Poor organization has been the downfall of countless companies, with millions of dollars wasted due to negligence or simple carelessness. The cost of such poor organization obviously depends on the size of a company and the industry it serves. Nonetheless, for companies in which contracting forms an integral facet of the business, poor contract management may have catastrophic financial consequences. After all, the fallout associated with contract failures can have a host of legal ramifications, the vast majority of which tend to be quite costly. Here are some simple examples of how poor contract organization and management can result in major cost leakage:
For contracts that pertain to manufacturing or the production of a good that has a number of components, it can be very easy to lose track of all of the requisite supply contracts. In some cases, contracts may be entered with companies around the world, and the ordered parts may be arriving from somewhere else. Even if a company does not have component-related contracts, it may have a bunch of different licensing agreements or a number of any other kind of agreement that involves payment in exchange for some good or service.
In any of these instances, poor organization may result in duplicate purchases or unnecessary overlap in some form. This may not seem like it would have a significant financial effect, but if the redundant expenses are associated with technology or some other innovative aspect of the business, it could have a tremendous economic impact.
Expired Deals and Costly Renewals
One of the benefits of contracting with certain partners for a long period of time is that they usually offer discounted goods or services as a reward for demonstrating commitment and loyalty to the relationship. However, there are some contracts that are only applicable for short periods of time, although there is usually an option to enter into contracts for subsequent deals.
It is really important for companies to choose its contracting partners carefully, so that it is not put into a situation where its contracts expire, thereby requiring that the contracting cycle be started anew. In addition, contract management teams must pay close attention to ensure that it takes advantage of any special renewal provisions to avoid unexpected expenditures associated with the execution of a whole new contract.
In the event that a contract portfolio is mismanaged, it may be necessary to hire external consultants or additional staff for the contract management team to get things into order. This is clearly an avoidable reality if the team institutes a comprehensive contract management system and insists on organization from the outset. Granted, things may happen quickly, especially when a business is first founded, but cloud computing has made document retention and management incredibly quick and efficient. Therefore, improper staffing or inadequate oversight should never be an excuse for contract-related cost overruns.
Lack of Communication
Even if a company chooses not to invest in a sophisticated contract management solution, simply implementing a coherent communication strategy will help to keep things running smoothly. Far too often, business deals fall apart because one person simply failed to communicate with another party. Effective communication among team members, within the company, and with all relevant external parties will undoubtedly prevent things from ever spiraling to the point that it requires a significant financial investment to rectify and overcome.