By Markus Fabel – Global Head of Quality & Risk Management Advisory at KPMG
There is no easier way to get the boardroom’s attention than coming up with new ways of cutting costs and improving efficiency. And yet, there is one aspect of corporate operations – one that promises to do both those things and much more – that has long been seen as cumbersome, time consuming and an obstacle to business: contract management.
That aversion appears to finally be changing. A recent Forrester study in the US found that more than 60 per cent of companies polled had plans to improve their contract management methodologies within the next 12 months. And the reasons are myriad. When properly implemented, a professional contract management can reduce expenditures, increase transparency, highlight ways to improve contracting terms, mitigate compliance and regulatory risks, and improve time to market. Indeed, in an era of unprecedented technological change and increasing financial pressures, it should be a cornerstone of any effective business strategy.
What, though, is contract management? What must change to implement a successful approach? Where should the focus lie? And what are the specific benefits to each component of an effective contract management?
Structuring the approach
Contractual chaos is surprisingly common. Many firms have failed to establish sufficient contracting-related processes and lack coordination between entities or business units. As a result, there is almost no consistency in the terms negotiated across the company and little oversight. In addressing this inefficiency, it is vital to define each step in the contracting process, delineate clear roles and responsibilities for those involved and ensure consistent implementation. Furthermore, the process must be communicated to the entire company as an important first step in encouraging cross-functional cooperation between key stakeholders in both business and legal functions. Doing so will streamline the contracting process, reducing the amount of time spent on contracting and freeing up internal resources.
There is no one-size-fits-all solution when it comes to implementing a successful contract management approach. Each business unit will likely have its own aims, from cutting costs and increasing revenue to reducing regulatory and financial risk. A clear definition of objectives enables the development of a custom-designed approach that meets the individual needs of all stakeholders. That, in turn, improves transparency and access to information.
Contract standardisation and digitalisation
These days, even traditionally local companies are looking to foreign markets for growth opportunities. But those opportunities mean added complexity, with local laws, regulations and market practices differing across jurisdictions. Developing agile templates that can be quickly adapted to all global markets helps ensure consistency of terms and reduces the effort required to review new contracts. Companies with a low contract volume may consider developing a smart contract template database and a clause library.
Companies with higher volume or greater contract complexity, by contrast, should examine the possibility of a digital contracting solution. Such an approach allows several parties to work simultaneously on contracts with intuitive workflows supporting interdisciplinary creation, review and approval of contracts. Additionally, the digital signature enables the signing of contracts at the click of a button, no matter where the principles might be. Streamlining the contracting process will reduce time to market and minimise the effort needed to prepare, review and execute contracts.
“Companies with higher volume or greater contract complexity, should examine the possibility of a digital contracting solution”
Transparency & cost mitigation
Contracting doesn’t end once the documents are signed, of course. And a robust contract management approach also enables the monitoring of a contract’s performance throughout its lifecycle. In the inception phase, key indicators, such as the time spent negotiating and implementing the contract, can be monitored and improved upon. Later, milestones such as delivery dates and payment terms can be tracked and optimised, while increased efficiency guarantees that deadlines aren’t missed. Furthermore, each expired or terminated contract provides data that can help design and negotiate future deals with the same or similar clients.
On the flip side, failure to properly monitor contracts throughout their lifecycles can be extremely costly. A recent Gartner study on the pitfalls of inadequate contract management included the example of a large medical manufacturer that had accidentally extended a multi-year, $10million agreement that should have been terminated due to an auto-renewal clause. Similarly, a US-based manufacturer had been renewing leases on disused properties in Asia, resulting in six-figure losses that could easily have been prevented.
The above examples are extreme, but there are plenty of other potential pitfalls should contracts go unmonitored, including regulatory fines, penalties from vendors and civil or criminal actions against the company and its officers. Additional risks include human error and misconduct or fraud. Software vendors, for example, have increased their auditing of users and implemented sizable penalties for licence abuse. Similarly, regimes such as the European Union’s General Data Protection Regulation (GDPR), with fines of up to €20million or four per cent of global turnover, can create huge financial liabilities. Ensuring transparency and term consistency enables companies to identify potential risks earlier and to address them before it is too late.
Analytics and data
Harvesting and analysing data has never been easier. But the frenzied drive to commercialise that information is just one aspect of the trend. An effective contract management regime involving standardised contract terms and the monitoring of key milestones can generate vital and immensely beneficial internal data, allowing for the benchmarking of key clauses and making it easier to improve contract terms. It also allows decision-makers to identify market trends and to improve utilisation within the company.
Negotiation and drafting of contracts
Inevitably, even well-drafted contracts will need to be negotiated and some terms will require modification. As such, it is important to develop a contracting playbook that contains various fallback positions that would be acceptable to the company. Such a playbook should include internal explanations about the logic behind the positions taken in addition to external explanations to be used when elucidating positions in a manner understandable to the client. This will allow for more consistent and effective contracting.
It isn’t easy to remain competitive in today’s global economy. Identifying inconsistencies, mitigating risk, optimising data collection and analysis: all of those things can give a company a leg up on the competition. And that is what an effective contract management approach delivers – a message that any boardroom will love to hear.
About the Author:
Markus Fabel has more than 20 years of advisory experience in the areas Contracting, Quality and Risk Management. As the Global Head of Quality & Risk Management Advisory he is responsible for the technology-assisted quality and risk management on a global level. In addition, Markus is involved in the set-up and management of contract quality and risk management systems and global, complex contract negotiations. As COO for innovative solutions, he is responsible for the development and management of innovative services, digitalisation as well as the strategic formation of alliances. In October 2017 Markus Fabel also assumed the role as Global COO Technology & Knowledge. On an operating level he is responsible as COO in the areas Global IT Services, Knowledge Management, Lighthouse (Center of Excellence for Data & Analytics and Artificial Intelligence) and also supports the Global Alliance Management.