How to manage contracts diligently to gain competitive advantage and prevent them from becoming a burden on the business?
Contracts are not just documents representing a handshake. They are a spine of business relationship and transactions. Modern business contracts are far more complex; they cover more areas and provide for more exclusions. Hence, managing and drafting contracts is a complicate task. It requires foreseeing a multitude of possible scenarios and being able to assess risks.
Poor contract management – an actual threat to business
Did you know that poor contract management was threatening with the loss of revenue? Research shows that if companies managed their contracts more diligently, they would earn 9% more revenue (source: Research by the Independent International Association for Contract & Commercial Management (IACCM) 2011/2012). Experts say that proper contract management protects companies from significant financial loss and even bankruptcy.
How to identify threats
What are the characteristics of irresponsible contract management? A classic example of irresponsible and inefficient contract management is often illustrated as manual contract management with numerous issues arising thereof:
- Lost contracts;
- Missed deadlines;
- Expensive and inaccurate reports in connection with contracts;
- Finding a required contract takes long: many people in charge of storing contracts;
- Contract approval process is lengthy and out-of-control;
- It is difficult to trace who made amendments to the contract and what they were;
- It is difficult to ensure that consistent contract templates are used and important terms and conditions remain unchanged;
- It is difficult to manage exclusions and deadlines of the contract;
- It is difficult or impossible to assess how much it costs to draft a contract.
Process automation – the future of business
Many organisations (72%) solve the afore-mentioned contract management issues by invoking specialised contract management tools. Even though the maturity of contract management tools and the scope of issues to be resolved thereby vary, this, however, demonstrates that automated contract management is no longer a luxury, it is a necessity (source: © BeringPoint. Study “Contract Management 2010”). The remainder use contract management tools.
Automated contract management as a competitive advantage
Thus organisations are “arming” themselves with specialised contract management tools. Analysis of successful business examples shows that after contract management processes are put in order, i.e. after they become automated, any previous weaknesses turn into the company’s competitive advantage. Contracts managed in the mentioned manner increase efficiency of the business and reduce risks.
Higher efficiency means:
- A clear and standardised contract conclusion process;
- Less labour input for concluding contracts;
- Persons in charge are always evident;
- A possibility to exercise on-going control over the conclusion of contracts and respond to issues arising during the conclusion of a contract in a more expeditious manner;
- Simple archiving and easy access to contracts (contracts are accessible to authorised persons both at the office and outside);
- Straightforward control over validity and implementation of contracts.
Improved efficiency results in your contracts not being lost, but found in no time. It is also known who drafted and what, what was amended and which version is the most recent one. Contracts are drafted and managed efficiently (no more delivery of paperwork or delays when waiting for signatures). Just estimate that by transferring the coordination, approval and conclusion of contracts to cyberspace we can get more complex contracts concluded within 1 day (not within 1 week). Thus not only do you economise on labour, but also accelerate the activities and processes of the organisation. Financial flows improve at the organisation. What is more, you are confident that all contracts have been approved and concluded in accordance with the set standards. They are free of unapproved amendments. And the responsibility is clear.
Better risk management is achieved because:
- Managers see reports in connection with the contracts at all times: reports on contracts by sections or the time taken to draft a contract, also how many and what type of contracts each representative has, etc. This information is of importance for making strategic business decisions.
- Likelihood of errors is minimised or eliminated. For instance, no unapproved version of the contract shall be sent for conclusion; contracts will not be lost, approval of disadvantageous terms and conditions will be prevented, etc.
- Contracts are drafted using templates, and subsequent contracts undergo a pre-set approval process. Hence, all contracts comply with internal and external legal requirements.