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5 Ways a CLM Solution Improves Contract Compliance

Dermot Whittaker compliance

Every contract carries with it some risk of noncompliance, but contract management software can reduce that risk significantly.

Noncompliance is seldom intentional or caused by a lack of resources. It is often the result of one of three things:

  • Lack of visibility – people cannot find what is required in the contract
  • Lack of awareness – people don’t know what they are responsible for in the contract
  • Lack of consistency – people don’t know that their obligations have changed in a given contract

These three internal problems can be reduced with better communication of obligations and responsibility for them – something that contract management software makes possible.

Here are five ways that a contract management solution improves contract compliance.

Enforces the Use of Pre-Approved Contract Templates

Legal, finance, and department managers know what an organization can safely and reliably deliver. Collectively they know the details of a deliverable and whether it is properly understood as a performance or specified as condition. That is one reason all three groups weigh in on contracts as they are drafted and negotiated. The language used in describing deliverables protects the organization and keeps commitments precise.

Pre-approved contract templates make sure that this language is used for similar contracts, giving the same protection to the organization with every agreement. A contract management system insures that these templates and no others are employed by business users who make contracts. That keeps the organization’s commitments realistic, making it highly likely you’ll stay in compliance. In the rare case you fail to meet an obligation, pre-approved contract templates limit responsibility and damages appropriately.

Ensures Consistency with Automatic Redline Comparisons

During negotiations, a counterparty may offer their preferred language for certain clauses – or simply make a one- or two-word modification of your organization’s language. Even small changes to a contract can affect what constitutes a failure to observe or perform, the terms of delivering notice of failure, or the means of restitution. In the press of other business, small changes can be lost in the shuffle.

Automatic redlining catches every change to a draft contract, from one version to the next. This lets your legal team focus on the implications of the changes instead of the tiresome, error-prone task of finding them. Besides freeing highly-paid legal personnel for more important work, automatic redlining saves time and builds confidence in the contract review process. This feature of a mature contract management system makes it unlikely that even a small change will escape detection, ensuring that compliance with the contract will be on the terms your legal team has approved.

Surfaces Obligations to the Right People

Contracts point to your organization as the party responsible for meeting its obligations. In fact, any number of people at your organization make things happen. Contract managers have eyes on the contract itself, but often they are checking (perhaps by phone or email) with project managers in manufacturing or services to see that work was completed as specified. Using sub-contractors adds another layer of persons responsible for fulfilling obligations.

Contract management software allows you identify what you have agreed to do in the contract and record it as one or more obligations in an electronic system, each with a specific owner who is responsible for that obligation. A complex obligation can be broken into electronic milestones with owners responsible for completing each one.

Attaching obligations to owners has two immediate benefits for compliance.

  • There is no confusion as to who is responsible for an obligation.
  • Managers and executives can see in a second where responsibility lies.

Taken together, these features lead to quick resolution of any at-risk obligation, keeping your organization in compliance.

Alerts People to Pending Milestones with Advance Notice

Along with owners, obligations have due dates. Keeping track of due dates for dozens or hundreds of obligations can be a problem without contract management software. With such software, obligation due dates keep the organization in compliance in many ways. For example,

  • A due date can trigger emails and calendar notices to the obligation owner to keep that person aware of an approaching deadline. This is especially valuable if the contract provides a limited window for notifying the counterparty of an unavoidable delay in delivery without accruing a penalty.
  • A due date informs reporting for contract managers and supervisors that helps them allocate of resources needed to complete projects on time. Tasks that appear to be at-risk can receive added attention or resources as needed.
  • A due date can create advance warning for contracts that need review before they expire or auto-renew. For many contracts, an important obligation is giving adequate notice before terminating or renewing on specific terms.

Attaching due dates to obligations is probably the single most important feature for staying in compliance because so many contract terms are tied to time-windows or deadlines.

Maintains an Audit Trail of Contract-Related Correspondence

Meeting the terms of a contract ultimately comes down to expectations, yours and the counterparty’s. Ideally, expectations are clear from the contract’s language, but there are times when you need to support your interpretation of that language, or your compliance with it, with an audit of emails. A contract management system can produce such a report in minutes.

Producing a contract-related email history can be helpful in two ways:

  • It can reveal a clear understanding by both parties of what contract language meant during negotiation.
  • It can demonstrate a good faith effort to inform the counterparty of your efforts to fulfill the contract by specifying what was being delivered over time and how it was being delivered.

Disputes over contract compliance can always end up in court, but a contract management system that connects correspondence to a contract record can make that less likely where the audit shows consistent attention to compliance on your part.

Noncompliance is the very opposite of good contract management, but the potential for it – from lack of visibility, awareness, or consistency – is real. A contract management system can counter all three problems and keep your organization on target to fulfilling its obligations.