Contracts are at the heart of nearly every business dealing, yet many businesses struggle to effectively manage them for a variety of reasons. Let’s take a look at some of the biggest challenges organizations face today.
Top challenges and risks
Time: Large organizations spend considerable time and resources managing their core activities. For example, consider the level of detail that large government entities like the Department of Energy commit to explaining their contract management plans, never mind executing on those plans.
But you don't have to be a branch of the federal government to face challenges associated with multiple departments creating and maintaining contracts. For many businesses, a host of different departments — from purchasing to finance, HR to marketing — may be tasked with maintaining contract documents. This makes it difficult and time-consuming to locate and identify key documents related to, for example, a given regulatory request.
Variation: Even for highly centralized legal and contracts departments, maintaining uniform standard terms across all agreements is taxing. This is particularly true of B2B agreements, where the contract counterparty with greater bargaining power secures its own provisions — or at least a compromise between multiple contract documents and versions.
Additionally, different departments might be handling contracts in different ways — for instance, by emphasizing or leaving out certain terms. Not only does this compound issues with time, but it also can lead to risky scenarios in which organizations simply aren't aware of their obligations.
Transparency: Variation leads to problems with transparency. This can happen in a variety of ways. Different customers may have varying provisions for the same products or services. Different departments might maintain contracts in diverse locations or formats, or use non-standard terms. For example, preferred pricing clauses are sometimes titled “Most Favored Nation,” or “MFN” clauses — a nuance that can cause some challenges if your software doesn’t recognize these terms to mean the same thing.
In other words, it isn't safe to assume that all of the contracts you have out there are using your “standard" terms. For example, your finance team might be surprised to learn that your purchasing group has signed a purchase order with provisions that obligate you to late payment penalties or a non-standard invoicing period.
Time constraints, variation, transparency — taken together, all of these factors add risks to your contracting process. But there are solutions, like cutting-edge contract analytics tools, that can help reduce those risks.
How contract analytics tools can help
Imagine that your compliance team learns about a new regulation related to the storage and handling of personally identifiable information (PII). You aren't sure if your existing contracts with customers or vendors contain terms that might conflict with those new regulations. Instead of combing through thousands of individual contracts, a contract analytics solution can quickly scan the entire data pool to retrieve relevant documents and extract and characterize material terms, such as terms relating to PII collection, storage and destruction.
A good solution can also intelligently report those findings –– enabling a quick response to changing markets as well as business and regulatory demands. With effective analytics tools, you can generate a concise report and present your recommendations on how to proceed, given your current risk exposure.
Most businesses and the contracts that underpin their operations are becoming more complex. This means your organization could have contract management issues right now that you don’t even realize, ones that could give rise to troubling problems in the future. This makes it ever-more important to examine what your organization is doing to be both future-ready as well as ensure current contract management capabilities are optimized. But where should you start? Invariably it makes sense to start at the beginning.
1) Take a look at all your contracts — across all departments — what are the variations in those contracts? Do those variations make sense for your business and do they bring inherent risks? Identify areas where more consistency is needed, and where exceptions may be necessary.
2) Consider your technology needs — both now and in the future. If there’s work to do related to step #1, who’s going to do it? Are you prepared to achieve those consistency goals, and do you have the resources required (tools, systems, processes and people) to implement and sustain an analytics-based contract management process? Some technology differentiators include dashboard tools for easy access to contract characteristics; aggregation capabilities that can segregate supplier, sales and licensing contracts; portfolio-wide identification of value recognition and risk reduction opportunities.
3) Select the right partner(s) — Once you’ve evaluated your contracts and your needs, how will you go about selecting the right partner(s) to ensure your success? If you’re already using analytics tools, are they sophisticated enough to handle your business needs for the long haul? If you plan to seek a new technology partner, what’s your timeframe for implementation? Some other important questions to consider: How advanced are your potential partner’s digital capabilities? Can they provide a holistic solution that’s tailored to your specific requirements?
Digital and contract analytics capabilities are quickly becoming a pivotal factor for improving contract management. While contract management invariably entails some level of risk, the latest technology solutions and the right partner can help to minimize exposure.
Conduent is at the leading edge of legal and compliance solutions. Our digital strategies for contract management consolidate data using machine learning and provide organizations with a single, searchable database of all contracts and available metadata.
About the AuthorMore Content by Faiz Ahmed