Many happy returns: automated contract management can pay off with top rebates - Opinion - Column

Manufacturer rebates are an important element in the price of an item. The ultimate cost depends on the net price, which is the stated price less the rebate. From an operator's perspective, the ultimate price of an item is its landed cost less the rebate.

Operator rebates and contractual pricing terms can help facilitate consistent product pull and enable operator cost control. Rebates can have a substantial impact on the bottom line of manufacturers, distributors and operators. Recently, there has been a plethora of news about the questionable booking of rebates in the foodservice industry. That is the bad news.

The good news is that effective contract management -- supported with an automated contract management software application -- can provide better visibility into agreements between manufacturers, distributors and operators. Specifically, contract management can help maximize rebates and programs us the short as well as the long run for the foodservice supply chain.

Promotions or marketing programs, such as those paid by manufacturers to distributors, can be viewed in two ways, according to Ed Ketz, associate professor of accounting at Pennsylvania State's Smeal College of Business.

"First, they may be tied to volumes sold, in which case distributor net costs are reduced, and they often incite their restaurant customers to buy via passing through the promotional program," he said.

Second, Ketz says, "Promotional allowances may be given in anticipation of some services to be rendered by the distributor, such as advertising. The distributor can recognize these items as revenue when it in fact delivers those services."

This, of course, is what some of the recent press reports are about: the time frame in which promotional allowances are recognized as revenue. Recognizing all of the upfront obligations and possibly the entire program payout in the year the contract was initiated versus spreading them across the life of the contract challenges best-practices processes for contract management execution. It also tests generally accepted accounting principles, or GAAP, regulations on the financial reporting of contractual obligations.

From the manufacturer's viewpoint, the promotional rebate reduces sales, as would any allowance or discount, Ketz said. The promotion can be seen either as a marketing cost, consistent with the service view, or as a reduction of sales, consistent with the volume view, according to Ketz.

Operators can gain a higher comfort level doing business with manufacturers that use systems to account for rebates properly, knowing that the manufacturer has sound internal auditing capabilities. Software applications can validate that the right payments are being made to the right entity at the right time during the life of the agreement. There is significant value to ensuring that headquarters, store units/properties and franchise locations receive their allotted rebates in a timely, accurate fashion.

For example, if a contract was signed in anticipation that a minimum volume of product would be purchased, a good contract management system will verify whether or not that condition has been met before cash distributions are made.

If a supplier makes a payment in anticipation of a volume that doesn't materialize, it can be attributed to the supplier's having insufficient controls in place to catch discrepancies. With contract management software implemented, organizations are able to process proof-of-performance information and will be notified of the failed condition before payments go out the door. That is an especially painful example of the way poor systems and loose controls can affect the bottom line. Sometimes millions of dollars in unearned rebates are paid without ever being validated, which can strain trading-partner relationships further.

In addition to risk management, the close monitoring of contracts has other advantages. With improved visibility into agreements, suppliers can track the impact of incentives given to trading partners to buy and sell more products and services.

An important element in maintaining good relationships among manufacturers, distributors and operators is ensuring that each party meets agreed-upon contract guidelines. Manufacturers can do their part simply by ensuring that timely, accurate payments are made. Given the number of contracts -- often in the thousands -- and the number of trading partners involved, a good contract management system is essential. Foodservice manufacturers want their obligations with operators and distributors to be win-win situations when it comes to product, revenue and service.

An automated system offers users the ability to generate management reports to understand the true value of business relationships over time. If monies have been paid up front for a multiyear program, how does each trading partner know if the commitment was fulfilled? What were the results of the program? If each trading partner doesn't have a system to measure and validate the terms of the agreement, no one will know if the money was spent wisely.

The validation of rebate and deviated-billing payment requests is an issue that has existed for some time in the industry. Recent news about distributor booking of rebates -- not manufacturer rebate processing -- should compel foodservice manufacturers to consider the importance of having an automated solution to process the data and properly validate requests.

Automated contract management provides a competitive advantage. Without an automated solution a trading partner could, and in fact some trading partners do, use the knowledge that a company is unable to validate rebates as a weak point or an Achilles heel.

In that situation it is entirely possible for a trading partner to request a rebate and then wait to see if the company will respond with payment or dispute the claim. Without a system for validating rebates, the foodservice manufacturer is blind to the details and left with little choice but to pay the bill, thereby diluting profitability. That scenario could impact future operator incentives adversely, as the manufacturer has to revise promotional activity to offset hits on profitability.

The foodservice industry should view the recent cases of accounting improprieties as a call to action to examine procedures. That review is essentially an audit of existing contract management systems. Companies will pass the audit when they know, on a real-time basis, the current status of contract formation, execution and dispute resolution.

Mark Smith is general manager of the Foodservice Industry Solutions division of I-many Inc. Based in Portland, Maine, I-many is a leading provider of enterprise contract management and trade management solutions. More than 250 life science, consumer goods, foodservice and manufacturing companies use I-many solutions. For more information visit the company Web site at http.//www.imany.com.

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