Contract Automation Software

How to mitigate non-compliance risks in Contract Management

Contract compliance is crucial for internal operations as well as external relationships but can be a challenge for any organization as the number of contracts grows consistently along with shifting priorities and changes in personnel.

A typical contract describes the activities that each party is required to perform or refrain from doing. These obligations are the heart of any contract but are often overlooked when organizations define their contract management process.

While signing a contract, each party makes a legally binding commitment to follow through on their obligations. The scope and number of these obligations depend on the size and nature of the contract. There can be contracts with a large number of standard or common obligations, and contracts with a small number of complex or non-standard obligations, or a mix of both.

However, complying with these obligations isn’t as straightforward, especially in organizations that manage their contracts manually. Terms, conditions, commitments, obligations, and entitlements of contracts may not be easily accessible if the contract management process of an organization is not well-structured.

Contract compliance is crucial for internal operations as well as external relationships but can be a challenge for any organization as the number of contracts grows consistently along with shifting priorities and changes in personnel. For example, a newly-hired procurement manager might miss a non-standard payment obligation because he didn’t get the chance to manually go through every contract being managed by his predecessor.

Consequences of lapses in Contract Compliance

Such failures in contract compliance can result in serious consequences. Depending on who the other party is and the nature of a contract, failure to comply with contractual obligations may lead to some very expensive penalties and other damages. There is a good chance that a lawsuit can also be brought to rectify the wrongdoing.

Loss of reputation and goodwill is another issue that arises when contract compliance issues of an organization become public. Companies that fail to adhere to compliance mandates and protocols may also get blacklisted in some networks.

Failure to comply with contractual obligations can also result in complications in business relationships which can hit both operations and revenues. It can also lead to missed opportunities and can impact things as crucial as the renewal of contracts.

Whereas, a robust compliance process or system will help an organization save money, lower risk, and build better operational relationships with business partners. On the other hand, employees will also be more satisfied and perform more efficiently when they are equipped with the right tools and skills.

How a CLM solution can help

An automated, integrated Contract Lifecycle Management (CLM) solution can efficiently minimize non-compliance risks and improve profitability.

CLM solutions are equipped with a structured obligation management framework that can help assess the criticality of obligations and establish accountability to improve operational compliance. Even in contracts with complex obligations involving multiple departments, smart systems can help assign responsibilities to ensure fool-proof, fully compliant contracts.

For example, multiple teams at an IT services firm might be required to disclose the scope and purpose of processing a client’s data on a quarterly basis. A centralized CLM solution here can help bring these teams up to speed about their responsibilities to fulfill the obligations of the contract without giving them access to the full contract.

During the post-award stage, a CLM solution also helps in tracking the fulfillment of obligations and reporting any inconsistencies in contract performance through pre-configured benchmarks. Comparing these metrics with actual performance, it gives visibility into the day-to-day execution of contracts and alerts stakeholders in case of any deviations or delays. Such features help decision-makers get a clear picture of the risks and take steps to address any internal or external operational lapses while ensuring requisite compliance with desired performance obligations.

Compliance management is getting more complex by the day, especially with the rise of remote working where traditionally or manually stored contracts are not easily accessible. This has made it a necessity to be equipped with a smart, digitized contract management solution. Investing in an AI-powered CLM solution like smartContract can help you ensure maximum compliance with your obligations and minimize risks.

smartContract offers extensive yet digestible insights into your contract documents which enables you to quickly scan through relevant information about contract performance and compliance. It is a complete contract lifecycle management solution to create, execute, understand, and manage contracts. If you are interested in discovering more about CLM technology and the benefits it offers, please connect with a smartContract consultant today.

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