4 Challenges in Contract Management for Manufacturing Companies
While enterprises share some common issues when it comes to contract management, those within certain industries face a unique series of challenges. To learn about the most pressing issues with contract management in the manufacturing industry, Contract Logix surveyed 550 U.S. individuals responsible for the creation, editing, and/or management of contracts at manufacturing companies. Let’s review the most pressing contract management challenges in manufacturing.
Editor’s Note: To learn more, download our whitepaper on the top 10 contract management best practices.
- Use of Subpar Contract Lifecycle Management Solutions
All 550 survey respondents weren’t using contract management software, so one key question was to identify which tools they were using to manage their contracts. Nearly 1 in 4 contract management professionals either didn’t know contract management software exists or didn’t know what to look for in a contract lifecycle management solution.
The top alternatives to contract management software was email (79.64%), spreadsheets (68.73%), and paper (62.18%). (Note: the percentages don’t add to 100% because respondents could select multiple answers.) Unfortunately, using alternatives to contract management software such as email, spreadsheets, and paper creates major challenges because they aren’t built specifically to handle contract management processes.
Here are three resources for a deeper dive as to why these alternatives fail to meet many of the requirements of contract management processes:
- Why Excel is Not Enough for Contract Management
- Why Email is not a Replacement for Contract Management Software
- Why Reducing Paper Use through Contract Management Software is Good
- Inability to Extract Key Data from Contracts
Of the individuals surveyed who said that they are “Somewhat Challenged”, “Challenged”, or “Significantly Challenged” in contract management processes, 63.84% of those responses reported an inability to extract key data from contracts.
This is an expected roadblock when using email, spreadsheet software, or paper-based system to handle contracts. Transmission of information isn’t automated and requires somebody to manually pull key contract data, increasing the chances of errors.
Take for example, the tax accountant working the Magellan Fund who had to transcribe the net realized loss from the fund’s financial records to a separate spreadsheet and forgot to include the minus sign. This error went unnoticed and carried on to several interconnected spreadsheets resulting in a calculation error to the tune of $2.6 billion!
- Lack of Centralization
Regardless of whether the survey respondents worked in the procurement, legal, contracting, finance, or compliance departments, 63.60% of them indicated that scattered contracts created a challenge for their companies.
Having uncoordinated documents leaves a manufacturing company exposed to unnecessary risks, such as having payment withheld by the client. Lockheed Martin learned this lesson when the Defense Contract Management Agency decided to withhold a $195 million payment due to keeping costs logs by hand, long delays in providing project updates, and reporting overages way after they took place.
The larger the manufacturing enterprise, the larger the potential for errors when using a decentralized contract library.
- Issues with Regulatory Compliance
62.36% of individuals reporting contract management challenges said they had issues with regulatory compliance. Due to increased pressures from government agencies, companies are spending more time and resources in compliance processes.
Sarbanes-Oxley (SOX) compliance is a great example of this trend as nearly one in three organizations spends as much as $500,000 per year to comply with this act. In 2016, it was estimated that an organization with less $100 million in annual revenue spent an average of $367,000 in SOX compliance, experiencing a 55% increase in SOX compliance hours from the previous year. As the amount of annual revenues increases so does the average annual SOX compliance and number of SOX compliance hours.
Giving this rising compliance costs, a contract management system should help streamline those processes and not add extra burdens.
From a survey of 550 contract management professionals across multiple segments of the manufacturing industry, Contract Logix found that inability to extract key data from contracts, lack of centralization of contract data, and inefficient regulatory compliance stand as major challenges. Using contract lifecycle management software would help a manufacturing company address these and other contract management challenges.