Contracts are a vital aspect of business operations, and they carry some risk of noncompliance. Failure to comply with contractual obligations can have disastrous consequences for businesses, resulting in loss of revenue, legal disputes, and reputational damage. However, contract management software (CMS) can help reduce the risk of noncompliance by streamlining the contract management process and ensuring that all contractual obligations are met. In this article, we will explore the benefits of using CMS to achieve contract compliance, best practices for using CMS to manage contracts, and common challenges businesses face when managing contracts.
What is Contract Compliance?
Contract compliance refers to the extent to which a party fulfills its contractual obligations. In other words, it is the measurement of how closely a contract adheres to the laws and regulations set out by contract law. Compliance ensures that businesses follow external (government law) and internal (business policy) standards. When a business complies with a contract, it legally meets the conditions outlined in the agreement, protecting both parties involved from changing the stipulations of the agreement without expressed consent from the other party.
The Importance of Contract Compliance
Contract compliance is critical to risk management and helps ensure all stakeholders adhere to the contract’s terms. It protects businesses and individuals from legal disputes, avoids contractual disputes that could lead to court, prevents misinterpretations of roles and responsibilities, and protects asset values, physical property, and intellectual property. Compliance also helps resolve disputes by arbitration, mediation, or court. Enforcing compliance will bring in more business and protect your startup’s reputation. Non-compliance could negatively affect your bottom line and harm your business’s reputation.
Benefits of Using CMS for Contract Compliance
Contract management software is a tool that businesses can use to streamline the contract management process and ensure that all contractual obligations are met. Here are some of the benefits of using CMS for contract compliance:
1. Automated Contract Management
CMS automates many aspects of the contract management process, reducing the risk of human error and ensuring that all contractual obligations are met. The software enforces the use of pre-approved contract templates, ensuring consistency in language and protection for the organization with every agreement. CMS automatically catches every change to a draft contract, ensuring that even small changes do not go undetected.
2. Improved Visibility
CMS provides improved visibility into contracts, ensuring that all parties involved can find what is required in the contract. It allows for the identification of what a business has agreed to do in the contract and records each obligation in an electronic system, ensuring that the right people are aware of their obligations.
3. Enhanced Communication
CMS ensures better communication of obligations and responsibility for them, making it possible to break complex obligations into electronic milestones, with owners responsible for completing each. This feature leads to quick resolution of any at-risk obligation, keeping your organization in compliance.
4. Better Time Management
CMS alerts people to pending milestones with advance notice, ensuring that due dates do not slip through the cracks. It also creates advance warning for contracts that need review before they expire or auto-renew.
5. Audit Trail
CMS maintains an audit trail of contract-related correspondence, providing 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.
Best Practices for Using CMS to Manage Contracts
When using CMS to manage contracts, it is essential to follow best practices to ensure that all contractual obligations are met. Here are some best practices for using CMS to manage contracts:
1. Create a Contract Policy
Creating a contract policy helps provide direction on what clauses go where, what regulations to fall back on, and what document to use for what purpose. Document the steps required to achieve total contract compliance.
2. Use Legally Compliant Templates
Rely on legally-binding templates to ensure compliance. Get a lawyer to perfect your legal documents before handing them to customers or clients.
3. Develop a Dynamic Repository
Develop a dynamic repository to track your contracts from a single dashboard. Use a contract management system to store all your documents in one place, making it easy for your team to find what they need.
4. Establish a Contract Workflow
Establish a standardized workflow to authorize contracts faster. Define hierarchies in the approval process and use the right protocols and procedures. Assign duties to your employees to ensure that important tasks are not neglected or completed incorrectly.
5. Track the Right Metrics
Track the right metrics actively. Use these metrics as a part of your auditing protocol. Track how many contracts you’ve processed, turnaround time, response time, first to final draft, dollar value, reading simplicity, cost per transaction, deviations, and legal obligations. If you have international clients, track your contracts by type, business unit, and geography.
6. Participate in Regular Audits
Participate in regular contract audits and periodic reviews of new contracts to ensure you’re meeting industry standards. Use a contract management system to give you access to a complete audit trail, enabling a more standardized process for contract amendments and contract compliance activities.
7. Pay Attention to Compliance Changes
Monitor regulatory changes to ensure you’re maintaining compliance. Keep a watchful eye out for changes to industry standards, laws, and regulations.
Common Challenges Businesses Face When Managing Contracts
Despite the benefits of using CMS to manage contracts, businesses may face challenges when managing contracts. Here are some common challenges businesses face:
1. Maintaining Contracts That Aren’t in Writing
Verbal contracts are too risky and won’t hold up well in court. All compliance processes should include written contracts.
2. Contractual Review is Expensive for Teams
Hiring a lawyer every time you need help complying with a legal process is very expensive for startups and small teams.
3. Defining and Tracking Contract Costs
Managing costs and compliance issues regarding contracts is almost impossible with a manual system due to a lack of visibility.
4. Streamlining Agreement Approval
To meet your contractual obligations, you need an approval process, which can be difficult without automation software.
5. Dealing with Outdated Legal Speak
Legal jargon is an integral part of any compliance system, but if it’s outdated, it could harm you or your customers.
6. Lack of Contract Version Control
All legal documents require a “final version” that includes the most up-to-date regulations and legal processes, or it won’t protect you.
7. Time-Consuming Legal Reviews
Contract compliance isn’t just expensive; it’s also incredibly time-consuming without contract management software.
8. Constantly Evolving Standards
Companies require legal services because it’s hard to keep up with changing laws. Non-compliance could negatively affect your bottom line.
9. Sending Contracts via Snail Mail
Sending a contract via mail or email is unsafe and could delay the contracting process. It makes the review and sending process inefficient.
Contract compliance is critical to risk management and helps ensure all stakeholders adhere to the contract’s terms. CMS is a tool that businesses can use to streamline the contract management process and ensure that all contractual obligations are met. When using CMS to manage contracts, it is essential to follow best practices to ensure that all contractual obligations are met. Despite the benefits of using CMS to manage contracts, businesses may face challenges when managing contracts. By being aware of these challenges, businesses can take the necessary steps to achieve contract compliance and reap the benefits of effective contract management.