The Different Levels of Contract Compliance
Written by Julian Canlas
No contract lifecycle is complete without compliance. In fact, according to global management consulting firm, McKinsey & Company, companies that fail to invest in a proper contract management system stand to lose up to 9% of their revenues annually. This is where successful compliance programs come into play, as they help mitigate these potential losses.
This week we’ll be sharing some benefits, best practices and methods to ensure consistency in your contract compliance programs.
What Is Contract Compliance?
Contract compliance involves the strategic management of the parties and processes involved in the contract to ensure that all legal obligations are met. It also consists of reviewing your contract lifecycle to identify weaknesses and evaluate progress. This contract management function also aids in monitoring conformance with regulations.
Different levels Of Contract Compliance
Contract compliance is an ongoing process. There needs to be adequate controls over non-compliance. Thereafter, continuous monitoring and evaluation of existing processes is required to enable necessary adjustments in relation to changes in the business environment.
There are various levels when building a suitable contract compliance program:
Stage 1: Strategic level
At this level, this involves delegating roles and responsibilities to employees for tasks such as:
- Developing standard contract templates.
- Overseeing and ensuring integrity in the entire contract lifecycle management process.
- Monitoring existing compliance processes.
- Aligning contract terms with corporate and approved industrial practices, ensuring compliance with supervisory body requirements.
Stage 2: Transactional level
Moving on from the strategic level, it is time to establish processes to review, monitor and evaluate processes in the existing contract lifecycle.
- Set processes to review any deviation or variation from standard processes, terms, policies or expected performance.
- Automate contract approval processes.
- Monitor performance of parties to the contract and ensure compliance with specified quality and contract clauses.
Stage 3: Incorporating both levels
Bringing together efforts dispensed in the first 2 stages, you’ll need to incorporate these processes:
- Establish control systems with relevant compliance data.
- Identify and determine frequencies of compliance variations.
- Consistently assess the changing business environment and recommend suitable changes according to new compliance rules.
- Establish stringent management, reporting processes, and initiatives to introduce and manage change.
How Does Contract Compliance Benefit Companies?
- Cost savings — Lesser costs as a result of proper contract management, and lesser revenue tied up in contracts.
- Greater trust, accountability, and transparency in business operations — Issues with contract compliance can lead to a loss of reputation, affecting future partnership opportunities with well known clients in the industry.
- Higher efficiency and work productivity — Lesser time will be spent on managing working relationships and monitoring subcontractor performance. This means more time can be spent on other revenue driving tasks.
Best Practices For Contract Compliance:
1) Standardize and clearly define internal compliance frameworks and processes.
Plan, audit, build a framework and implement relevant technologies to help you achieve your contract compliance goals. Establish guidelines for when and how employees can edit templates in the repository.
Automating your contract management processes with contract management software and e-signature integrations will help to remove risks associated with human error. It also facilitates convenience as signees can sign on-the-go, speeding up the contract approval process and improves work efficiency.
2) Establish a contract and template repository to standardize contract details and reduce errors.
With a centralized platform to consolidate contracts and templates across the organization, it reduces the number of process gaps and increases visibility. According to Aberdeen Research, a clearly defined contract compliance process can enable organizations to achieve over 80% more savings compared to others.
Standardizing contract creation through templates minimizes the time required to draft contracts. Long contract creation processes lead to undue delays and greater risks of non-compliance. What you can do is to:
- Regularly update templates and clauses when there are changes made to regulations.
- Define mandatory clauses.
- Define templates and clauses applicable to each region and category. Different regions have their own compliance regulations and supervisory bodies.
3) Establish compliance goals and measures of success.
When employees know what to work towards and set quantifiable contract compliance performance metrics, companies can better identify underperforming segments. Some measures of success include:
- Approval time — Amount of time taken for a contract to be executed. This is an indicator of how efficient your contract approval process is.
- Cost per transaction — How much does it cost the company for each signed contract.
- Annual contract value — Annual profits each customer contract will bring in.
- Fulfillment of obligations — How long does it take for you or your vendors to fulfill contractual obligations.
4) Clearly define roles and responsibilities.
Effective contract compliance cannot be implemented by one person alone. It requires a collaborative effort. As such, employees need to know their individual responsibilities to be able to perform. Ensure that everyone knows what they need to do, the respective deadlines and who to approach if they require assistance.
A thorough contract management structure sets the foundations of a successful compliance program. Thereafter, setting clear expectations and communicating them effectively increases the likelihood of its success.
5) Establish a clear contract approval workflow and automate processes where possible.
Are you still using traditional methods (emails, calls, texts, etc.) in your contract approval process? These methods have been proven to cause confusion, and are difficult to audit.
Switching to an automated contract approval workflow with a tool like Contract Hound provides you with an intuitive dashboard. It displays the statuses of all contracts in progress, simplifying your contract management process. This creates a more efficient process for viewing and managing contracts, and every step can be tracked via an audit trail.
6) Identify sources of non-compliance and disparate data
Vendor overpayment has been cited as one of the most common sources of non-compliance within an organization. It may not be an indicator of dishonest behavior, but a clerical error when keying values into the system manually. Consolidation of contract data across different regions also gives rise to disparate formats, hindering efficient auditing processes.
These errors can be minimized by investing in necessary infrastructure or software to increase visibility and standardize formats throughout the organization. Adopting automatic processes will ultimately reduce the number of errors, leading to greater cost savings in the long run.
7) Monitor contract performance and adjust processes as changes occur.
Set regular key performance indicators to gauge compliance performance internally and by vendors. Vendors should also be required to submit regular performance reports to update you on their progress. This gives you time to implement changes, ensure quality, cost-effectiveness and adhere to deadlines.
8) Perform regular contract compliance audit exercises.
Schedule regular audits to verify the consistency of vendor performance and effectiveness of internal control processes and systems. Use these audits to also look through and inspect your vendor’s business and financial records to detect early signs of dishonest behavior.
How To Ensure Consistent Contract Compliance Practices
Periodic contract compliance audit exercises allow companies to determine whether contractual duties have been fulfilled by the corresponding parties. When performing contract compliance audits, these are a few points to observe to ensure consistency:
- Define objectives and scope
What do you want to accomplish throughout the auditing process? Will you be auditing the entire contract portfolio or only contracts that satisfy certain criteria? Discuss with key stakeholders before going ahead with the audit.
Examples of objectives include:
- To obtain a better understanding of existing contractual obligations and liabilities the company is exposed to.
- Identify areas of non-compliance by the organization or its vendors. It can be quality wise, late deliveries, over-billing, etc.
- To confirm invoice amounts and ensure billing accuracy.
- To familiarize with contractual rights and internal controls.
- Identify areas for improvement.
- Reasons for audits
The reasons for which you conduct your audits can be classified as reactive or proactive.
Reactive reasons are usually associated with specific business events or concerns that arose, such as:
- Planning for an expansion into new markets.
- Determining feasibility of investment opportunities such as a merger/acquisition.
- Decision to terminate an existing contract.
- Significant company structure or personnel change.
Proactive reasons however, are associated with preventive measures and routine audits. These help to pick out and address potential issues before they impose significant impact to the organization.
- Auditing communications
Auditing communications is no easy feat, but is detrimental towards ensuring productive and useful audits.
Before conducting audits on internal communications, ensure that proper communication and broadcasts has been made with clear reasons and explanations. This will help to quell unnecessary anxiety, and prevent employees from feeling as if they are being investigated.
As for external communication audits, consistent and open communication with contract parties help to ensure smooth sailing business relationships. Send notices of audits early, such that subcontractors can schedule an appropriate time for the audit.
Similarly, avoid raising suspicion and playing the blame game if any abnormalities have been found. Instead, use this opportunity to focus on strengthening your vendor relationship during the dispute resolution.
Standardize and keep up with changes in your contract management process with Contract Hound.
Monitoring compliance is an ongoing process and should be observed at every stage of the contract lifecycle. Simplify your contract management processes and save time, money and resources with us today.
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