Contract Management - Hardships Large Businesses Face
Contract management hardships faced by large businesses are overall in the area of not being centralized which exasperates the sheer logistics of mail-execution of contracts, maintaining contracts that are not in writing, inabilities to track key dates within contracts, and also calculating and tracking contract costs. They are also influenced by the human element such as the use of boilerplate language, the business's ability to adhere to business rules, the operational effectiveness of the business structure and the challenges of compliance performance and the resulting reporting challenges. The variety and amount of contracts being generated can cause difficulties in developing a centralized, logistical infrastructure for making, executing, recording and recalling contractual information. Other issues involve the business operational behavior and performance, as well as the boilerplate language used to convey the contract information.
Lack of Centralization
When asked to rate the extent to which certain contract management issues present a challenge within their organization’s management of contracts, 61.50% of respondents put having to deal with scattered contracts as one of the most pressing issues. (Note: the percentages cited throughout this article don’t add to 100% because respondents were allowed to select multiple answers.)
65.15% of respondents used paper in the process of managing contracts.
While all the respondents didn’t use contract management software, those focusing on paper were the ones citing a lack of centralization the most. When contracts are sitting in a filing cabinet, they’re holding back contract managers for two reasons. First, a delay in access to contract data leads to slower decision-making. Second, a paper-based contract management system doesn’t provide insights as to how existing and new contracts are interconnected, which can lead to missing out on critical information.
Executing Contracts Via Regular Mail
Talking about unnecessary delays in contract management, contract execution can be a major pain point in any contract life cycle. Printing out and mailing out a contract so that the other party reviews a contract, only to send it back with revisions, is a very inefficient process. Emailing out contracts so that the other party prints the contract out, either to mail back or email back a scanned copy is also not efficient. A company should leverage e-signature capabilities of contract management systems to execute contracts faster.
Keeping Track of Contract Costs
Cost efficiency is another major issue in government contracts. For example, the Pentagon held back $5.2 million in payments to Boeing after a crackdown on a regulation that took effect in 2011 and required contractors to meet standards from internal reporting systems. Several government contractors have been slow to adapt digital systems to keep track of costs. Manual systems for record-keeping and cost-accounting are ineffective because they never allow the client or contractor to have a real snapshot of a project’s budget due to the inefficiency of systematic human data entry.
Maintaining Contracts Not in Writing
As contract managers, nothing can be more frustrating than something you can’t control. While verbal contracts are supposed to hold up just fine in court, the reality is that verbal contracts are open to interpretation from each party. However, there are certain “agreements” that may be older that the enterprise itself.
Things are even more complicated when those verbal agreements depend entirely on the good relationship between two people. If the relationship were to go sour, what would happen to with the agreement? It goes without saying, any contract needs to be inside of a contract management system in order to have no doubts about the terms and conditions.
Inability to Track Key Dates Within Contracts
One of the key pieces of contract data often being missed in the business services' industry is the schedule within a contract. 61.2% of respondents reported an inability to track key dates within their contractual relationships. 71.88% of individuals in a purchasing or procurement role are the ones that most frequently cited this concern.
A good example was the lack of good quality data on the MoD’s portfolio of non-competitive contracts created challenges for MoD in achieving savings. For example, as its contract database contained out-of-date information, the MoD struggled to identify the contracts due for renewal or amendment and that may fall within the scope of the Single Source Contract Regulations.
Dealing with Boilerplate Language
One of the benefits of boilerplate language is that it speeds up the execution of contracts. However, boilerplate language should be reviewed on a regular basis to make sure that it meets internal and external compliance requirements. A rule of thumb is to review standard contract language every 6 to 12 months. One important benefit from a robust enterprise contract management system is the ability to handle several contract templates.
Unlike paper-based contract management systems, a company is limited to a single template. The digital system allows for several templates to be implemented. Even more, the system allows managers to assign access to certain templates to specific individuals. This way, any doubt about what is the right template to use is prevented.
Lack of Standardized Language
While only 54.1% of respondents to Contract Logix’ survey singled out a lack of standardized language as a challenge, this issue shouldn’t be taken too lightly. Information asymmetry is a serious issue because it creates risks that are taken into account in any contractual relationships.
Inability to Adhere to Business Rules
When examining the relationship between the roles responsible for contract management and the challenges experienced in managing, the most frequently cited challenge by experts in contracting is the inability to adhere to business rules.
Operational effectiveness includes whether contact information is stored in multiple locations, inconsistent terms and conditions, lack of consistent use of standard templates, and contracting decisions that are not aligned or centralized. Regular assessment of operational efficiency of contract management provides a clearer path to having an effect management of contracts.
Compliance performance and reporting challenges
Challenges related to compliance performance include lack of a performance goal, measures, metric and tracking mechanisms of contracts compliance, and absence of performance management, resulting in increased cost compliance with contract terms. If reporting doesn't occur, large business can fall out of compliance and be liable for penalty.
To wrap up, the ten areas of contract management listed above allow any large business to find their own focus points in order to stay on top of and ahead of contract management. It is key that the logistical infrastructure of handling a contract is correctly addressed in order to allow for centralizing contract information and digitizing execution to be effective. Another infrastructure to modulate for greater management is human resources. This includes using clear and standardized language, refining the boilerplate language, writing out the verbal contracts made, regularly assessing compliance performance, and being operationally effective.