• 5 min read

What are Contractual Obligations?

Following the huge hit of his film ”American Graffiti”, George Lucas was negotiating with 20th Century Fox for a sequel. Lucas envisioned a space opera with characters like aliens, speaking robots, and sequences of aliens fighting with weapons like lightsabers, etc. 

When Lucas directed American Graffiti, he only earned $150,000 (($50K to write, $50K to produce, and another $50K to direct). Fox Studios offered Lucas a salary bump of $500,000 to direct Star Wars plus 40% profit margins. Lucas could have negotiated for a pay bump to $500,000 or even $1 million. Instead of negotiating for a higher directing salary, or other points (basically a higher percentage of profits), Lucas opted for greater control: Control over how the film was made, as well as its ancillary rights. He turned down this salary bump to keep his salary to $150,000. This is how he insisted on two contract obligations tracking and compliance management for the movie franchise.

In his two obligations/clauses, Lucas wanted complete control over franchise direction and rights to licensing and merchandise for the movie franchise. 

The movie franchise in the discussion 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 is a landmark anecdote in Contracts and why obligations are critical to contracts.

Let us understand more about how the obligations and compliance management system works in contract management. Talking about contracts in the current 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 must comply with or commit to from a customer or third party.

Generally, organizations spend hours negotiating 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. 

You can shorten your contract approval time by 85% with streamlined redlining and negotiation. Learn how>>

Unlock the True Value of Contracts with Contract Obligations Tracking and Compliance Management

Contractual obligations are duties each party is legally responsible for acting 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.

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Obligations refer to requirements; bound commitments concerning regulatory & contractual directives. Also, contractual obligations are 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 and 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.

Read More: What are the 3 key challenges in managing contract obligations 

Studies reveal that managing the contractual promises in the form of obligations, commitments, SLAs, and entitlements enshrined in contract clauses and terms has many challenges:

  • 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 comes with errors, higher costs, and is prone to delayed extraction
  • No clear ownership for obligation fulfillment
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Ensuring contracts perform to their promise requires contracting parties to fulfill all their obligations. Non-compliance harms performance and 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

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. 

In addition, companies besides helping auto-discover key contract obligations, 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 transform 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. By harnessing Aavenir solutions, businesses can:

  • Obtain 70% faster obligation identification cycle time
  • Derive 35% cost savings with a centralized obligations fulfillment approach
  • Save 98% on-time obligation fulfillment
  • 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
Download the Product Brief to understand how Aavenir Obligationflow built on ServiceNo 1

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 during the pandemic. Obligations were added to contracts to safeguard business interests. With modern technologies such as  AI for insights and workflow to enable collaboration, proper use of obligations Management will help strengthen and streamline business, while helping improve the bottom line.

If you have any questions regarding Contractual obligations and how you can implement and manage them seamlessly with minimum risk, Schedule a (no-obligation) Demo today.

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