Optimizing contract value and mitigating your legal, financial, governance and operational risks through effective contract management
Exponential rise in outsourcing of non-core/ core services, globalization and new business models over last 5 years have led to a significant increase in the complexity and volume of third party contracts (viz. customer, vendor, JVs, franchisee, outsourcing, off-shoring contracts). Simultaneously, several regulators across industries (especially BFSI, healthcare, telecommunication etc.) have tightened their oversight of third party contracts. There have also been several instances wherein global regulatory bodies have imposed hefty penalties on companies on account of weak governance over their vendor contracts.
Several Indian companies have lost their global customers due to weak management of contractual obligations.
Considering this as an important concern EY team has identified the need to improvise the contract management processes and systems in an organization.
Growing relevance of contract management framework
Globally, organizations are facing multiple challenges around managing the issues around contract management. Growing trends around contract complexity, volume, and regulatory oversight are putting pressure on organizations to establish a robust contract management framework covering all aspects such as people, organization, processes and technology.
Contract management has gained significant importance due to:
- Enhanced outsourcing and offshoring of core and non-core functions
- Increased regulatory oversight
- Increase in no. of complex and multi-geographic contracts
- Board /Audit committees want enhanced visibility and monitoring of obligations made to customers
- Increased focus globally on data privacy and information security
EY India recently participated in a webinar on contract management and presented best practices to help organizations strengthen their existing contract management framework. More than 250 professionals from Legal, Supply Chain, Sales, Risk & Compliance, and Finance & Taxation background ( across multiple industries, technology, e-commerce, logistics, real estate, hospitality, food and beverage, manufacturing, media and entertainment etc..) attended the webinar.
A short survey was also conducted during the webinar so as to understand the current priorities and maturity of existing contract management framework in the respective organisations. Here is what we found out
- 41% of the respondents recognized contract management as a top strategic/CXO priority and another 40% recognized it as an important effort needed to drive their organization.
- Nearly 60% of respondents either aim to implement a robust contract management framework (designing standard process, procedures & contracting templates and implementation of technology solution) within next 6 to 12 months or are presently in the process of establishing it.
- 90% of the respondents don’t have any automated contract management workflows to manage their contracts and related obligations.
Thus, the survey analysis highlighted heightened interest in the dire need for a better contract management framework.
Essentials of an effective contract management framework
Considering the growing trends, organizations consider following three as the most important pillars of contract management. These factors are crucial while designing the overall strategy of the contract management:
- Establishing control over contract creation – Looking at the nature, value and risks involved in a transaction, organizations establish adequate levels of control around creation of the contract. This is an important preventive control to ensure that the terms and conditions agreed in a contract have been reviewed and approved at an appropriate level before agreement with the third party.
- Gain visibility into contracts entered – Organizations are now establishing consolidated repository of all contract related documents (including master service agreement, schedules, SOWs, exhibits, amendments, etc.) with advanced search capabilities to provide a complete view of contractual obligations. This move helps them in performing internal benchmarking of contracts across businesses, functions and geographies.
Unless an organization has a visibility into contracts, they cannot be monitored.
- Adherence/ compliance to requirements – Contracts contain clauses, conditions, commitments and milestones that need to be tracked and managed to maximize business benefits, reduce associated risks and costs. In such a scenario, organizations must question themselves – if an effective contract compliance/ monitoring framework is in place to provide an overall assurance on the fulfillment of contractual obligations and commitment by vendors/ for customers. Based on the nature and impact, obligations should be identified, prioritized and tracked for compliances across all domains i.e. legal, commercial, operations, regulatory, data security, people, etc.
Thus, robust contract management framework helps organizations align and integrate management of contractual risks and access better control across the enterprise. It increases organizational capabilities to maximize business value by reducing revenue leakages, identifying the cost saving opportunities, improving the customer and vendor relationships, and ensuring better service delivery/operational efficiencies.
In addition to this, it ensures a clear visibility into the contracts and enables the organisations to pro-actively identify and prioritize risk and gain additional assurance over contract compliance.
Udit Aggarwal, Partner, Advisory Services and Manoj Marwah, Associate Director, Advisory Services have contributed to this article.