Contracts are the backbone of supply chain processes. Modern businesses and organizations have to create and manage complex verbal and written contracts which run into hundreds of pages with numerous clauses, terms, and agreements.
What do contracts mention apart from a business transaction?
- Expected revenues
- Ways to control procurement costs
- How to manage suppliers and customers
- How to protect intellectual property rights
- How to establish service levels
- How to reduce risks
Why is there a need to manage contracts?
- Regulations that require companies to establish and document business control procedures for tracking and reporting material business information, are growing more rigorous every year.
- Globalization is increasing the complexity in contracts as well as the risks inherent in trading relationships.
- Licensing, channel, and warranty agreements are increasing in number and complexity too.
A good contract lifecycle management can reduce the financial risks and enhance the net value of a company, while a poor contract lifecycle management can expose organizations to high costs, lost revenues and liability for contractual and regulatory, and operational and supplier non-compliance. In fact, failure to manage contracts from the joint perspective of profitability and compliance, costs organizations billions of dollars every year.
What are the challenges of not having an adequate CLM technology?
Failure to enforce negotiated terms: Organizations must be diligent about getting everything they had agreed upon on the basis of the contract. Poor contract management can lead to financial loss due to “time-consuming negotiations”. At times companies miss out on the ability to negotiate the value in contractual terms to get a better deal.
Inadequate delivery services to customers: Establishing a project timeline, production schedule and delivery process are crucial to meeting customer expectations. Poorly managed delivery terms can hinder the creation and application of service-level agreements and KPIs.
Poor time management owing to disorganization: Not maintaining a repository of contracts in a centralized manner can lead to loss of valuable time in searching for contracts, schedules, notes, and data.
Missed opportunities: Organizations can face missed opportunities to leverage existing on-contract spend to get a lower price, missed revenue and rebate prospects, wasted time and inflated costs due to a reactive attitude than a proactive one.
Errors and additional work due to inefficient processes: Regulating processes with proper CLM in practice is crucial. Ad-hoc processes and tools are not designed to provide functionality, visibility, reporting capabilities and compliance necessary for efficient use of resources and reduced errors.
Contract lifecycle management is used to control, coordinate, and streamline the various stages of a contract. It forms an essential part of sales and procurement as it helps companies in optimizing contract performance. A firm CLM might not be a risk-management system but with CLM, contract terms and conditions can reflect the key metrics that measure supplier and customer performance. It improves contract visibility, control, and reporting, which enable legal and regulatory affairs departments to diminish risk.
The result of a CLM in place is tangible, measurable and sustainable. Demands for accountability, proper governance and transparency, and regulatory requirements have made it clear that there is a rising need for contract lifecycle management processes.