As procurement organizations continue to extend their relationships with existing and new suppliers globally, there is a need to structure the contracts in a way that is mutually beneficial to both organizations. Procurement or Sales contracts between two parties can get very complex over a period of time, especially as the business and legal terms continue to change. To manage these terms in a single contract is extremely challenging and unrealistic. This usually requires creating multiple contracts with the same supplier or different supplier and then structuring them in some kind of a logical hierarchy.
The example below show how contracts can be structured in a multi-level hierarchy.
Buying organization B1 has a global business agreement with a Vendor A. Such an agreement would be the Parent or Base agreement (Level 1) in CLM system. At Level 2, the buying organization can have participation agreements with a different vendors (B and C) that could either be an affiliate or country specific subsidiary of the vendor organization A in the global business agreement. After establishing such a country specific agreement, it may be required to have a Statement of Work (SOW), containing specific work activities / deliverables for the regional supplier. Fig 1. below is schematic representation of such a three level hierarchy.
In large multi-national organizations such a hierarchy can easily extend up-to four or more levels depending on the complexity of the business processes.
Master agreements and Sub-Agreements in the current SAP Contract Lifecycle Management solution (Wave 8: On-Demand and Version 7.0: On-Premise) give contract managers the ability to structure their contracts in a hierarchy that can extend only up-to 2 levels.
With the upcoming release of SAP CLM 9.0, companies will be able to structure their contracts in a logical hierarchy that can extend to more than two levels. There shall not be a definite limit in terms of the number of levels that can be formed within the hierarchy.
With the new solution, contract managers can link independent master agreements to one another and thus form a hierarchy. The SAP CLM user interface shall allow end users to add a parent master agreement reference to a child master agreement, provided it complies with certain system validations and settings. A document type setting will check whether the master agreement can be included in a hierarchy of agreements.
In Fig 2. above, the ‘Hierarchy’ flag shall indicate whether the master agreement created from this master agreement type can be included in a hierarchy. The ‘Enforce Parent Date Range’ flag indicates that any master agreements created from this type can only have a parent agreement whose validity period (both start and end) is greater than the child agreement
Once a master agreement is created, contract managers can include it to an existing or new hierarchy of agreements by referencing it to a parent master agreement. The following Fig 3. shows the user interface that shall enable a contract manager to assign a parent reference agreement to any child agreement.
After a hierarchy is established, one can check the hierarchy of agreements using the ‘Hierarchy Report’ (shown in Fig 4.) that can be triggered using the ‘Display Hierarchy’ button.
The SAP CLM solution until Wave 9 release (all preceding releases) has the functionality to create a two level hierarchy in the form of master agreement and sub-agreements. With wave 9, the existing master agreement – sub-agreement functionality shall remain unchanged. However master agreements that have sub-agreements attached to it cannot be used in the formation of hierarchies using the new concept outlined above. In the future SAP shall provide a way for customers to migrate their existing master agreement – sub-agreements objects such that they can be used with the new hierarchy concept.
Customers, who wish to use the new hierarchy concept in SAP CLM 7.0 solution, can do so by leveraging the extension concept in SAP Sourcing / CLM. This can be possible by creating a parent reference extension field on the master agreement. Those master agreements that need to be included in a multi-level hierarchy can then be assigned a parent master agreement in the parent reference extension field. This approach will increase the probability of a smooth migration path from the custom CLM 7.0 hierarchy concept to the standard solution in CLM 9.0.
Thanks and stay tuned for more blogs on upcoming SAP Sourcing / CLM features.
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