As global regulations multiply, and as stakeholder expectations increase, organizations are exposed to a larger extent of compliance risk than ever before. Non-compliance poses risks to an organization’s financial, organizational, or reputational position as a result of violations of laws, regulations, obligations, or organizational standards of practice. And when companies deal in thousands of contracts on a yearly basis, there are multiple and varied compliance risks associated to each, depending on sector, size, type of contract, federal and state laws, etc. As per an IACCM survey, up to 600% increase in spend management related savings is possible with doubling of contract compliance. With such high value at stake, investing in advanced contract management solutions is the best way to assure maximum compliance.
Contractual non-compliance gaps amount to nearly 40% of total obligations (Source: IACCM). Hence, in order to meet of all necessary obligations associated with contract management and minimize compliance risk for an organization, compliance can be divided into 4 types. Let us look at each of the types and the best way to address them:
4 Types of Compliance Risks
- Regulatory compliance
Large billion-dollar organizations deal in overseas contracts all the time with companies spread across the globe. Every state or country has its own set of regulations and obligations to be met in order to be compliant. A shortfall in meeting any of these could pose huge risks for a company. Manual drafting and monitoring of contracts expose the company to many potential risks due to human error, omissions, faulty language, etc., often leading to non-compliance with certain regulations. This, in turn, could end up costing the company a fortune in penalties and a bad reputation.
How does CLM help?
Contract Lifecycle Management (CLM) software comes inbuilt with a comprehensive and smart clause library with hints and suggestions to ensure all necessary regulatory compliances are covered. The system is also capable of updating the stakeholders in case of any changes or updates to any of the regulations ensuring fool-proof, fully compliant contracts.
- Clause compliance
During the contract authoring stage, companies often need to draft contracts on third-party papers. Manually drafting on these templates mean hours or days of just extracting all important clauses and data and ensuring it matches our clauses and templates. This unwieldy process doesn’t just delay the authoring process but could also lead to omission of certain clauses resulting in non-compliance. Post drafting, the negotiation process goes through multiple alterations and versions by both parties to ensure both parties are equally benefitted by them. This leads to further confusion with respect to tracking all the latest changes and versions and ensuring all changes are thoroughly reviewed. With minimum visibility into changes in documents, there could be an oversight of all changes that could put the company at a disadvantage.
How does CLM help?
AI-enabled contract management solution extracts all important meta-data and divides the whole third-party paper into readable clauses and sections comparing it with the pre-configured templates and clauses for ease of authoring. During review the system auto-tracks all changes and maintains latest versions ensuring visibility into every small alteration made by the third party. This ensures clause compliance and inclusion of all necessary clauses into the contract.
- Commercial compliance
Another type of compliance that cannot be overlooked is compliance to commercials. As commercials are the most important aspect of any business or contract, it is a must to leave no page unturned when it comes to tracking and ensuring commercial compliance. CLM aids in realizing the full potential of negotiated contracts through better enforcement of commercial terms. Often, getting a complete risk analysis of the commercial terms is not possible manually and could put the organization in commercial risk by agreeing to high risk clauses. This does not end at commercial terms alone during the pre-award phase. Post sign-off, if there is no monitoring of contracts, there is no visibility into any discrepancies in receiving payments, delays or auto-renewals leading to higher costs.
How does CLM help?
According to a study conducted by the Aberdeen Group, 60% of corporate litigations are related to contract disputes. And of that group, 73% indicated “price changes” as the #1 reason behind the contract dispute. During authoring, CLM analyses risks associated with financial terms like payments, currency exchange rates, price variations etc. to ensure fewer financial risks and disputes and better returns. Moreover, it allows for real-time monitoring of on-going commercials and financials through milestones tracking, allowing for timely remediation in case of delay in receiving payments, breach of certain financial terms etc. Moreover,
- Operational compliance
After sign-off, people often lose sight of contract performance. Without visibility into the operations, there is always a risk of sub-standard product/service, delayed delivery, inadequate volumes etc. Often, when the contract is outsourced to a third party, there is a larger risk of non-compliance to operational performance, without a proper process to track contracts.
How does CLM help?
With contract lifecycle management solutions, appropriate milestones and metrics can be pre-configured for accurate tracking and analysis of performance during the post-award stage. These give visibility into the day to day operational performance and alert the stakeholders in case of any deviation from or delays in the milestones configured. This immunizes organizations from any internal or external operational contingencies and ensures maximum compliance to operational performance.