Contracts Management: Problems and Solutions
As every businessperson knows, well-crafted and managed contracts are critical for any organization. Contracts management problems can lead to lost revenue and dissatisfied business partners. In fact, a recent McKinsey study found that “suboptimal contract terms and conditions combined with a lack of effective contract management can cause an erosion of value in sourcing equal to 9% of annual revenues. For Fortune’s Global 500 companies in 2016, this 9% would have equaled $2.5 trillion in value.”
Considering the hundreds of contracts that a single organization reviews each year, some mistakes are inevitable. After all, to err is human. But many contract risk factors are well known and, with the proper care, avoidable.
Read on to discover the most common contract risk factors—and how to prevent them.
Potential Contract Management Problems
With full knowledge of potential contracts management problems, side-stepping them is far easier. Keep your eyes peeled for these 7 potential contract risk factors you might encounter.
Legal loopholes: Insufficient or ineffective contracts leave organizations exposed. If a contract has omissions or ambiguities, the external party is far more likely to successfully identify requirements or stipulations that they don’t technically need to meet. To avoid these legal loopholes, ensure all contracts are drafted airtight. When all agreements are final and binding, external parties will not be able to find any wiggle room with which they can harm your business.
Lack of resources: In contract management, contracts are the first priority, but the people who create the contracts must be prioritized as well. Constraints on internal employees or lack of mentorship opportunities have serious effects on the efficacy of your contracts. For example, a poorly staffed office can lead to delayed or hurried contract execution and even reduced contract value. In fact, 96% of organizations said that employee error impacts their contract process.
Lower than expected value: Ultimately, contracts define the exchange of value. Without expressly articulating your organization’s expected value exchange in writing, you could be at risk of receiving less than the value that you wanted initially.
Contract delays: Astonishingly, 87% of organizations say their contract approval process is at least somewhat responsible for stalled deals. These delays can be disastrous, leading to a chain reaction of negative results for both customers and vendors. To prevent delays, ensure your contract management team is well staffed. You can also create standardized or pre-defined legal language so that team members don’t waste time struggling with these small details.
Relationship damage: When a conflict arises between parties, a well-defined contract can save the relationship. Inarguable, pre-defined goals and rules can help solve disagreements quickly. For example, if there are questions raised about performance, a business can point to KPIs in order to determine whether there really was a contract violation. In one survey, it was revealed that more than 75% of contracts did not include an exhaustive set of KPIs.
Revenue leakage: While auto-renewed contracts can be convenient for services that you definitely want to continue for the foreseeable future, they can also be a pitfall as well. Ensure your teams review auto-renews, renegotiation, and bonus dates when a contract is signed so that your teams can review them before that deadline has passed. Without access to an intricate view of contracts from a central storage location, this can be an especially challenging task. Poorly defined or rarely revisited contracts leave organizations at risk of not receiving expected value—and inefficient contracts and contracts management can decrease the value in sourcing by 9% of annual revenues.
Contract silos: When your teams store contracts on multiple disparate systems, with different departments and individuals in charge of them, successful contract management can be difficult. If you need to draw on language from an existing contract, access contracts for renegotiation, or want to review the historical performance of a client, contract silos are likely to hinder your progress.
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Avoiding Contract Management Problems
A well-staffed team that has ample amounts of time to comb over each and every of the possible contract risk factors will successfully help your organization avoid contract management problems. While this team will consume a significant amount of money, a smaller department will simply be unable to review and mitigate each of the potential risks your contracts face.
Alternatively, you can bring in an expert organization that specializes in contract management. This trusted organization should be able to assess, strategize, and execute a comprehensive contract management plan for your teams.
Among other things, this organization should standardize your processes and language, and help your teams adopt these new processes. This way, your teams will have a well-defined process in place and will always have access to the process information when they need it—and your business will be empowered to gain full value from the contract with your expert team, even after your relationship is successfully completed.
Ready to hire a trusted partner to help your organization mitigate contract management problems? Schedule a 30-minute no-obligation consultation and we’ll give you a high-level review of your organization’s current process, then provide recommendations for next steps.