Risks of Poor Contract Management

Contract Management in business is not simply an exercise in filing or document storage. Nor is it solely focused on the creation of contract documentation. Contract Management is a broad area of business operation that encompasses a number of different disciplines across multiple departments. This being the case, it is essential for businesses to have a clearly defined Contract Management approach, so that this complex and challenging area can be handled in an efficient and proactive way.

It is the issue of efficiency that is key here. The broadness of the Contract Management challenge means that the difference between a cohesive approach and a non-cohesive approach is the difference between efficiency and inefficiency. Non-cohesion and inefficiency are bad for business – they prevent progress and can cause damaging revenue loss.

What does poor Contract Management look like?

How do we recognize poor Contract Management in our own organizations? You might think it is as simple as working to understand Contract Management best practices and comparing them to the operation in question. However, in inefficient and non-cohesive systems, even this is difficult to do. The most accurate way to reveal the quality of the Contract Management approach of a business is to understand what the characteristics of a poorly managed contract system are.

Decentralized Approach

When a contract system is decentralized, it is essentially unmanaged in the context of modern business. If an organization is still allowing contract documentation to be scattered throughout the operation, in various departments, then there is no cohesion in the approach to managing that documentation. Contract Management best practice indicates that the fundamental basis for effective Contract Management is the centralization of the contract collection, simply because this allows for the Contract Lifecycle approach to be implemented. This means that everything regarding the contract – from request to termination – is handled as a whole, cohesive process, rather than in a disjointed set of tasks.

Inconsistent Version Control

The personnel of a business cannot perform to the best of their ability if they do not have the confidence that they are working with the very latest information, and this is certainly the case for Contract Management. Stringent version control is an essential element of good Contract Management, not least because the documentation being used and created involves legal language that should be composed to accommodate the latest applicable regulations.

Nonstandard Documentation

When a business uses non-standardized documentation, cohesion and efficiency is difficult to achieve. It becomes a time-consuming endeavour to ensure that contracts are fully reflective of the goals and objectives of individual projects, commercial relationships and the business as a whole. It also reflects poorly on the running of the business, from the perspective of both customers and vendors or suppliers.

 Reliance on Paper Copies of Documentation

Businesses of today should be embracing digital technology in all aspects of operation because digitization brings with it advantages in efficiency and cost-effectiveness. A continued reliance on paper-based Contract Management systems is a clear indication of the need to modernize the entire operation, and is a glimpse into a disorganized approach to Contract Management as a whole.

 Inconsistent or Non-Existent Performance Monitoring

The contract collection of a business can be a powerful tool when performance is properly monitored. That includes tracking the fulfillment of obligations, requirements and deliverables and the cost-effectiveness of each agreement. If a business does not have this information for each contract then it will undoubtedly also be failing to conduct proper Risk Management, forecasting and planning.

 Lack of Access Control

Full and effective data protection is not possible without stringent control of access to a business contract collection. A lack of access protocols makes the tracking of changes and activities relating to documentation difficult, and the maintenance of data security inconsistent at best.

Inconsistent or Non-Existent Due Diligence

One of the biggest advantages of proper Contract Management is the way in which an efficient contract system supports thorough due diligence. The absence, or inconsistency of due diligence – including risk assessments and background checks – indicates a contract collection that is disorganized to the extent that it provides little value in terms of data analysis.

Identifying the characteristics of poor Contract Management is only part of the task, however. Pinpointing these systemic failings can result in a strong sense of the overwhelming scope of the issue. This is because business contracts govern internal and external commercial relationships, intersecting with every area of the operation. The way in which to steel the business and its personnel to make change is to develop a comprehensive understanding of the risks associated with poor Contract Management.

The Risks

The motivation for all change in business is the improvement of the bottom line. Improvements to Contract Management approaches are no different. The benefits of adopting best practice Contract Lifecycle Management principles unarguably relates to profitability. For this reason, it is essential to understand clearly the risks associated with a poorly managed contract collection. In other words, the risk to the business must be understood in order to motivate change.

Document Loss

A poorly managed contract collection results in lost documentation. Without stringent controls, centralization, and monitoring, it is not possible to ensure that all documents are stored correctly and securely. This is true of both paper-based and digital systems. The potential consequences of document loss include:

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  • Damage to the company’s ability to conduct thorough risk assessments regarding new and existing deals. This, in turn, increases risk to revenue and reputation.
  • Increased resource wastage as more personnel time and skill is invested in trying to locate documentation. This results in increased costs.
  • Contravention of compliance rules and regulations regarding the storage and maintenance of contract data, particularly in relation to future audits and investigations.
  • Collapse of mergers or acquisitions because the business is unable to produce the necessary documentation.
  • Increased risk of fraud and the theft of intellectual property.

Missed Deadlines

Deadlines are among the most foundational, structural elements of a business contract. They make clear the timeframe of the agreement and allow all involved to plan everything connected to that project; to build the rest of the project around that core structure. This is why, as a general rule, contracts include penalty clauses for missed deadlines – because the impact of a missed deadline ripples throughout the rest of the associated activities of all parties. Deadlines are usually also the result of lengthy and complex negotiations and reflect the needs of both parties. To miss contract deadlines, then – even by a short period of time – risks several serious consequences:

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  • The Contract Lifecycle is lengthened, increasing costs and reducing availability of resources for additional sales or projects.
  • Penalties can be triggered, which increase costs and damage the commercial relationship between parties.
  • Reputational damage is incurred and becomes a potential deterrent for future consumers, vendors, suppliers, or commercial partners.
  • Legal challenges or litigation can ensue, causing increased costs, revenue losses and further reputational damage.

Compliance Failures

In the context of business, ‘compliance’ can include the fulfilment of contractual obligations as well as adherence to both internal and external regulations. While failure to fulfil contractual obligations risks the same consequences as missed deadlines, the failure to adhere to internal and external regulations can trigger a broader range of issues:

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  • Failure to comply with internal regulations can lead to conflict with stakeholders, with possible financial loss as a consequence.
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  • Failure to comply with external regulations can incur legal prosecution or financial penalty in any territories or jurisdictions associated with the failure. This, in turn, increases costs and causes revenue loss.
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  • Serious and systemic compliance failures can lead to the collapse of the business, risking serious consequences for those with liability.
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  • Compliance failures also have negative implications for business insurance premiums.

 Breaches of confidentiality

While breaches of confidentiality can relate to compliance failures, they are also associated with very specific risks.

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  • Revenue loss caused by the undermining of consumer confidence.
  • Increased costs caused by legal action.
  • Revenue loss caused by the loss of intellectual property.
  • Increased costs associated with investigating and fixing the breach – either through training, employing new staff, acquiring new technologies, and restoring systems.
  • Increased cost of insurance premiums.
  • Increased cost of reputation restoration.

 Incorrect charges

In order to charge customers the correct amount or agree to a price that has been quoted by a vendor or supplier, it can be important to view a contract in the context of similar agreements. It is also important to keep track of charges over time – both those being made to customers and those being made to the business – in order to ensure that the business is not being overcharged or under charged. This is difficult to do when the contract collection of the business is decentralized and poorly managed. Charging customers the incorrect amount damages that commercial relationship which can, consequently, result in lost business and lost revenue. Likewise, the business being charged the incorrect amount can result in revenue loss.

The solution to poor Contract Management

Having established that poor Contract Management brings with it serious risk, and how the characteristics of poor Contract Management can be identified, we can understand that it is a problem that requires a solution. The solution to poor Contract Management is the adoption of a Contract Lifecycle approach, and the implementation of Contract Management Software. This type of digital solution is built around the principles of Contract Lifecycle Management – the consideration of the Contract Lifecycle as a whole process, rather than a set of disjointed tasks – and consequently encompasses all the necessary tools and features.