In this blog we will highlight steps that you can follow to ensure that your contracts are always in accordance with relevant agreed-upon terms, regulations, laws, and industry standards. Through our contract management compliance checklist, you will be able to ensure that all parties involved are fulfilling their obligations and following established procedures. The steps listed here will enable you to minimize the risk of contractual disputes and non-compliance issues.
But before we get started, let us understand what contract compliance is.
What is Contract Compliance?
Contract compliance refers to the process of ensuring that all parties involved in a contract adhere to the terms and conditions finalized upon in the agreement. Simply put, it’s making sure that everyone is following the rules of the contract and is performing in ways that are in accordance with industry standards and regulations.
Why Contractual Compliance is more important today than ever before?
The management of contracts is a critical aspect of any business operation and is becoming increasingly complex and challenging. With the rapidly changing business landscape, it is more important than ever to ensure that contract management practices are aligned with evolving regulations, laws, and standards.
A lack of controls around these relationships and agreements gives way to avoidable risks, these risks, whether financial or operational in nature, and can lead to brand or reputation damage and loss of significant revenue in the form of misreported claims, uncollected royalties, and inadequate inventory controls.
Here are some of the reasons why organizations today need to put higher emphasis on ensuring contract compliance:
(Reason 1) Dynamic Contract Risk Landscape
One of the most prominent risk factors today is the volatile global economic climate. This is leading not only to fluctuations in consumer spending but also to resultant changes in government policies and regulations. This means everything from commodity of prices to currency values, raw availability to supply chain ETAs etc., are likely to be disrupted or to fluctuate.
For instance, currency fluctuations may result in companies overpaying for contracts which have been negotiated earlier, making them lose out on savings.
Moreover, the ongoing climate crisis has added a whole new layer of uncertainty and risk to the business landscape, companies now face the potential impacts of extreme weather calamities, changing regulations, and disruptions to supply chains. An increase in the frequency of black swan events such as the Covid-19 Pandemic, further compound this threat.
(Reason 2) Ensuing Regulatory Landscape
As stated in the point above, in order to accommodate for high economic volatility – there are ensuing changes in the regulatory landscape that businesses operate in – these impact nearly all industries – and can come in the form of trade restrictions, operational interruptions, economic compensation, data privacy issues, corporate disclosures, prosecutions and much more.
The world is changing rapidly, and our laws are changing in tandem. Failure to adhere to regulatory requirements can lead to heavy monetary loss in the form of fines, legal action on your company, and even reputational damage.
It is very important to continuously monitor the changing regulations in your country (regulatory watch). And, to perform impact assessments, so that preventative and detective measures can be put in place.
(Reason 3) Fiercer Consequences of Reputational Damage
Company reputations are in the spotlight like never before. A recent survey of 300 executives by Deloitte and Forbes Insights revealed that brand reputation is considered the highest strategic risk area for companies, even surpassing other factors such as business model, competition, and the impact of economic trends.
More than ever before, people today care about what companies did or did not do, how they treat their employees, customers and communities. This heightened scrutiny from consumers greatly influences and informs their consumption and buying habits. Any action that is perceived as inappropriate or unethical has a compounded affect on the company’s reputation, and subsequently on their revenue.
In fact, the recent Reputational Risk Management Survey reported that 86% of organizations are concerned about loss of income and a reduced customer base due to reputational risk.
Here is your Contract Compliance Checklist for 2023
1. Deploy a contract repository that is dynamic and in tune with market trends
The economic volatility that was alluded to in the above points compounds and results in a higher risk of contractual non-compliance in signed agreements – leading to monetary losses, operational issues, delayed or shelved projects, and more.
An important first step to solving this problem is increasing the visibility of contracts. Especially for global contracts that are negotiated based on different currencies with vendors/partners spread across the globe and for contracts dealing with commodities with high price fluctuations.
Furthermore, it is important to include provisions of escalation and de-escalation clauses during contract negotiation for contracts that are linked to market parameters like foreign exchange & commodity indices
Contracts housed in disparate locations are difficult to track, modify and renegotiate. With a centralized, digital repository, companies can view, change and control their contracts. Enabling them to:
- Locate at risk clauses and contracts that may be susceptible to losses due to volatility
- Set a system of alerts and reminders for the specific escalator/de-escalator clauses linked to commodity or forex indices.
- Track and measure compliance and if possible, quantify the savings accrued from these contracts
2. Provide standard templates and guiding manuals
At any given time, businesses are dealing with multiple relationships through corporate stakeholders; these stakeholders who are executing contracts and signing agreements know little about the correct guidelines to ensure compliance.
In order to get rid of this process ambiguity, these business stakeholders need to guided by a repository of pre-approved and legally compliant templates, along with pointed manuals on how to remain compliant.
Zycus’ iContract provides authoring software that integrates with MS Word for quick and easy contract creation using templates and clause libraries, making it easier to draft compliant contracts from the get-go. With intuitive drag-and-drop functionality for picking clauses from standard libraries – it further reduces friction and overall ambiguity from the process.
3. Streamline collaborative authoring and negotiation
With multiple parties and stakeholders involved in the contracting process, it can be easy to miss input and changes provided by the contributors. Human errors are only natural when multiple versions with redlining and comments are being floated from one approver to the other.
Making an error in approvals and negotiations stage can set you up for failure. The challenge is to bring together all stakeholders’ imperative to contract authoring on a single platform to ensure every input is considered.
Putting in place a standardized workflow can help streamline the process of amending and gaining approval for contracts and prevents missed information that can be critical to ensuring compliance.
Tools such as Zycus’ iContract can help by enabling you to configure clause-based review-approval workflows with provisions of parallel and ad hoc reviews. Additionally, it can help improve visibility into contract redlining by comparing all versions throughout the negotiation process.
4. Define what success and compliance looks like
In order to measure if all parties are complying with negotiated terms – it is important to set very clear and quantifiable benchmarks to measure performance and compliance. Communicate and elicit input from concerned decision makers to determine the right parameters to measure.
This is especially useful if you have a slew of 3rd party contracts with complex, high risk contractual relationships. Without knowing what good performance is, it is impossible to determine if the contract partner has delivered on terms.
As per PwC, setting up robust contract compliance programs leads to greater value from third-party relationships.
With pre-set benchmarks, it can be easy to spot if your third party is not meeting operational objectives such as KPIs, SLAs, and pricing compliance. After setting these benchmarks it is also essential to communicate it to all parties involved as well as to set up checks and alerts in place to spot inconsistencies.
With defined benchmarks, milestones of contract utilization and obligation fulfillment can be tracked minutely, and this can lower the risk of value leakage and non-compliance.
The dynamic visibility offered by Zycus’ Merlin AI can further bolster this effort by increasing visibility into your risks, obligations and opportunities, especially when the legal or regulatory circumstances change.
5. Facilitate regular and comprehensive audits
Conducting comprehensive contract audits is crucial to ensuring that both parties involved in a contract fulfill their obligations and that all terms are being honored.
Many organizations engage in reactive contract audits, these are usually triggered by an event such as a merger or acquisition, or expansion into new markets. While these audits are preventative, pointed, and help avert risks, they leave a lot of room for improvement.
To maximize compliance and value from all contracts it is important to set up systems for proactive audits – these can be periodic, broad purpose audits that keep you on top of your contract documentation and compliance status.
More often than not, contract non-compliance is in the form of unmet SLAs and overpayment/non availing eligible discounts from vendors which is a huge source of value leakage. This can be easily caught via comprehensive and regular audits and alert contract owners to take corrective action.
To facilitate a successful contract audit, it is essential to establish a systematic process that includes a review of all documents and records related to the contract, including financial statements, invoices, and correspondence.
Setting up audit friendly infrastructure such as a centralized, searchable repository of contracts with clause and contract level drill-down search capabilities and improving organizational commitment towards regular audits is also pivotal to this process.
Start Making Your Contracts Compliant Today
Keeping close tabs on signed agreements and following the above-listed points will help you leapfrog your way to better contract compliance.
If you would like to know more about how you can ensure contract compliance in your organization, here is another similar resource that can help – The Four Pillars of Contract Compliance Management
Alternatively, you can also book a call with Zycus solution experts to understand how you can achieve higher contract compliance by implementing an enterprise wide CLM solution.