Obligations form the heart of contracts. The signing of an agreement legally binds the contracting parties to be obliged to do and refrain from doing specific activities for the fulfilment of the contract. Businesses spend innumerable hours and resources to negotiate deals and agree on terms and conditions of contract obligations during contract creation and before signing their contracts. But Post Award Contract Management to track contract obligations is usually not in place because businesses believe that their race is won by signing contracts, but they don’t realize that it has only begun.
Contracts are legally complex and difficult to phrase. Not adhering to specific terms and regulations or non-fulfillment of obligations on time can prove catastrophic to businesses by damaging revenue and sacrificing reputation, which they may not be aware of till it reaches huge proportions.
What is Contractual Obligations Management?
Contractual obligations management refers to the tracking of the contracts and ensuring that the signatories comply with the obligations signed in the contract for its effective fulfillment. It tracks if contract obligations are met, and both parties can realize the contract’s total value by operating at the efficiency they are entitled to as per the terms of the agreement. At a glance tracking, a business contract may be simple as it depends on the delivery of goods and services for a payment. But it is not so – contract terms are numerous and highly specific, and these exact terms may easily get lost in a crowd of contracts over the years since its signed.
Contractual obligations management can bring to your notice any contract violations that may cause you to lose revenue in the long run. This is crucial because contracts are legally enforceable by law, and breaches on your side or the opposite side can invoke the penalty clauses in the agreement and make you liable to face a lawsuit which can be detrimental to your reputation.
Types of Obligations:
Obligations may not be straightforward, like delivery of services or products, payment before the due date, or renewal. Still, it can also be nuanced concerning government and internal regulatory measures like detailed encryption requirements regarding data privacy standards, background checks, assurance of insurance, and other restrictive covenants. The most common types of obligations include,
- Provision of goods or services
- Provision of invoice
- Payment on the due date
- Type of delivery
- Method of payment
- Quality of goods or services
- Refunds and Penalties
General and Standard Obligations
- Background verification
- Period of notice
- Restrictive covenants
- Service level commitments
- Termination requirements
An efficient contract obligation management will keep you in the light of what is happening in your contracts regarding its performance and fulfillment of obligations.
Why is Contractual Obligations Management Important?
All businesses have tabs to monitor their incoming revenue, but they are seldom aware of their revenue leakages. Non-fulfillment of contract obligations is a significant factor for revenue leakages, and without a proper contract obligation management system, you will not be able to track and monitor them. Further failure to comply with contractual obligations may lead to a breach of contract, which can prove to be a potentially severe latent risk to your business and reputation.
For example, your company agreed to provide services to a client company and signed a contract with a term that will increase your cost of services by 5% every financial year. But contracting parties and contract managers are usually different, due to which this term will be lost due to lack of knowledge. Assume three years have passed since signing the contract, and the value of the contract might be around $60000 per year. A 5% year-on-year increase will result in an inflow of $9458, which is lost due to ignorance of the contract obligation. This is just for one contract; imagine the revenue leakages for the rest of your contracts.
An efficient contractual obligations management gives you timely alerts and reminders and complete tracking over the contract lifecycle. It brings critical clauses and terms to scrutiny that needs action to avoid penalty. It also ensures your contracting services are operating at the efficiency you are entitled to so that you are not losing money or the quality of services that can compromise your functional abilities due to such services.
Consequences of Non-performance of Contract Obligations
Non-performance of contract obligations leads to a breach of a contract. A violation of an agreement can attract legal action. Without someone looking into your contract’s performance, you may never know of a contract breach. The aftereffects can range from mild to fatal for your business performance and its reputation. Further non-performance of contract obligations may lead to missed opportunities and translate to heavy revenue losses for your business.
Today every business deals with enormous volumes of contracts. Without proper contract tracking software, it is possible to breach an agreement without realizing it. Accidental breaches like missed deadlines are common without adequate tracking of the contracts. A breach should be a significant concern for any business as contracts are legally enforceable by law. Parties will include the consequences of breach of agreement within the contract when signing a contract. When a breach occurs, both parties must come together to find a solution for the violation. Failure to do so might attract legal action in the court. But what if you are kept in the dark about the breach as you are not aware of specific important dates and information in the contract?
When faced with a lawsuit endangering your business reputation, you might be caught unaware.
You might be liable to pay penalties for breaching the contract from your side.
You might be ignorant about the breach of contract of the opposite party leading to not collecting penalties due to you for such breach.
You might not realize the total value of the contract performance leading to a compromise in your operational ability.
How Can Contractual Obligations Management Help in Breach of Contracts?
A likely breach of contract should be expected and allowed during the ordinary course of business, but how much you should allow is a factor to be decided. Contract obligation management system can help to:
Challenges With Traditional Contract Obligation Management System
Most organizations still use the rudimentary or traditional manual approach towards their contract obligation management. They use spreadsheets, word docs, emails, and in-house repositories to manage their contract obligations, commitments, SLAs, and entitlements contained in the contract clauses. With piles of contracts added every day, this methodology is inefficient. It lacks a proper contract tracking system to track, trace and report contract performance which can put organizations at high-risk for contract non-compliance and attract disputes, termination and penalties. It does not allow managers to act proactively rather than react in haste. Some of the key challenges of this approach include,
Manual identification of obligations from different contract repositories
The contract language is legally complex and contains technically tricky terms to understand. Contract obligations get hidden in these complex phrases in lengthy contracts. Added with the need to search multiple contract repositories of different departments, the manual extraction, identification, and interpretation is highly impossible and time-consuming without knowing the legal know-how of the terms.
Manual entry of critical data
Contracts contain crucial data on milestones, renewal dates, penalty clauses that must be tracked. Inability to capture such data instantly and manual entry of such data in spreadsheets is a laborious and error-prone process. Further, even if entered, keeping track of such data cannot be done effectively in the traditional method with no automation for alerts.
Lack of ownership and accountability
In most cases, people who sign the contract and those who manage are different, leading to a lack of ownership and accountability regarding contract obligations. People need to be aware of their responsibilities toward their contract obligations and be held accountable for their performance. This requires effective tracking and a proper audit trail that keeps all parties working in sync with the latest version of the contract, which is not always possible through traditional management. It is difficult to decipher an audit trail of the changes in the agreement.
Obscure visibility of obligations
Inability to compare actual and the target value of contract data may keep organizations bleak about their contract obligations. This is difficult in the traditional method as contract data is spread across different systems like ERP, CRM, FMI, and HRM, leading to the non-visibility of data obscuring the comparison of actual obligatory performance with the target obligations as entitled in the contract.
Impact of Poor Obligation Management on Organizations
Even after spending countless resources and time on drafting, negotiating, and signing a contract, poor contract obligation management may not let you realize the total value of your contracts. As per reports of IACCM and Ardent, due to needy contract obligation, management organizations are;
- Suffering a 9% revenue leak annually due to contract-related issues leading to severe penalties and litigations and injured customer relationships.
- Having only 54% of spending and 66% of contract compliant company transactions leads to overpricing and overpayments with underperforming vendors and a damaged business reputation due to uninvited legal actions.
- Not having a contract compliance tracking and reporting with standards as only 29% of organizations collect compliance data regularly regarding standards with their contracting party.
Transform Your Contractual Obligations Management with Zycus iContract
Transform your contractual obligation management system today with the Zycus iContract system powered by AI and realize the total value of your contracts. Our cloud-based contract management software allows you to always stay on top of your obligations and have greater visibility about contract dates, milestones, and other specific terms in your contract. Whichever side of the agreement you are on, you can track contract performance with a unified and centralized contract repository that integrates with your current operating systems. Collaborate better relationships with your customers/clients by improving your business performance with enhanced efficiency through automated obligation tracking and fulfillment on time and meeting all contract compliance requirements, thereby reducing your exposure to risk.
Dynamic Contract Repository
With Zycus’s Contract Repository Software, all existing and new contracts are stored in a unified space. All documents are linked to the contracts ensuring that all your essential contract information such as key dates, milestones, costs, compliance activities are all in the same space. With free-text search and AI-powered metadata search, you can quickly search relevant contract data with just a click and generate reports relating to obligation data.
Automated obligations capture
Obligations are usually written in complex contract language that are highly technical and legal. With the power of AI and machine learning, the Zycus iContract system can identify and decipher these complex terms, automatically capture obligations and bring it to the attention of the concerned stakeholders for taking action. These identified obligations are prioritized and scheduled into tasks, whether one-time, recurring or triggered, and the obligation fulfillment process is set into motion.
Configurable alerts and reminders
Zycus iContract system automatically captures obligations and milestones like SLAs, quality of goods, the number of goods, renewal dates, recurring payment, need for a background check, insurance check, etc. Users can configure unlimited alerts and reminders to notify concerned parties of the upcoming obligations or milestones to be met on time and keep them in sync with achieved responsibilities increasing the visibility of contract performance.
Monitored real-time contract performance
With Zycus’s Contract Repository, contract data is no longer scattered in disparate systems but is in a single unified CLM space. It is capable of tracking all the critical obligations and provide unparalleled analytics and insights about your real-time contract performance. During the contract lifecycle, organizations can generate reports of comparison between their actual and target data of contracts allowing them to stay ahead of upcoming or overdue tasks and obligations. It will enable them to gain insights into bottlenecks and leverage the captured obligation to gain an edge in future negotiations.
Visible ownership and accountability
Once a contract is requested, Zycus’s CLM sets an inbuilt pre-designed contract workflow into action. It defines ownership and accountability by assigning obligation fulfillment tasks to concerned stakeholders. With automated reminders, users can take action on their obligations cultivating better relationships with external parties by meeting milestones and deliverables on time.
User-defined Dashboard and Reports
Zycus iContract system allows user-defined access into the CLM space with a configurable and intuitive dashboard interface. Only the right people can access the correct information at the right time. Users can view all contractual obligations based on priority, vendors, business unit, or category in a single place based on a person’s role in the organization. It generates reports on overdue and rejected obligations and pending, completed, in-progress, and closed obligation tasks.
Collaborative Contract Compliance Assurance
Today businesses are expanding globally and need to meet compliance requirements across borders. Zycus iContract system enables third-party self-service request portals, allowing specific users from the opposite contracting party to access the contract management solution interface. This enables both parties to track obligations, collaborate on contract compliance requirements, and take necessary action in case of a potential breach of contracts before it can adversely affect both parties.
Stay ahead of your peers and pull your business out of risk by acting proactively rather than reactively by meeting every contract obligation on time with the cutting-edge technology of AI-powered Zycus iContract. With our contract lifecycle management solution, realize the total value of your contract, increase organization and vendor compliance, save time and spend, reduce revenue leakages. Zycus iContract helps you improve contract structuring for sustained cost reduction and enhance your business performance by building better collaborative relationships. With the power of AI and Machine learning, extract critical obligation data, create obligation tasks, and set your digital workflow in motion with a single click from anywhere in the world.