be a very interesting year for these guys."