Does your business do a poor job of managing existing contracts? Well, if the answer is "Yes" or if you do do know you are not alone. A recent report: "Low Tech/High Risk: How Weak Contract Management Prevents General Counsel from Answering CEOs’ Toughest Questions" finds that businesses of all types do a poor job of contract management.
Why should your business care about contract management?
The reason is pretty simple. Contracts are at the core of your businesses and govern everything from sales, purchasing and vendor management to employment agreements. Poor contract management not only leaves your company in the dark regarding its true obligations and liabilities, but may also mean your business is losing out on the ability to capitalize on opportunities.
How can your business do better?
A January 30, 2017 Inhouse Counsel article by Ralph Levy: "3 Goals of Effective Contract Management" suggests that effective contract management can be achieved by implementing three objectives:
- consistency of commitment
- consistency of payments
- consistency of compliance
Consistency of Commitment
Your company should establish systems and best practices for all contracts in order to help the company pay attention to every stage of the life of the contract to avoid costly risks. These practices can involve creating templates and consistency of language (clauses); managing and storing contracts and tracking contract expiration.
1. Templates and consistency of language: Your contacts should contain terms and other elements that are the same throughout the company. What this will do is provide guidance (almost like a map or template) for starting any new contract whereby whomever works on the contract from the company will be working from the same template or guidelines.
2. Managing and storing contracts: Proper management and storage of company contracts can also help avoid risks associated from assembling documents, via a cut-and-paste approach, when using documents that are not part of the managed group.
3. Tracking contract expiration: It is critical for a company to review, track and ensure it does not let a contract expiration lapse as mistakes can be costly. Tracking can be easily implemented either with the use of technology like a shared spreadsheet, email tickers or task reminders. For example, a procedure can be put in place whereby whenever a contract is signed, the expiration can be recorded on the shared spreadsheet, or a task reminder can be created with the expiration, cancellation and renewal details. Before the renewal, the company should review and assess the contract's performance to determine whether or not it should be renewed.
Consistency of Payments
It is imperative to have systems and processes in place that document what money is going out and for what purpose especially when standing payments have been set up. Poor contract payment management can be a red flag that a company's health is not good since money is the lifeblood of any company.
Likewise, proper contract management can be a key factor in ensuring the company itself is being paid and is not losing out on revenue from either missing important deadlines or from payors who or not, in fact, paying.
Consistency of Compliance
For companies that are heavily regulated it is especially important to have effective in-house systems and processes in place to manage contracts in order to remain compliant. Poor contract management could lead to scrutiny from enforcement agencies and even negative PR attention which could lead to a nightmare scenario for a company.
Equally important is for the company to also ensure that any third-parties with which the company does business, meet all regulatory requirements and also have the right systems, processes and procedures in place. This can be done via inserting contractual obligations, requiring proper contract management, into those third-party contracts to ensure they are operating in a way that satisfies regulatory requirements.
The bottom line for your business
Your business cannot afford to continue to neglect contract management since it is crucial to running a company. Contract management is a task that is the responsibility of everyone in the business and failure to do so could cost the company either through costly liabilities to others or missing out on costly liabilities owed to the company.