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The True Cost of Poor Contract Management


Independent research conducted by the International Association for Contract & Commercial Management (IACCM) suggests poor contract management costs organizations as much as 9% of their annual revenue. Here are some of the weakest points that cost organizations the most money.

Opportunity Costs

It’s easy to treat auto-renewal or other automatic contract updates as a perk. After all, managers have more pressing things to deal with than pouring over contracts after they’re signed. The problem is that this approach sets organizations up to miss opportunities to negotiate better deals. A smarter strategy is automating aspects of the contract management process, not the contract itself. A timely reminder to review and renegotiate makes contract management more efficient, without sacrificing the opportunity for a better deal.

Opportunity costs also arise within the organization. A disorganized system takes longer to maintain than an efficient one. Legal counsel may spend potentially billable hours hunting through filing cabinets. Managers devote time to handling minor contract emergencies, when they would have preferred to prepare for the organization’s next deal. A more organized system can save a lot of money by freeing employee time to work on higher-yield projects.

Performance Costs

If a vendor mentions cost-saving or value-adding measures in their bid, this can become a deciding factor for the organization to sign a contract. Neglecting to manage the contract effectively, however, can mean those cost-saving measures can fall by the wayside. Checking contracts periodically can ensure that benefits promised at signing are actually fulfilled over the life of the contract.

The contract is also an important document to keep track of a project’s timeline. Delays, unexpected extra costs, and contract cancellation can add up to a financial burden for the organization. Effective contract management may catch delays earlier. This allows organizations to course-correct with the original partner or set up a new contract sooner if it becomes clear that a current relationship is failing.

Penalty Costs

Companies held to compliance regulations on a federal or state/local level face potentially costly penalties if non-compliance incidents occur. Managing contracts is especially critical for these organizations so they avoid potential criminal charges.

Organizations not bound by federal compliance regulations should still be concerned about penalties. Contracts have their own particular clauses in place to protect both parties from failure to meet expectations. Settling claims and disputes on any contract can turn into a persistent revenue leak.

Redundancy Costs

In large organizations, effective information sharing is critical to avoid wasting resources and establishing redundant accounts. Old-fashioned contract management methods often obscure these redundancies. An effective system may have multiple ways to clearly identify which contract cover which of the organization’s needs.

The first step to transparency is making it easy to share important documents. A cloud-based, interdepartmental system allows decision-makers and managers throughout the organization the opportunity to review contracts. Communication is clearer because users connect to the same document folders, instead of hunting through parallel local folders that may or may not be up to date.

The second step is organizing documents in a way that reveals unused or redundant accounts. Creating a template of tags for various types of supplier accounts makes it easy to compare contracts. Instead of auto-renewing tech support for the one department that uses a particular brand of copier, a manager might find it’s better to end the contract and negotiate a discount on additional supplies and services from the copier company used in the rest of the organization.

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