Many leading businesses and organizations want to drive revenue while reducing costs. To assess supplier performance and monitor contract management efficiency, tracking contract compliance is the single best method. To get the most out of your contracts, you must first know the risks your organization is exposed to, which can help you cut costs. With a dedicated contract management software solution, you can easily identify compliance obligations and track them throughout the lifecycle of each contract.
Contracts undergo several stages from contract intake, all the way to expiration or renewal. By managing the contract lifecycle within a contract management software solution, you streamline the tasks and responsibilities associated with every contract. Every detail of every contract is trackable within an electronic contract repository, allowing you to easily manage and monitor contract terms, compliance policies, and more throughout the entirety of every contract lifecycle.
Why Contract Management Software Can Solve Compliance Problems
Contract management software enables an initiative-taking environment surrounding contract compliance. Compliance management necessitates the feedback from several stakeholders throughout the contract lifecycle, and most particularly during contract drafting and negotiations. According to the requirements of your contract management operations, you might leverage your internal legal team to support contract drafting by designing a library of preapproved, compliant clauses. Your legal team should work to ensure that your clause library adheres to all current compliance policies. Clause libraries allow you to draft contracts efficiently and to improve turnaround times. With your preapproved clauses, your teams can improve overall contract operations.
A contract template library is another wonderful way to increase contract compliance. With a comprehensive contract template library, you can standardize requirements surrounding contract compliance. For each type of contract, you can easily create a specific template that addresses internal compliance and procurement procedures. Contract templates help to save time because it reduces the need for your in-house legal team to review each agreement. We recommend that you develop contract templates that include attachments likes standardized forms and a list of compliance requirements for each contracted party to follow.
Boilerplate contracts should be reviewed at least yearly to ensure compliance and that the language included is up to date. When a contract template is adjusted, it’s necessary to communicate with your teams where new requirements might exist within the new template. Contract management software is an excellent tool to ensure that your agreements are current.
It’s essential to regularly monitor the changes in the legislation and in compliance regulations. These may change depending on the industry. When there are new laws in place or updates to current regulations, it demands immediate action from your internal legal team. This means you might review every current contract template and clause in relation to new compliance policies and requirements. The majority of compliance laws will establish a set of compliance requirements that oversee fiscal responsibility, quality control, and best practice for security. In the case a new law applies, your legal team can help confirm that your compliance clauses and liability and indemnification documents are up to date within your contract management software.
With contract management software, you can easily assess compliance clauses and leverage certain deliverables to monitor contract performance throughout the active term of the agreement, which can help reduce costs associated with fines. We recommend generating financial reports to help assess contract compliance. By integrating financial performance with compliance performance, you can combine several performance metrics to measure the efficiency of your contract management while gaining insights on your contract compliance strategies.
Failure to adhere to contract compliance requirements can certainly negatively affect your organization’s bottom line. With contract management software, you can integrate financial data with your contract data to track expenses, which can help your team assess contract performance in relation to compliance requirements. A contract management system can also support you in monitoring all contract performance across digital platforms and integrations while maintaining all of this data in a centralized place, connecting it back to the original contract.
Communication is another key point to help ensure that your contracts and contract management procedures are compliant. This means that compliance monitoring requires you to assign specific duties to select parties and to effectively communicate expectations. You will need to communicate obligations and responsibilities that apply to vendors and suppliers.
When variable costs and associated documents are included in a given contract, then lead times and itineraries should be appropriately specified. We recommend communicating consistently with your teams regarding any changes by using approval workflows that ask for signatures from associated parties. In addition, you can insert contract performance data via KPIs and link them to specified contracts in order to monitor performance, as well as notify vendors or suppliers in advance if KPIs are not met.
Leading businesses and organizations must get a clear handle on their contract performance by instituting contract compliance tracking procedures using a contract management software solution. These solutions empower organizations to increase contract security and operational efficiency with a standardized contract management process that allows for contract compliance monitoring in a centralized place. These solutions make it easy to collaborate with teams, external vendors, and suppliers while overseeing all contract compliance policies in a single digital platform.
Because of the complex nature of the contract management process, it can be difficult to accurately manage every deadline, detail, and most especially, an everchanging list of compliance requirements. Contract management software makes compliance tracking a rather straightforward process, serving as an excellent solution for even the most daunting agreements.
Contract compliance becomes complicated when dealing with manual contract storage and tracking methods. For example, tracking contract deadlines and deliverables within spreadsheets makes it a time-consuming process to retrieve necessary data. When monitoring several contracts with different compliance requirements, spreadsheets are one of the most error-prone and time-consumptive ways to do so. This is why we strongly encourage the use of a digital contract management tool.
Contract Compliance Defined
Contract compliance refers to how and if a contract adheres to specific obligations, performance goals, and legal policies between the counterparty and their organization. Contract compliance is the measurement used to determine how the contract terms were followed. Managing contract compliance includes measuring how adherent the contract was to its obligation and laws during the post-execution stage of the contract’s lifecycle.
One of the most familiar challenges in managing contract compliance refers to a manual approach used to audit and report on contracts. Spreadsheets are risky, time-consuming, and prone to human errors. However, contract management software offers the ability to generate custom reports and leverage advanced auditing tools. You can also use visual, proactive dashboards to gain oversight of contract compliance in your organization. Audit trails and milestone monitoring capabilities also allow you to gain the upper hand, so you can stay aware of approaching obligations.
Contracts are an incredibly valuable part of any business or organization. Contracts outline the business partnerships that an organization has with customers, vendors, and suppliers. It takes time and effort on both sides of the contract to ensure a successful agreement. Even more time and effort are spent during the authoring, negotiation, and review of contract terms and obligations. All of this is completed to ensure that the finalized agreement aligns with the partnership that the parties would like to develop.
Unfortunately, contracts can also be an incredible source of risk and inefficiency when improperly managed. In order to extract the most value out of your agreements, you must ensure compliance throughout every step of the contract lifecycle. Compliance is key for minimizing risk exposure while maximizing the value of each contract. An increase of contract compliance can help increase the value of your organization.
Let's discuss some ways to encourage contract compliance within your organization.
Firstly, prioritize contract compliance organization wide. The best place to start is by including your procurement, sales, and legal teams in developing best practices to ensure contract compliance.
Secondly, it's necessary to identify which types of contracts the company typically enters into and if it uses their own form of contracts or the form of the counterparty. For example, these types of contracts might include non-disclosure agreements, employment contracts, and customer or vendor agreements. In this way, you can use the most conducive compliance procedure per each type of contract. Contract compliance also plays a role during the contract review process. A standardized contract review phase should be used when you receive an agreement from an external source.
We recommend developing a compliance review procedure that addresses the following in terms of clause management:
- Clauses required by the organization at hand that must be included into the contract.
- Clauses that the organization will not use.
- Clauses that the organization must approve.
This checklist is great for ensuring that potential contracts are compliant with organizational policies. It can also help you stay alert of risky clauses to take into consideration.
It's important to determine who within your organization is authorized to approve contracts. This means instituting a contract approval regulation. With this regulation in place, you can authorize stakeholders at various organizational levels to sign contracts depending on their monetary value. With this approval process, once the definitive version of the contract agreement is prepared for signature, having gone through this process will ensure that the agreement has had a full review by the legal department. An approval workflow helps limit the number of individuals authorized to sign agreements, making it easier to monitor the entire process and gain compliance. It is important to note however that this may lead to increase in workload for the authorized individuals.
Contract compliance is influenced by the method of contract storage and how accessible the contracts are. Monitoring compliance is a challenging task when contracts are stored in various places and when contract lifecycle processes are conducted in multiple locations. This brings to light the importance of organizational visibility and how organizations should adopt a centralized contract storage system in order to increase compliance. A digital centralized contract repository to store and retrieve current and legacy contracts is the best solution available today.
Let's take a look at the following benefits of a digital contract repository:
- Increase accessibility to contracts from any location on any device due to secure cloud storage
- Configure permissions and role-based access to contracts and groups of contracts, limiting system users to only view specific documents
- Leverage contract metadata to generate customized reports on a routine basis and to answer contract related queries
An Overview of Contract Compliance Strategies
Periodical contract reviews: a scheduled review of an agreement is used to assess vendor compliance and vendor performance with KPIs. In the case that a contract review is completed with a supplier or vendor, both parties can use the review to assess where improvements can be made on both sides of the contract.
Monitor scope creep: this is oftentimes a large source of risk, where the scope and expectations of a given party during a contract’s active term change. In this scenario, in order to increase compliance, you will need to develop a change control process for your agreements to ensure that changes in scope are appropriately documented.
Prioritize deadlines: lastly, one of the greatest sources of risk is failure to complete obligations and contract responsibilities prior to a given deadline. A quite common one is the failure to renew in agreement when it expires. Contracts management software can help users stay in the know with automated notifications to remind them of these key dates in advance.
Contract compliance audits are an additional tool that can support businesses and organizations in monitoring the effectiveness of compliance strategies used across their organization. An audit might be a onetime procedure to address one problem, or it might be a routinely scheduled procedure. An audit is completed either by an internal audit team or by an external auditor. Audits are a valuable procedure for addressing compliance with contract regulations organization-wide because they ensure that the systems in place are effective and are used to find any areas that need improvement. In addition, audits are used on single agreements to ensure that parties are compliant with contracted responsibilities. Many contracts include audit clauses that give one party the right to review documents held by the counterparty.
Another way to improve contract compliance in an organization is by communicating and training internal teams in-depth on contract compliance strategies. Often times, a business will invest time and finances in designing and deploying compliance procedures. However, in this scenario, employees typically don't know how to properly complete their tasks while leveraging these compliance procedures. To address this issue, your contract compliance procedures must have a training strategy associated.
Contract compliance training can include the following:
- how to use a contract clause and contracts template library
- where to locate key contract metadata like authorization and contract approval information
- which regulations in contract procedures apply to the new contract compliance policies and why are they important
Contract compliance training is best utilized with new employees, as well as a yearly refresher. We highly recommend developing detailed training methods for specific groups of employees that might use contracts and work within the contract lifecycle on a routine basis. We also highly recommend developing an efficient mode of communication within the workplace. It's important to maintain open lines of communication with your staff if an audit has brought to light any compliance issues and if a contract alerts your team of a lack of compliance that results in lost opportunities.
Complete compliance in regard to contracts must be set as the expectation within your organization, as noncompliance can result in numerous financially detrimental consequences as well as reputational damage. Contract administrators and contract managers understand the importance of contract compliance requirements and often routinely spend a considerable amount of time dealing with responsibilities pertaining to contract compliance.
What sets the stage for contract compliance is a list of rules and guidelines created by parties to a contract. In the context of contract management, compliance can be strategized to ensure that every party is compliant with legal requirements and industrial regulations. There are several best practices to maintain compliance in a contract portfolio. It is important to note that achieving contract compliance is dependent on a contract-by-contract basis. Each contract must be fulfilled of its obligations by both parties to the contract jointly and individually.
Achieving contract compliance depends upon the following:
- an understanding of contractual obligations by both parties.
- a staff that is trained and informed of current contract compliance protocols
- effective resolution of non-compliant contracts and non-compliant protocols
- contract compliance reporting procedures
- a dedicated compliance management department or team
We recommend consulting with your legal team for advice on specific legal matters. Key contract stakeholders should participate in compliance resolution strategies as well as other contract management operations that fall within their scope and areas of expertise.
Contract obligations and the overarching theme of contract compliance are intricately connected. The purpose of monitoring internal compliance obligations is to gain further insights on contract performance.
Furthermore, addressing internal compliance obligations seeks to accomplish the following:
- that the party made payments according to a contracted timeline
- that the party delivered products, goods, or services when expected
- that the party placed orders, adhering to what was agreed upon within the contract
In the previous examples, these obligations and the parties that they belong to are specified within the contract and are agreed upon between each party to the contract. Within the contract the consequences of lack of adherence to contracted obligations are typically clearly specified. Contracts will include performance obligations and usage obligations which must be clearly addressed and continually managed. The contract management procedures leveraged can support the fulfillment of these usage obligations by maintaining updated details and current reports.
External compliance obligations also play a critical role. The majority of organizations will work with numerous compliance obligations that are imposed by an external regulatory body. Certain obligations might be included within a contract, while others might not. This is because some obligations are blatantly obvious and don't necessarily need to be included in writing, as they are accepted in a business environment. It is important to note that some regulatory compliance mechanisms call for extremely strict criteria to achieve contract compliance with laws and industry policies. These mechanisms usually are applied at the process level within a company; however, they can also impact employees and other parts of an organization’s structure.
Three Stages to Achieve Compliance with External Compliance Obligations
To achieve compliance with external compliance obligations there were a few stages that must be followed.
Stage One
The first stage refers to the importance of acknowledging external compliance obligations. Businesses and organizations must have an awareness of the implications of regulatory compliance. Some common regulatory bodies include:
- HIPAA: US Health Insurance Portability and Accountability Act
- ISO: International Standardization Organization
- GPDR: EU General Data Protection Regulation
The regulatory bodies that an organization must acknowledge depends upon several factors:
- The industry the organization operates under
- The country its headquarters is located in
- The countries in which the organization operates
- The countries the organization receives goods and services
- The customers who use the goods and services
- The countries the organization stores their data
- And much more
To this end, the business or organization must know any type of information pertinent to any of the concepts listed above. In the case that an organization has operated for quite some time, then it's highly likely that it is aware of all of these key pieces of information regarding regulatory bodies.
Now in the case that a business is new or is beginning to expand their operations in different geographical locations or by way of their product offerings or service offerings, then the organization must gain awareness of any new compliance obligations. Contract managers and associated stakeholders are solely responsible for informing themselves on new business opportunities that they may need to collect relevant data from in order to search for which regulatory bodies apply. In this way, they can maintain more compliant operations. Searching for any applicable compliance regulations should occur prior to executing any new contracts in new areas of business. This can ensure that contractual elements regarding these regulatory obligation mechanisms are included. It is important to consider that the majority of contracts might be subject to various compliance mechanisms depending upon the eligibility criteria for each regulatory compliance body.
Proactive Contract Compliance Management
It is best practice to take a proactive approach towards contract compliance. Do not treat new legislation and compliance regulations nonchalantly when searching for compliance requirements that might be applicable to your contract portfolio. The majority of these regulatory bodies will give an advanced notice of a change in the compliance landscape and typically so while calling for submissions requests from companies interested in such matters.
Taking a proactive approach can benefit you in the following ways:
- gives you advance notice of key regulations that may concern your organization.
- enables you to monitor the way these regulations could potentially impact your organization
- provide a framework ahead of time on how you will approach your compliance strategy
- gives you an awareness of specific obligations that might require adjustments and new actions to be taken by your organization before the regulations are rolled out, this way you ensure compliance in advance prior to the date the new regulations are instituted.
Stage Two
The second stage to achieve and manage compliance with external obligations refers to the implementation of a contract compliance achievement strategy. After the organization at hand fully understands the expectations of the regulatory bodies its contracts are subjected to, they must lay out a plan for achieving compliance within the confines of each regulatory regime. This will be inclusive of risk management, necessitating the systems for effective contract management strategies and use of technology. The method used for achieving contract compliance might include any of the company’s parties or relevant third parties with contingent obligations based on goods or services provided. The organization might manage and report on these parties under the guidelines of compliance requirements. Due to the massive impact of the consequences regarding contract noncompliance, it is necessary to develop an approach for achieving contract compliance that is adaptable and able to easily apply across the organization.
When new regulations are instituted or when changes are made to existing regulations, there is often a phase between the enforcement of new regulations to provide organizations the time to reinstitute contracts compliance methods. The organizations that are subjected to a regulatory compliance mechanism following an enforcement date might be given additional time to prepare for compliance. However, this depends on the specific regulatory body, so this must be taken into consideration and prepared for accordingly. Developing and deploying a contract compliance approach requires commitment and diligence across given organization. Contract compliance must be treated in a stepwise, standardized manner with continued attention through all levels of the organization. The approach to obtaining contract compliance must be integrated with the organization's risk mitigation procedures.
Let's take a look at the following key features of a contract compliance management strategy:
- written rules and associated methodologies to adhere to compliance regulations
- compliance procedures are integrated with contract management systems and processes
- the oversight body is instituted to constantly monitor contract compliance.
- an initial contract compliance training is scheduled
- annual contracts compliance trainings are scheduled
- information regarding organizational compliance mechanisms and how they apply
- strategies for locating contracts subject to various compliance mechanisms
- documentation of contracts subject to specific regulatory compliance mechanisms
- internal and external compliance obligations pertaining to the contract portfolio\
- obligation compliance tracking timelines and reporting timelines are designed
- an approach for achieving contract compliance per each obligation
- KPI's are designed to track the achievement of contract compliance
- strategies are created to address contract noncompliance and preventative measures are taken
- systems are in place for gathering and reporting on contract compliance progress and performance metadata
Today, there is a wide array of information available to serve as a guideline regarding how to approach achieving contract compliance within an organization. Conducting some research in this manner can provide a framework as well as some insights regarding the factors that must be considered when designing a companywide contract compliance approach. We recommend gaining the input from several stakeholders in your organization to cover any possible compliance methodologies that might be sensible, effective, and achievable. Contract stakeholders must play a role within this effort because they certainly will work towards achieving contract compliance. The approach used for achieving contract compliance must be effective in achieving its goal while being easy to adopt and train on. The compliance approach must also be adaptable and able to change according to any iterations with an ever-changing compliance environment.
There are many compliance management software solutions available on the market with various feature sets and levels of sophistication that can support organizations in gaining contract compliance. However, the top priority of any organization in terms of contract compliance is that they adhere to be methodologies they have instituted to achieve regulatory and internal contract compliance. It is this degree of organizational compliance that requires continual tracking, monitoring, and reviews, as well as regular reporting, to discover any areas of noncompliance. Oftentimes organizations will overlook just this, especially in industries that are very highly regulated. And oftentimes, penalties are given when organizational and internal compliance protocols result in regulatory noncompliance.
Stage Three
The third stage to achieve and manage compliance with external obligations refers to the ongoing maintenance of external obligations. In organizations, external contract compliance obligations might change for several reasons.
Let's take a look at the three main reasons why.
Firstly, as time goes on, so will changes in obligations. When new contracts are introduced, there are oftentimes new associated external obligations introduced along with them. Current contracts might expire and terminate, be selected to not renew, or be subjected to early termination. These result in a reduction of external obligations for the given organization. The current contracts may be edited during their term or during term renegotiations. These can result in a fluctuation in external obligations. And lastly, activity with any contract subjected to regulatory compliance mechanisms might be flagged for a compliance limit, which can result in the agreement no longer being held to the current compliance mechanism or the obligations associated with it. The existing method for dealing with changes in the contract lifecycle must be adjusted to manage changes in external obligations applicability, which may be associated with these changes based on both stages one and two as mentioned previously.
Secondly, as an organization changes, the external contract compliance obligations might also change. Organizations might change for several reasons, whether planned or reactive. The ways an organization might morph depend on its resources, location, law, and approval by shareholders. It's important to note that changes in an organization might include mergers and acquisitions that can influence it's contracts and obligations by increasing the volume of regulatory compliance policies. These changes might also include the dissolvement of various elements of the organization, which can result in a reduction in compliance volume. No matter the reason for change, the manner in which an organization does change might influence the regulatory compliance procedures. In this manner, the organization must return to the first stage of discovering external obligations to assess if there are changes that must be addressed to external obligations. Only in this scenario, where there are iterations to obligations in the number of obligations, will it necessitate a look at stage two, implementing contract compliance achievement procedures to lay a framework for how to address these changes.
Thirdly, as regulations change so will the external contract compliance regulations. In the case that regulations change, you become vulnerable to noncompliance. In this way, changes to regulations can result in changes in its compliance framework. This can impact how an organization operates, so they must address these iterations in compliance. In this way, you should regularly review all regulatory compliance mechanisms to confirm if a change is to be made. It might be worth looking into a regulation monitoring service to do so. When information regarding these changes comes so light, you might need to implement new contract compliance achievement methodologies to address and adapt to such changes.
Conclusion
All this in mind, it's clear that developing an enormous amount of awareness regarding any changes in the external obligations is a crucial component to an organization's risk management strategy. Certainly, there is a limitation on the amount of time, money, and resources that can be used to address contract compliance procedures. In this way, organizations should narrow in on specific critical contracts that are central to the purpose of the organization at large.
Contract parties are required to have a comprehensive understanding of their contracted obligations both internally and externally, and they must fulfill them accordingly. To maintain continual awareness of compliance requirements, it takes time and consistent effort from any organization’s contract management team. It can be a challenging task to develop, deploy, and continually maintain a proven contract compliance management methodology. However, it is very much possible with a dedicated contract management software solution.
