How to Solve the Problem of a Poor Contract Management Policy
Spend a little time reading up on contract management and you’ll undoubtedly come across this stat: good contract management can improve corporate profitability by nine percent of annual revenues. Flipped the other way, this figure, as reported by the International Association for Contract and Commercial Management, shows that poor contract management is costing companies significantly every year.
How can poor contract management erode company revenues and profits? There are numerous things that can occur throughout the contract lifecycle that can reduce value in big ways and small:
Prolonged contract negotiations can result in opportunity costs or run the risk of the agreement never coming to fruition.
Failure to proactively monitor contract performance can result in missed milestones, problems with deliverables, and the risk of contract breach; it can also result in compliance penalties, late fees, and other costs.
Contracts focused on the wrong terms and risks can result in poor protection in the event of a problem.
Failure to assess contract performance at the conclusion of an agreement and to capture and implement those learnings can result in repetitive issues and underperformance causing ongoing value leakage.
And these are just a few examples of the myriad ways a failure to employ contract management best practices can have a big toll on company bottom lines.
Of course, identifying that there is a problem is one thing – but fixing it is a whole other challenge. So how do you solve the problem of a poor contract management policy within your organization? Here are three steps you can follow.
1. Conduct an Audit of All Things Contract Related
You can’t begin to find a solution to any problem without an understanding of what that problem actually is. To uncover why your organization’s contract management policy is underperforming, you must first take steps to diagnose the issues by conducting a contract management audit.
A contract management audit is a holistic, organization-wide assessment of your current approach to managing business agreements. It should include a close look at all of the stakeholders, resources, and processes that currently guide the way you deal with contracts of all types. Your audit should consider:
What types of contracts does your organization use and in what volume?
Which teams and business units are involved in the various aspects of contract management, from drafting through to conclusion? Who else should be involved?
What is the current contract management policy? Where are contracts stored once executed? What steps are currently being taken to implement contracts and monitor their performance?
What are your goals in managing contracts? What will success look like?
What specific problems have occurred in the management of various types of contracts in the past? Are there common themes or problems occurring? (Note that if you currently have no formal contract management policy and are not actively monitoring and evaluating contract performance, this may not initially be clear.)
Once you have a thorough understanding of how contracts are currently being handled, you can begin to identify and address problems and gaps that exist within the contract management chain. Though these will be different from organization to organization, there are some common issues that exist within enterprises:
Many organizations have no formal contract management processes at all, instead taking an ad hoc approach to handling each new agreement. This can cause chaos and disorganization throughout the contract lifecycle – approaches can be siloed across departments, you may have redundant and even conflicting agreements, contracts may get physically lost so that you cannot retrieve and reference them when needed, and on and on.
A top-heavy approach means you may be putting lots of effort into negotiating the most favorable terms for your agreements – but paying little attention to what happens when the agreement is signed.
Unclear stakeholder ownership and responsibilities can result in poor contract implementation, including missed obligations and opportunities.
2. Develop a Formal Contract Management Framework
The next step to solving poorly-performing contract management policies is to use the learnings from your audit to improve your approach. Contract management requires an organized and systemic approach at all stages – and this is far easier to achieve with a roadmap that can be applied to all contracts that arise throughout the organization. For each of the stages of contract management, detail what needs to happen and who should be involved. For maximum clarity, it’s important to consider not only standard contract-related situations but how you will address anything out of the ordinary. Once you have developed your framework, it is important to document it, communicate processes to anyone who will be involved in contract management, and implement a rollout and training plan.
3. Use Technology to Make It Easier
Dedicated contract management software can improve the ease of contract management at every stage, from helping you find the right standard contracts to employ for common types of business arrangements to reminding you to stay on top of each contract-related task. However, there are numerous solutions on the market and features and pricing models may vary, so take some time to evaluate the options based on the specific needs and workflows you’ve identified and developed in the first two steps.