Up to 75% — or more — of business-to-business transactions today are governed by contracts. Think about it: leases, consulting arrangements, equipment rental, insurance policies — even that agreement with the cleaning service. As they’ve multiplied, contracts have also become increasingly complex. And each creates rights and imposes obligations.
Businesses can’t live without contracts. But it’s often questionable how well we’re living with them. Negotiated agreements can be assets or liabilities, depending upon how well they’re managed.
THE RISKS OF POOR CONTRACT MANAGEMENT
What’s hidden in the fine print in your filing cabinets can threaten the health of your organization. The business, legal, and financial risks in failing to effectively manage contracts are substantial. The costs may be hidden, but they are real.
Overlooking an automatic renewal date on an unfavorable contract can multiply your costs over a period of years.
Consider the impact of a missed escalation clause, un-enforced delivery date, or failure to give required notice of a price increase. People don’t intentionally ignore these key milestones. Expensive slip-ups like this often happen simply because no one noticed the deadline in time.
Then there’s the true boogeyman. Poor administration of contracts makes disputes more likely. And settling disputes entails legal expenses and, potentially, costly litigation.
BENEFITS OF GOOD CONTRACT MANAGEMENT
The risks of poor contract management are clear. The inverse is also true: the potential upside of good contract management is substantial.
The list of benefits is long. At the very top are visibility and control.
By implementing an effective contract management system, an organization gains visibility into what contracts it has and control over the impact of those contracts.
There may be opportunities to consolidate vendors. Unsuspected waste. Companies have even realized they’re paying service agreement fees on equipment they haven’t used in years.
SOLVING THE PROBLEM
You’re convinced that better managing contracts is vital. But how do you go about it?
Administering negotiated agreements via hard copy files is labor-intensive and notoriously ineffective. Internally developed spreadsheets are a band-aid at best.
Fortunately, technology comes to the rescue. Any number of software developers have turned their attention to the issue and come up with applications designed specifically for contract management.
Contract management software puts you in control.
You’ll be better able to meet your contractual obligations and to ensure that other parties meet theirs. Within each contract, you’ll gain visibility into key dates and milestones, obligations and requirements (both yours and the other party’s).
You’ll be able to begin negotiations of contracts coming up for renewal in a timely fashion, improving your chance of obtaining favorable terms. And you’ll avoid the automatic renewal of unfavorable contracts because you won’t miss giving the necessary notice. You’ll give required notice for price increases and be aware of impending delivery dates.
You’ll more easily manage master purchase agreements and blanket orders. You’ll have the opportunity to improve cash flow by collecting monies when due and making payments in the right amounts at the right times — not too much, not too soon or too late.
You’ll avoid penalties incurred through inadvertent noncompliance.
The potential savings are even greater than the sum of these benefits. Your increased ability to live up to your obligations and enforce your rights will decrease the risk of costly litigation.
You’ll even be able to easily review your past experience in order to structure more favorable agreements in the future.
THE BOTTOM LINE
With the bulk of business today conducted under negotiated agreements, effective contract management is essential. Fortunately, dedicated software packages are affordable, simple to implement, and easy to use.
The business case is compelling. The measurable benefits are clear. ROI is favorable, payback speedy. Young businesses should implement contract management software as an important part of building their infrastructure. More mature firms should take this step to reduce existing risks and enable them to proactively manage their negotiated agreements.