The North American railroad system is critical for freight transportation. For a complex industry such as freight transportation, a well-functioning supply chain is a key to efficient operations. Just like any other freight transporter, railroads have multiple contracts related to various commercial activities such as third parties, vendors, suppliers, labor, procurement, regulations, compliance, commercial agreements.
Railways and Contracts
Railways have a large number of contracts ranging from industrial track maintenance, rail crossing agreements, to haulage and real estates. These contracts cover major areas such as volume commitments, rate stability, accessorial applicability, and terms of contract duration, detention, demurrage and dispute resolution.
The complexity of contract terms & clauses is quite unnerving in the railroad industry. Amending multiple contracts and updating dynamic carrier accessorial manually is nearly impossible. Consequently, railroads frequently struggle to reconcile estimated versus actual shipping costs.
The additional challenges in railroad contracts include:
- Locating rates across numerous contracts with disparate formats and calculating a total shipment cost based on the contract terms
- Accounting for accessorial items that are not fixed in the contract, such as fuel adjustment factors that may change daily
- Determining all available routes under contract and comparing costs
- Maintaining current amendments and rate changes
- Paying the right amount, based on contract and tariff rates
- Timed payments to meet agreed-upon terms, which can vary by carrier
- To have visibility into invoices received where no contract rate is on file
- To have visibility into the use of non-contracted carriers
Railroad investment projects mainly revolve around 5 disciplines – civil engineering, signaling equipment, electricity, telecommunication & tracks. As such, these five types of work items are often performed by a different crew and may require different procurement strategies. This makes the procurement challenge even more complex. In addition, procurement strategies may be affected by domestic characteristics of the railroad sectors in different geographies, e.g., extent and timing of deregulation, supply market development and competition.
Contract Management software for railroads- implications for various Rail departments
In the typical organization, the existing contract management process often limits employee efficiency, especially when it comes to insights. The traditional tools often slow down the business outcomes they are meant to drive. Below are key contract management imperatives for various departments of a railway:
- Procurement professionals need to negotiate better prices even with a high volume of global contracts. If they had access to key metrics, like expiry dates and aggregated spend, this would be possible.
- Finance and compliance teams need the tools to reduce their labor costs while still ensuring compliance and minimizing risk. This is possible when they have visibility into the financial impact of all contracts, agreements etc. Railroads, being highly regulated, have various regulatory mandates from APTA, FRA, ASLRRA, AAR as well as the new safety diktat around Positive Train Control (PTC) which require reporting from time to time.
- Legal teams need to decrease their exposure to risks while making sure they are compliant. This is done by ensuring people use the latest approved language in all contract documents. In addition, a variety of labor unions and their laws add to the complexity. The clauses and agreements need to be diligently monitored to avoid penalties and service terminations.
- Finally, sales professionals need to accelerate their sales process without sacrificing quality. This is obtained by having a seamless connection with the contract team which reduces their overhead costs and enables self-service with approved language. Managing rate price management, revenue sharing under Interline Settlement System (ISS) and complex freight invoices come under such challenges.
The need for a modern Enterprise Contract Management Platform
Though almost everything has changed about how modern organizations execute and manage contracts, one thing remains the same – contracts are still the foundation of all commercial relationships and transactions. Hence, a Contract Lifecycle Management (CLM) system, which could evaluate all the needs of railroads and provide the capabilities to tackle all the challenges and issues play a vital role.
In our next blog, we will dive deeper into the benefits of a modern CLM on key departments.