Why creating a culture of proactive contract management is key to business excellence

If you were to list your business priorities, where would contract management fall? In the top 5? Top 10? Is it even on the list at all?

Unfortunately, the third option tends to be the most common one. Simply put, many companies do not make contract management a priority or even consider it at all. Once contracts are negotiated and signed, they are filed away, only to be reviewed if there is an issue, or when it comes time discuss renegotiations. Even more common is a disjointed process of contract management. Each department—or even individual sales teams—may have their own methods of managing contracting, causing confusion and chaos. Even worse? This lack of cohesion can cause serious problems within your business, including lost revenues and increased risk.

Why contract management matters

Imagine this scenario: One of your best salespeople lands a major account with a local business. As part of the deal, the business promises to purchase a minimum number of widgets from you each quarter. For every quarter that they do not meet that minimum, they will face a 20 percent surcharge on the next quarter’s orders. The first quarter goes great, and the customer meets the obligation. However, their sales are down in the second quarter, and they only purchase half the number of widgets they committed to.

Unfortunately, your salesperson has moved on to working with other customers—landing several other big accounts in the process—and doesn’t realize that the customer hasn’t met their obligations. Now, the company has not only lost the promised revenue from the sale, but also the revenue from the surcharge that was supposed to be added. Further compounding the problem are the salesperson’s other clients, who haven’t met their obligations either, as well as the contracts that the salesperson lost because they weren’t renewed on time.

While this might be an extreme example of a salesperson who needs some retraining, it highlights the importance of proactive contract management. If the salesperson was able to easily gain visibility into the contracts he already had, he would have spotted issues before they led to revenue losses, and known when to renegotiate and renew contracts.

In fact, according to research from the Aberdeen Group, companies that use contract management solutions are twice as likely to renew and renegotiate contracts on time than companies that don’t. Their research indicated that companies focused on proactive contract management renew 56 percent of their contracts and renegotiate 49 percent, whereas those that do not only see about a 25 percent renewal and renegotiation rate.

The problem stems in large part from the fact that many companies simply do not have the visibility into their contracts that they need to manage them effectively. It’s almost impossible to remain proactive on contracts that are stored in a filing cabinet in a back room and know exactly when to evaluate certain milestones or enact specific clauses.

 

Implementing proactive contract management

For most companies, proactive contract management means using a contract lifecycle management solution that automates the key aspects of the contract management process, from negotiation through analysis. Not only does such a solution streamline the process of contract creation by reducing the bottlenecks associated with drafting contracts and securing approvals, but it also provides the visibility that allows companies to act proactively.

Not only does a contract management system provide notifications of key contracting milestones, it also allows for a better assessment of risk. There are many situations in which an organization might need to provide insights into their existing contracts, such as before an IPO, during merger and acquisition negotiations, restructuring, or any time there are significant financial resources at stake.

Without a contract management system, compiling and analyzing contract data can potentially take hundreds of worker hours, not to mention it is likely to be skewed or inaccurate. Contract management software turns the content of contracts into data that can be efficiently analyzed, presenting an accurate picture of risk that can spur action before the contracts prove detrimental to the bottom line.

And for the salesperson with multiple contracts that are out of compliance, these risk analysis tools can not only save accounts but potentially save his job. Advanced programs use artificial intelligence to monitor contract performance in real time, evaluating risk based on how well the parties meet their agreements—meaning that should customers fail to meet their obligations, or a particular salesperson continuously write bad business, the contracting software will alert your team to those issues, allowing you to prevent future bad contracts from slipping through. In short, by getting a handle on the contracting process and taking a more proactive approach, you’ll have a better chance of achieving business excellence.