Identify, Track and Manage Contract Obligations to Prevent Revenue Leakage

A newbie in contract management might find the notion of revenue leakage surprising. You can lose between 1–5 percent from revenue leakage as per statistics, which can add up to a significant loss of revenue in the long run.

According to The International Association for Contract & Commercial Management (IACCM), companies lose 9% of annual revenue through the leakage.

One of the root causes of leakage is poor quality contracts and missed contractual obligations. Obligation management in contracts is a function where the probability of loss of revenue is high.

Let’s take a look at one relatable scenario of contractual obligation management.

Company X has signed a vendor contract with Company Y. Company Y has a decent contract management system. It manages the contract lifecycle from drafting to renewals but lacks the tracking of SLAs committed by themselves.

As per the contract signed with Company X, if raw materials do not reach on time, they are obliged to pay a penalty of USD 150 per hour in case of a missed commitment. The amount sounds negligible, of course, when the purchase order (PO) is in thousands or lakhs. However, assuming several missed obligations remain unnoticed to the COO of Company Y, the penalty amount associated with this vendor contract can easily bump up in thousands and lakhs! On top of it, it can shake the organization’s financial planning when it is due to Company X’s payment.

Apart from financial loss, there are reputation damage risks when this vendor contract will be due for expiration. Company X will think twice before going into renewals with the same supplier.

Sales and operations teams rarely possess a solid legal background. And hence, the above scenario shows that your sales and operations teams will need actionable insights from the contract information, which can help them avoid non-compliance and associated penalties. So, it depends on how well they understand, analyze, interpret and act. Simply reading between the lines won’t save the situation for them. However, misinterpretation or failure to give attention to details will result in delays and losses, which ultimately invite severe operational and business risks.

What are the key challenges in managing contract obligations? Read More >>

In a nutshell,

• Attempting to track agreements manually is time-consuming, which if done incorrectly, might result in unnecessary litigation.
• The relationship has no value if you cannot guarantee that the other party will fulfill their part of the contract obligation.

Regarding the technical side of contract management, you could use free Excel contract management templates or tweak the contract worksheets based on your requirements

Over time, your contract management team will build up a database of completed clauses and obligations you should adhere. Eventually, it will consume even less time to create, manage and obey obligation requirements.

Try automation over manual efforts to ensure end-to-end tracking of contractual obligations throughout the company.

So, how to track and manage contract obligations with automation?

According to the Arcadis Global Construction Disputes Report 2019, failure to properly administer the contract is the third global reason causing disputes.

Quick tips for better contract management to fulfill obligations and prevent revenue leakage:

• Establish a well-organized repository where you can store your contracts in the format that suits you best.
• All legal department personnel should know the details, including document contents and correct terminology.
• The full-text search would be a huge benefit for such a contract repository since it would make it much easier to find the contracts and terms you need.
• Remember to save the associated metadata, as it allows you to filter and display different contract data.

Here, an automated contract obligation tracker can solve all the challenges. A proper contract compliance system enables your organization to keep track of all your contractual obligations with ease.

Compliance trackers like Aavenir Obligationflow, built on ServiceNow, can:

• Verify that the vendor adheres to all of the contract’s SLAs and KPIs.
• Eliminate the possibility of overpayments, overpricing, and severe financial penalties to prevent revenue leakage.
• Identify repetitive business opportunities and make most of your contracts.

Schedule a Demo to explore more about Aavenir Obligationflow

Before you leave — Know how you can manage contractual obligations on ServiceNow!