The Relationship Between Contract Management & Compliance
Risk & Compliance
The terms contract management and contract compliance are often used interchangeably. Although the two business processes do overlap in many ways, and it is not incorrect to intermingle these concepts, there are some slight nuances to each. Perhaps the easiest way to discern the difference is by thinking about contract management as a more internal process focused on the manner in which a company is managing its own contract portfolio. On the other hand, contract compliance is somewhat more externally focused, as it requires an examination of the performance by the other parties to contracts. Despite these subtle differences, contract management and compliance will always be inextricably intertwined as each facet continuously influences the other, as discussed below.
In the end, the primary emphasis of both contract management and compliance is on overall performance of the obligations contained within the contract agreement. A contracting relationship will not survive if one or both sides cannot abide by their commitments. As a result, contract managers must diligently monitor contract performance. This must occur with respect to the company’s internal actions, and it must also include a periodic review of any relevant external actions. It is the contract management team’s responsibility to ensure that deadlines are adhered to, payments are timely, and issues are identified and rectified promptly. Any performance shortcomings will inevitably impact compliance and vice versa.
Conflicts and Costs
Contracting relationships are all about a mutually beneficial exchange. A company that is not receiving some level of value from a contract will no doubt abandon the situation at the first opportunity. Hopefully, the cessation will simply occur at the completion of the contract, essentially resulting in non-renewal of the agreement. However, it certainly may happen in the midst of the contract’s timeframe, as one party may decide to ignore its commitments, either intentionally or inadvertently.
Regardless of the reason a party to a contract does not perform as stipulated, and irrespective of the extent of the party’s non-performance, there will most likely be rather costly consequences. Of course, the goal of both contract management and compliance is to contain costs and avoid financial consequences, so taking steps to avoid performance disruptions is key. This may require a renegotiation of some of the contract terms or coming to some other compromise to keep things running smoothly. A willingness to act in a way that benefits both sides of the transaction will always prove critical to preventing conflicts, and thereby eliminating unnecessary expenditures.
One of the most important aspects of both contract management and compliance is that it enables parties to an agreement to identify existing and potential issues and to take steps to mitigate the likelihood, or at least scope, of their impact. Every time the contract management team evaluates a contract’s performance (with or without CLM software), the information gleaned will serve as a valuable lesson and should influence strategic planning going forward. This is also true of contract compliance, as the same reasons for non-compliance may crop up from time to time. But, with the appropriate analysis and planning, companies can easily avoid running into the same problems over and over again.
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