Contract management can seem like a foggy concept with little tangible, direct value. The reality is quite the opposite. Contract management improves the financial performance of any business that implements an effective system.
Every organization has different challenges, but here are four of the most common situations that compel an organization to implement contract management.
Organizations large and small, private and public still retain contracts in file systems, electronic and paper. The file system is often personal and inaccessible. Even when contracts are stored on a network, ever-changing organizational systems and antiquated controls inhibit access to contracts.
Individuals with contracting authority or responsibilities — legal counsel, contract managers, procurement managers, sales executives, etc. — often waste valuable time looking for contracts, amendments, schedules and exhibits. When the documents are located it is not clear whether the document is the latest or final version.
Spreadsheets, and more spreadsheets, are the most common contract management tools. Spreadsheets work for small collections of simple or similar contracts. Spreadsheets do not send alerts of pending renewals, payments in excess of contract provisions and past due audits.
Renewal and expiration dates receive the most attention in contract management. Many contracts impose other date obligations on both parties, such as review periods and interim deliverables. Spreadsheets notoriously fail to capture all the important milestones for each contract.
Automated alerts make contract management mission critical to the organization. Ignorance of key provisions and dates is the source of lost revenue, unnecessary expenses and frightening legal risk.
As contracts grow in number and complexity, automated alerts allow contract managers to deliver value to the bottom line of any business.
For example, purchasing contracts with auto renewal provisions can deprive a buyer of the opportunity to shop the contract before the renewal. An automated alert, or combination of alerts, allows the buyer to test the contract pricing and terms in the market and make an informed decision about the impending renewal.
The best spreadsheets contain termination dates for contracts, but omit the fuzzier covenants of a contract. Many covenants have important implications for the value of the contract.
Performance bonds and insurance, for example, provide a backstop to the risk that a contractor will fail to perform or an unexpected event will occur. Without a bond or insurance policy, the prices and terms of the contract would be very different. However, without a contract management system it is a challenge (a) to recall the bonding provisions, (b) to validate that the bond or insurance is still in effect, and (c) to enforce non-compliance provisions in the event of default.
If your organizations face even one of these circumstances, then an effective contract management solution can pay for itself rapidly.