In a rush for growth, companies find themselves dealing with an increased volume of contracts. It’s a great problem to have—until it becomes a real problem. If there are any inherent weaknesses in an organisation’s contract management process, more contracts mean more chances for those weaknesses to cause an issue.
Some issues are minor inconveniences, but others end up becoming serious crises. In 2013, Facebook failed to detect a violation of its contractual terms by Cambridge Analytica, and the resulting publicity caused its stock to plunge, erasing $150 billion of market value within 90 minutes of its earnings call.
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Sometimes it takes a crisis for executives to appreciate the risks of operating without a robust contract lifecycle management (CLM) system. Lax access controls, missed deadlines, compliance failures, inefficient approval workflows, and ineffective reporting can result in severe consequences. Poor CLM can also cause a subtle, steady erosion of profitability. According to research conducted by the International Association for Contract & Commercial Management (IACCM), the average company loses about 10% of annual revenue due to poor contract management practices. With typical profit margins hovering around 10%, even halving this loss can increase profit margins by 50%.
Let’s take a closer look at the five major risks surfaced by ineffective contract processes:
1. Lax access controls
It seems obvious that only people and entities that need access to information should have access, but many companies don’t precisely spell out access restrictions. Excessive access can lead to unscrupulous employees mishandling information or walking away with valuable IP, pricing information, or confidential customer and employee data. Far more organisations have suffered from data theft by their own employees than outside hackers.
Today’s best CLM software prevent this with granular permission controls that provide precise view and edit access by user group, including dynamic filters to address the specific access needs of different departments, divisions, teams, and employee classifications. The best systems allow extensive configuration of multilayered access controls that securely compartmentalise data to address the unique needs of the organisation.
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2. Missed deadlines
Licensing agreements typically restrict the amount of time that a company can use intellectual property belonging to another party. If a company allows the agreement to expire—accidentally or deliberately—but continues to use the product, it opens itself up to liability risk. On the other hand, if a business sets up an auto-renewal and loses sight of it, then the business could be paying for a service it no longer needs.
A company that licenses out IP also must stay on top of these windows of access. Otherwise, it loses revenue every day that it doesn’t notice a contract expiration. And if it’s providing service to customers who no longer have valid support contracts, it’s losing even more.
Some contract management systems actively help prevent these problems. In contrast to those that have repository-only functionality, these solutions can proactively track contracts and alert staff of upcoming deadlines, so the organisation can protect its business and optimise revenues.
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3. Compliance failures
Businesses spend considerable resources on problems like rogue spending and regulatory compliance. But in many cases, people still fall short in delivering contractual obligations promptly. As Facebook discovered, incorporating ways to track compliance with contract terms is just as critical. A well-thought-out CLM system requires contracts to meet specific conditions as they move through the approval process and can also log events and actions as they occur, automating compliance documentation.
For regulatory compliance, a CLM solution helps audit current contracts to ensure they have the appropriate clauses related to data privacy, arbitration, confidentiality, or other regulations that affect the business. The legal team can be automatically notified to fill in any gaps, update the contracts with the appropriate language, and contact third-party signatories.
For operational compliance, a CLM solution helps ensure contracts clearly define performance obligations that the system can track and manage. A simple example is payment terms: though most companies have payment due dates in contracts with penalties for missing the deadline, many fail to track those late payments, let alone enforce the penalties. On the supply side, one of the most common forms of operational non-compliance is overpaying due to not keeping track of volume or other discounts negotiated in the contract. Automated CLM prevents both these issues from occurring.
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4. Inefficient approval workflow
Approval workflow issues can delay and even destroy deals. If an approver is on vacation or doesn’t see a time-critical email, it can derail time-sensitive deals. Even if there isn’t an explicit time deadline, approval bottlenecks cause disruptions in deal flows that result in frustration and lost business.
A robust contract management system reduces friction by automating complex contract approval routing, including sequential, parallel, and conditional approvals. The best systems intelligently nudge, route, and escalate approval requests to ensure that an unnoticed email or a vacation doesn’t cause the process to grind to a halt. It’s the digital age, so legal e-signature capability provided by integrations with DocuSign and Adobe Sign are no longer optional.
A good example of a company that reduces friction in its approval workflow and contract management process as a whole is golf company TaylorMade. With more than 6,000 highly sensitive contracts to manage, the company’s CLM system features automatic notification of contractual changes, service level agreements, and compliance requirements. Attorneys can log in from their mobile devices to review contracts, make comments, and sign them digitally in minutes, so contracts can advance through the approval cycle without delay.
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5. Ineffective reporting
Executives need company-specific, KPI-driven reports that give them advance notice of potential problems before they become disasters. A lot of contract management software emphasise the repository or content management function. The problem with this approach is if data is not actively turned into actionable reports, vulnerabilities tend to remain undetected until there’s a problem.
In contrast, the best CLM software offers fully configurable reporting across business owners. For example, the legal team may want to see the overall risk profile of all contracts and flag problematic ones, the operations team may want to see how well contracts move through the lifecycle and highlight obstacles, and sales leaders may be interested in upcoming revenue opportunities and important contracts that are up for renewal.
Written by Colin Earl is CEO of Agiloft, Inc.