• 4 min read

What are Contractual Obligations?

Post his huge hit, George Lucas was negotiating with 20th Century Fox for a sequel. Lucas had envisioned a space opera that had characters like aliens, speaking robots, and had sequences of aliens fighting with weapons like lightsabers, etc. Movie studios negotiated with Lucas to make a sequel to his film ”American Graffiti” and were willing to pay him up to $1 million for directing a different sequel. However, George Lucas agreed to the clause and returned $500,000. But he insisted on two contract obligations tracking and compliance management for the movie franchisee.

In his two obligations/clauses, Lucas wanted control over franchisee direction and rights to licensing and merchandise for the Movie Franchise. 

The Movie Franchise was Star Wars, and the rest is history. The clause on merchandising had made Lucas richer by almost $100 million in 1978. Fox’s loss was Lucas’ gain. This anecdote is a landmark in Contracts and why obligations are critical to contracts.

Talking about contracts in today’s situation gives each organization a chance to smartly use legally enforceable agreements to safeguard their interest in an unavoidable situation. A contract is a compilation of terms and conditions, critical dates, currencies for payment, legal clauses, and obligations that either party has to comply with or commit to from a customer or third party.

Generally, organizations spend hours in negotiations to close out the BAFO (best & final offer) with their chosen contractor under the guidance of an advisor. The resulting contract and mentioned obligations are the new Bible to manage a complex relationship ahead of time. 

What is Contract Obligations Tracking and Compliance Management?

Contractual obligations are duties that each party is legally responsible to act upon in a contract agreement. With each contract, either of the parties exchanges something of value, whether it be a product, services, money, etc in connection with various obligations.

Obligations are stated requirements; bound commitments concerning regulatory & contractual directives. Contractual obligations are really exhaustive, complex,  inconvenient to manage, and most often, the forgotten risk management tool.

Goals of Contractual Obligation Compliance Tracking
  • Executing actions to meet regulatory and operational obligations
  • Continuous contracts obligation status assessment and reporting
  • Reduce risks of contractual obligations non-compliance 

Key Challenges of Contract Obligation Tracking and Management

According to an IACCM study, only 29% of organizations regularly collect data on compliance with standards/scorecards by other parts of the business or trading partners.

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

Challenges in Identifying Contract Obligations
  • Manual identification / extraction of obligation data hidden in complex contracts language
  • Highly fragmented contract data across different IT systems ( ERPs, S2P, CRM)
  • Unable to get a complete picture of obligations by business unit, supplier category, or customer type
  • A manual finding of contract obligations is ridden with errors, higher costs, and prone to delayed extraction
  • No clear ownership for obligation fulfillment

Ensuring contracts perform to their promise requires contracting parties to deliver on all their obligations. Non-compliance not only harms performance but also exposes businesses to substantial risks, including reputational damage, financial loss, and soured partner relationships; in extreme cases, non-compliance could even jeopardize business continuity.

AI-enabled Automated Contract Obligations Tracking and Compliance Management

Contract Obligations Tracking and Compliance Management

Aavenir Obligationflow enables organizations to have 360-degree visibility into enterprise-wide contractual obligations for customers, suppliers, service providers, sales partners, and other parties – using Artificial Intelligence-enabled contextual search. Not only can companies auto-discover key contracts obligations, but they can also collaborate with the relevant stakeholder for fulfillment using digital workflow and monitor the compliance status via the Obligationflow dashboard on ServiceNow.

Aavenir Obligationflow can quickly import all active contracts from Aavenir Contractflow or any other CLM system and transforms how organizations discover, manage, and fulfill obligations that were previously hidden in complex contract language.

Benefits: AI-enabled Obligation Extraction + ServiceNow's Digital Workflow Platform

Aavenir Obligationflow enables businesses to bootstrap the complicated process of discovering and managing obligations using artificial intelligence. Using Aavenir solution, businesses can:

  • 70% faster obligation identification cycle time
  • 35% cost savings with centralized obligations fulfilment approach
  • 98% on-time obligation fulfilment
  • Significantly increase compliance and reduce business risks
  • Automate the obligation fulfillment process through a workflow engine instead of email/Excel
  • Enables the team to leverage insights gained for better outcomes in future contract negotiations and renewals

What's next?

Organizations should try to manage compliance with contracts, policy, processes & other obligations as it turns out to be a good risk minimization practice.

In 2020, Force Majeure was the most used clause in the pandemic. To safeguard business interests, obligations were added to contracts. With modern technologies of AI for insights and workflow to enable collaboration, proper use of obligations Management will help to strengthen business and improve bottom-line and streamline.

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