Top 3 Pitfalls in Contract Management
When you work in contract management, you may feel as if you’re constantly putting out fires. And even though your contract management team faces challenges on a regular basis, it hasn’t been able to focus on the root cause of these challenges.
With limited time and resources, your enterprise has understandably chosen to put off solving these problems. This, however, is a costly mistake. According to estimates from the International Association of Commercial and Contract Management (IACCM) after reviewing contract data from its more than 12,000 member organizations, companies could increase their bottom lines by 9% by tackling common issues in contract management.
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To help you focus on the key issues, here are the top three pitfalls in contract management and tips for how to prevent them.
1. Lack of Clear Scope and Goals
Research from the IACCM shows that this is the most common source of disputes in contract management, affecting around 40% of projects. Misaligned expectations and unclear deliverables are time bombs that can go off at anytime, eating away your profits and eroding client relationships.
Lack of clear scope and goals often leads to the dreaded scope creep. Fayola Yeboah, founder of the Commercial Contracts Consultancy, provides a great example of scope creep in the IACCM blog. “You need to preserve the relationship with your customer, so you have to find middle ground,” she says of this common scenario. Yeboah adds, “Your processes just aren’t set up to do what the customer requires, so the business designs and implements a work-around.” The problem is that these types of work-arounds require a lot of research time, which isn’t necessarily billable to the client.
Here are five strategies to handle scope creep in contract management:
- Define a scope statement
- Provide specifics about deliverables
- Budget for small discrepancies
- Set expectations for change requests
- Stipulate what is considered a new project request
2. Lack of Appropriate Software Tools
In the same report by the IACCM, the organization found that more than 60% of project managers complain about the lack of coordination between the bid team and the post-award execution team. Among the top complaints by project managers and implementation teams were lack of engagement, communication, and appropriate software tools.
According to the IACCM, contract management is one of the least automated processes. For example, the execution of a contract can be delayed by several days or weeks when using paper-based methods. On top of the shortened timelines, there is the high cost of postage and printer ink. According to the Aberdeen Group, 57% of companies generate more than 100 contracts a month and 7.5% of those companies have more than 10,000 active sales contracts during the same period. By having to print out paper copies of contracts and ship them to customers for signing, you’re inflating your cost of contract execution.
Instead, an enterprise could use a contract management system that leverages electronic signature software to enable the instantaneous execution of a contract. To account for software preferences from your clients, choose a contract management system that is compatible with many e-signature solutions. For example, Contract Logix’ contract management systems have full integration with Adobe ESign, Docusign, and Sertifi electronic signature software.
3. Weak Insights on Performance and Process Governance
The lack of software that fits the needs of your organization results in additional inefficiencies. In the best-case scenario, organizations suffer value erosion of less than 4% of their contracts, according to research from the IACCM. This means that most enterprises are losing more than 4% in value when they renew contracts or fail to learn from previous mistakes in contract processes.
Less than 15% of executives have the key data or insights on contract performance that they need to revise processes and detect problematic trends. For example, when working with a paper-based system an executive may not be aware of how close they are to the renewal dates of several contracts. By failing to contact a client in advance to prepare for the renewal, managers force last-minute negotiations that can result in subpar results for both parties.
On one hand, the client may feel that the consultant isn’t servicing her well because the contract manager lacks attention to detail or only contacts her when it’s time to ask for more money. On the other hand, the contract manager fails to evaluate whether revisions are necessary to the terms of the contract (e.g. the existing scope resulted in 15% overages the last time that had to be absorbed by the company).
Another example is that 80% of trading relationships remain unchanged in their terms and structure, according to the IACCM. By failing to integrate governance processes into the contract lifecycle and automate the implication of those processes, enterprises incur in higher costs when trying to meet governance requirements after contract execution or implementation.
By defining clear scope with well-defined goals, adopting an appropriate contract management system and other relevant software, and developing and implementing processes that provide insights into performance and governance, you are preventing the top three pitfalls in contract management.