Post-award Contract Compliance – How a CLM Can Keep you in Check
Contract compliance can make or break an organization. Businesses cannot afford to overlook it, as the consequences can be crippling.
Consider these numbers: The average annual cost for organizations that experienced non-compliance stood at $14.82 million in 2017, a 45% increase from 2011. On the other hand, organizations can achieve up to 80% additional savings by using a well-defined contract compliance process.
If an organization files away a contract after signing on the dotted line, it may not deliver the value it expected. The milestones of payment, delivery, or quality of goods would not get tracked efficiently, and no one would know when the contract expires or auto-renews. This would result in lost opportunities for savings, cross-selling, and up-selling, besides leaving the enterprise grappling with the consequences of contractual obligation breach.
Why Contract Compliance Matters?
- Protects Reputation
Contract non-compliance can lead to a loss of reputation and a breakdown of business relationships. No company wants to do business with a firm that does not commit to or respect the importance of adhering to compliance mandates and protocols. This can cause substantial losses. In today’s digital media-fuelled business environment, one ethical misstep can lead to business ruin.
Complying with performance obligations and regulations is essential to maintain an organization’s reputation within an industry. Performance obligations are the mutual promises at the centre of an agreement. Breaching a performance obligation can result in two adverse consequences for an organization: litigation, or reputation damage.
- Protects Revenue
The way companies manage their contracts influences their revenue in surprising ways. The most common contract factors that impact revenue are activities related to contract creation, negotiating contracts, managing risks, and monitoring their performance. Failing to comply with these factors can lead to an imposition of fines, penalties, and damages.
A McKinsey research found that companies can have more than 90% of their annual revenue represented in their supplier and vendor contracts. And about 80% of procurement functions are not fully aware of competitive terms and contract structures. Not having visibility into contracts makes a company’s economical health vulnerable to being a victim of contract non-compliance.
- Controls Expenses
When any business transaction goes sour, there is a good chance that a lawsuit will be filed. Long-running, expensive lawsuits often ring the death knell for businesses, especially those with modest resources. McKinsey’s Rapid Procurement Contract Insights (RPCI) service line that reviewed over 100 contracts against a comprehensive assessment grid, found that more than 75% of samples did not include an exhaustive set of key performance indicators (KPIs) and reporting processes linked to the total cost of ownership.
Contract compliance provides value by offering businesses a comprehensive cost-benefit analysis that incorporates compliance-related costs even in third-party contracts
Most contracts carry a risk of non-compliance. CLMs can reduce non-compliance risks significantly. Non-compliance usually results from the following causes:
- Lack of visibility: An inability to find what you’re looking for in a contract.
- Lack of awareness: Lack of accountability and ownership of contract obligations
- Lack of consistency: Inability to track constantly changing contract scope and obligations.
How a Contract Management Solution can improve Post-award Contract Compliance
Visibility via centralized contract repository
With dynamic contract repositories, the risk related to forgotten or misplaced contracts, missing contract expirations or unintended renewals that can impact business is reduced tremendously.
Track Contract KPIs Effectively
Milestones set up in contracts should not be set and forgotten. These systems make it possible to define, communicate and effectively manage specified contract metrics. The service-level agreements, contract utilization, overpayments, penalties and other supplier metrics are monitored with reports and alerts to keep the risk related to milestone obligations under check.
Standard workflow for collaborative authoring and negotiation
Standardization of workflow is essential to reduce contract authoring cycle time, reduce risk on every contract review, and ensure that every stakeholder is involved. This also ensures no ambiguity and confusion in the process of contract authoring, and the subsequent negotiations with complete transparency and visibility through redlining, versioning, and audit trails.
Audit Contracts More Effectively
Keeping tabs on the contract is made easier. Institute regular contract audits and use them to create opportunities. Contract compliance audits satisfy the need to appropriately manage risk for companies. By improving visibility in the following areas, the organization will realize a net benefit through cost recoveries, processes improvement savings, fraud prevention and detection, and identification of hidden risks.
Standardized contract authoring with contract template and clause library.
Standardized contract creation means faster contract creation. Long-drawn contract authoring leads to undue delays in negotiation cycles. Well-set templates and formats for contract authoring also facilitate lower risks of violating regulations or skipping details.
To learn more about Post-award Contract Compliance, please download our whitepaper on Guide to Post-award Contract Compliance – How a CLM Can Keep you in Check.