Contract Utilization And Compliance: Are Promises Meant To Be Broken?
Contracts are nothing but fancy promises. One would expect parties involved in a contract to keep their respective promises, because of its formal and strict nature. But that’s hardly the case. Every single day in large global organizations, contract terms are not adhered to.
Are promises meant to be broken?
According to the Aberdeen Group, ineffective management of contracts costs businesses $153 billion per year due to missed savings opportunities.
Contract management can broadly be divided into two kinds of tasks:
1. Efforts directed towards negotiating and authoring the right contracts
No contract is ever authored by just one person. It has its share of contributions from the requestor whose business unit the contract might be budgeted under, the finance and admin teams that might be critical about the payment terms, the legal team that might be fussy about indemnity clauses and so on. Within large organizations, multiple collaborators working in parallel delay outputs by months, and there is always someone reconciling one version with another.
While there are definite steps procurement leaders can take to streamline the contract authoring process and very quickly churn contracts that align with business goals, we are more interested in the second type of contract management efforts today.
2. Efforts directed towards realizing, monitoring, and improving contracts
Once a contract is made, it is only the start of the battle. Organizations that lack sound contract management are unable to enforce contractual obligations on their suppliers, or even their own employees. Not all contracts in mid-market and above companies meet the necessary regulatory compliances and it is cumbersome to keep track of updates in the pipeline.
Key business challenges (or manifestations of broken promises)
… when it comes to contract utilization, performance monitoring and compliance adherence:
1. For Procurement
Off-contract or maverick spends ultimately reflect on Procurement’s poor abilities to enforce spend compliance. Even when purchases are as per existing contracts, the team might not have the means to match the right purchases against the right contracts leading to ‘perceived maverick spend’.
Sometimes employees may go ahead and make wrong commitments to suppliers, the brunt of which is again borne by Procurement. A major chunk of the Procurement and Admin teams’ roles comprise of haggling with suppliers every day.
2. For Legal
The Legal team’s battle lies in enforcing preferred and the most up to date clauses and ensuring adherence to critical regulatory compliances.
With new contracts being churned out at the drop of a hat, no set approval process in place and requestors sending out contracts externally without the necessary vetting, the Legal team’s goals go for a major toss.
3. For Project Managers
The tasks involved in contract authoring and management belong to individual organizational departments – however, a new role of ‘project manager’ has permeated medium and large organizations in the last couple of decades. In the context of today’s topic, project managers are responsible for setting up process templates and tracking progress of contracts.
With too much iteration made disparately in each contract, multiplied by hundreds of contracts, MS Excel trackers and sticky notes can be disastrous for the PMs. The result in most cases is non-compliant contracts.
4. For Requestors
Merely having great contracts in your company’s repository doesn’t guarantee that requestors are aware about their existence and know how to utilize them. Requestors might end up spending several hours evaluating suppliers and communicating with them because there is no easy way to flip contracts into purchasable catalogs. Getting multiple levels of approvals on such purchases might become another headache to deal with while in fact they should be focusing on their core tasks.
Besides the above, damaged supplier relationships are a given when excellence in contract management is given a low priority. According to IACCM, 30-35% of an organization’s contracts underperform translating to 9% of its annual revenue.
After a year of offering you the best possible industry rates, a supplier whose contract your organization utilized only up to 30% is definitely going to hike up those rates the next year or worse – revoke further associations with you.
Promises Need Not Be Broken
A buy-side contract management solution that is the right fit for your organization’s procurement and legal goals can solve for not just all the above mentioned process efficiencies for every department, but can also realize hard dollar savings in the millions.
To be specific, 600% increase in savings by doubling contract compliance (Source: IACCM) and 12% greater savings overall (Source: PwC).
Here’s a quick list of ways in which a sound contract management solution helps you increase your organization’s contract utilization and compliance.
- Broad and granular reporting on contracts and their performances
- Automated spend to contract matching
- Easy flipping of contracts into catalogs to ensure purchases with preferred suppliers
- Alerts at various milestones to track contract utilization and alter next steps wherever necessary
- Enforced goals by Legal teams
- Changes in a clause reflect its impact on multiple contracts where the clause is also present.
- Easy drag and drop templates to adhere to the most up to date regulatory norms
- Mandatory approvals and workflows as per regulatory guidelines (such as SOX)
All these make for winning a contract management solution. For organizations that have to deal with hundreds of suppliers, partners and dealers every year, lack of such a solution is a straight invitation for contract risks and millions of dollars of lost savings opportunities.
Since you were interested in reading about contracts, you might also be interested in reading about eCatalogs. Read our latest White Paper titled ‘Efﬁcient Procurement Through eCatalogs: Key Factors To Online Catalog Success’.