” Organizations which manage their contracts and compliance effectively will be at a tremendous competitive advantage.“
Many companies have a divisional focus rather than enterprise-wide basis for contract and compliance management. Divisional ”islands of information” also restrict an organization’s overall visibility to risk exposure and potential dangers.
Effective contract and compliance management enables improved risk management and greater extraction of value from commercial relationships.
Recent studies have shown over 75% of respondents to be observing increased regulatory activity with over 65% citing ”conducting investigations“ as a prime focus of regulators.
Areas that are attracting increased focus include money-laundering, insider-trading, breaches of anti-trust law, bribery and corruption, stock market disclosure and breaches of directors and officers duties.
The need to manage risk exposure
The modern business environment is forever driving the number and complexity of contracts ever higher. Unfortunately, organizations are still trying to manage contracts and compliance in a fragmented, manual and ad-hoc manner. The results are an excessive risk, lost revenue and higher costs. Risks are not visible and so are not managed. Visible risks can be acceptably managed and priced correctly and unacceptable risks, once recognized, may be mitigated, passed on or insured against.
Company officers are being increasingly held personally accountable should negative unforeseen circumstances strike a company’s operations. Thus board members are increasingly demanding information systems which provide capture of relevant, reliable and up-to-date information.
Third parties are increasingly demanding visibility and audit trail records of contracts as part of their own risk management and/or regulatory reviews.
Risk management is not simply a departmental issue. It is an enterprise-wide concern.
A company can have only one reputation, protect it
What constitutes a company's reputation? What is the value of this reputation? How much of this reputation is based upon intangible assets?
A loss of corporate reputation is viewed as one of the greatest risks to the modern enterprise.
Corporate reputation is based upon an image formed from a sum of experiences. It may take decades to form but only days or perhaps even hours to destroy. Any unforeseen risk event which negatively impacts a company’s perception or reputation may immediately impact materially its corporate valuation and stock price.
Not only must a company directly protect its own reputation but it must also have sufficient visibility into its relationships with commercial partners in order that they are not allowed to operate in a fashion to negatively impact and destroy years of effort and investment in reputation and brand positioning. Litigation and dispute resolution.
Commercial and regulatory disputes are increasingly being resolved by negotiated settlements. With typically over 70% of legal disputes resolved out-of-court and judicial determination being required for less than 15% of cases. It is clear however that for both judicial and negotiated settlements the party with the most accurate and proactive access to data and documents will be best placed to succeed and negotiate or conclude a beneficial resolution.
A rigorous Contract Management Lifecycle with IT solution support as a solution
Contract lifecycle management can address these issues by enabling compliance to the contract and understanding of all terms and conditions as related to the actual business expectations, both during good times and bad times.
The CLM process has five steps:
Contract authoring and creation—Contracts typically contain, but are not limited to, partner information, contract value, contract time period, specific terms and conditions that must be met by each trading partner, addenda, approval signatures,
and date of signatures.
Contract negotiation and revision—The second step is where contract terms are negotiated, reworded, and changed by one or both parties and their legal and finance departments.
Contract approval—This step includes approvals for clauses, quantitative amounts such as total dollar value and total items contracted, and terms and conditions by each trading partner and its organization. The organization may include, but is not limited to, the CEO, CFO, legal counsel, CPO, ….
Signature—This is where the final agreement between two parties becomes definitive. When both identifying parties have signed the contract, the contract is considered complete. It is also active for the duration as defined in the contract. This may be accomplished with a physical or electronic signature process.
Contract archiving—Archiving, the final step is one that immature companies take for granted, often just filing the contract away for future record. More advanced companies use the information for compliance and value analysis. To gain the most success from the contract, companies must also understand and be able to act on the value that can be derived from a contract.
Trading partners can derive three elements of value in particular from their contracts:
Compliance—Many companies audit and review their trading partner relationships. Search capabilities and analytics are the most utilized tools to ensure compliance with trading partner agreements.
Visibility—Contract visibility provides a view of each step of the contract process, progress, revisions, and remaining steps that must be fulfilled. In addition, dashboards and alerts are configured for more visibility based on quantitative and qualitative requirements, such as volume, lead time, and inventory requirements.
Collaboration—This refers to the ability for a contract to track revisions, ideas, comments, and alternatives for clauses and terms. Innovative ideas and key performance criteria can be jointly defined and enabled with a collaborative workflow between trading partners and their ability to meet the parameters outlined is critical to ensuring a joint value relationship. The total dollars and cents, relative to the revenue, margin, and overall supply chain ecosystem costs are highlighted, assessed, and tied to business requirements.