3 Key Challenges in Managing Contract Obligations

Each day across all industries, companies spend thousands of hours and millions of dollars negotiating deals and sweating over minute details in the terms and conditions of the final contractual obligation management.

But what happens next? Too often, on both the buy and sell-side, there is a drop-off in attention to the contract stipulations — as if the finish line has been crossed. But in many ways, the effort is just beginning.

Contract Lifecycle Management is a concept that is widely known and discussed but shockingly ignored. Companies frequently neglect to put in place virtually any controls for the active contract and fail to manage the contractual obligations agreed to during the negotiation phase. This failure leaves them exposed to substantial risks and lost revenue. 

What are the key challenges in Contractual Obligation Management?

To gain maximum from the contracts, it is imperative to manage these contractual obligations well. Without a proper contract obligation system in place, it is hard to ascertain whether a business deal is working as per the terms and conditions or if there is a breach of contract. Important milestones of delivery, payment, and more may easily get missed.

Few contracts contain penalty clauses that are to be enforced whenever specific obligations are not met by a contracting party. Not tracking & non-compliance to these contract obligations can lead to missed opportunities and may translate into heavy financial losses for an organization.

Managing these promises in the form of obligations, commitments, SLAs, and entitlements enshrined in contract clauses and terms have three key challenges :

1. Time-consuming manual identification of obligations from multiple contract repositories:

Large organizations have an overwhelmingly huge number of contracts containing an even greater number of obligations. Keeping track of such a huge number of obligations, without any way to configure alerts and reminders, is a tedious task.

Obligations are often hidden in complex contract language and must be manually extracted, identified, and interpreted. Identifying such obligations in a sea of complicated technical wording, page-after-page makes the process even more complicated.

Along with that updating data for contract milestones, penalty clauses, and more, in spreadsheets, is cumbersome and error-prone. Even if the data is laboriously entered, tracking it effectively is still a problem.

Thus, it is time-consuming & requires intense human intervention to identify obligations from multiple contract repositories, spreadsheets, word docs, emails. 

2. Undefined ownership of obligations fulfilment actions:

There is a lack of clarity regarding the ownership of contract obligation management duties for specific agreements. Accountability & delegation of these duties is the primary reason behind the issue in handling obligation. Often, the spreadsheet owner and the person responsible for managing the obligations of a specific contract are not the same. Manual processes are error-prone, not scalable, and do not proactively surface obligations. 

3. Lack of cross-function visibility

Actual and target value comparison is difficult to observe since actual value data is spread across multiple disparate systems such as ERP (Enterprise Resource Planning), CRM (Customer Relationship Management), FMI (Financial Management Information), and HRM (Human Resource Management).

One of the most important challenges in executing a proper contract management solution is a lack of visibility and insight into obligation performance. When there is a difference in the actual & target value data, such negligence can lead to substantial risks for businesses. 

Along with that lack of cross-function visibility also hampers inter-departmental performance. Non-compliance to obligations hurt revenue, increase the risk of penalties and litigations including reputational damage, financial loss, and soured partner relationships.

How does poor management of obligations impact Organizations?

Contract obligations management means ensuring that contracting parties fulfill the

commitments laid out in the contract. To get the full value out of your contracts, it is imperative to manage these obligations well… why?

  • Prevention of Revenue Loss – Average company leaks over 9% of its revenues annually due to contract related issues – IACCM
  • Improving off-contract spend – Market average 54% of spend is contract compliant; 66% transactions are contract compliant – Ardent Partners
  • Tracking of Compliance – Only 29% of organizations regularly collect data on the compliance with standards/scorecards by other part of the business or trading partners – IACCM 

How Obligationflow can improve compliance with contracts?

Effective contract obligation management and appropriate governance tools provide greater visibility and control over the contract process by not only providing a more logical environment to manage contract documents, performance, and milestone data but also an environment where contract obligations can be easily tracked and adhered to. Some of the benefits from Obligationflow which helps to improve compliance to contracts are:

  • Greater visibility into contract processes significantly reduces the risk and exposure that complex agreements typically introduce. 
  • Maximize Contract Value: Cost optimization & Revenue Recovery
  • Improve relationships with service providers 
  • Ensures that the vendors comply with contract terms & conditions
  • Improves contract structuring for sustained cost reduction

What's Next?

Furthermore, contract obligation management isn’t something that you do once, and then rest easy. It needs to be performed on an ongoing basis, throughout the lifecycle of every contract. There is, however, a more efficient way to handle this. To manage such a staggering number of contractual obligations, one needs an automated system that can offer configurable alerts, reminders, and act as a secure repository of all contracts and supporting documents with user-defined access.

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