In today’s fast-changing regulatory and political environment, many aspects of agreements need to be reviewed regularly for ongoing relevance and compliance. After all, obligations lie at the very heart of contracts, specifying the duties that each party is obliged to act upon — or the activities they must refrain from doing — either individually or together with other parties. These commitments concerning contractual and regulatory directives can vary in number and type, and be rather exhaustive and complex.
Tracking contract obligations is the process of boiling down the terms of an agreement to these most essential parts. It makes certain that each contract party fully understands and honors their legally enforceable commitments. In fact, the process is one of the most crucial components of agreement management. By successfully tracking contract obligations, legal and other departments can minimize errors in contracts, avoid breaching the negotiated terms of agreements and reduce the overall exposure to risk.
Here is why all of this is so important today, and how organizations can achieve these goals through efficient and effective contract management.
Why is Tracking Contract Obligations Important?
When two (or more) parties enter into an agreement with one another, they work together to develop a set of contractual terms. In other words, all parties need to be fully aware of what is expected from each other in a legal undertaking. They must then uphold the legal responsibilities on their end of an entered agreement. And this is ensured through proper contract management and obligations tracking, which in turn sees that the parties get what they need out of the individual agreement. Without an effective process, organizations are more likely to breach contracts (often inadvertently) and less likely to benefit from agreed-upon arrangements. What is more, they may waste a great deal of time, effort, and resources during negotiations.
The goals and importance of tracking contractual obligations include the following, in particular:
- Assessment and reporting of contract obligation status
- Investigation of causes of actual or potential non-compliance
- Informing obligation holders about actual or potential non-compliance
- Execution of actions to meet the regulatory and operational obligations
- Reduction of risks associated with contractual obligations and non-compliance
- Restating of obligations or revision of compliance specifications if needed
Consequences of Poor Contract Management
Whenever a new agreement is entered into, legal and other departments could manually compile all of their responsibilities and commitments that their company has promised to uphold — along with those of the other party. However, tracking these obligations in a manual fashion is not only tedious, but also prone to errors, delays, and higher costs. And if done improperly, it can lead to missed opportunities or breaches of contract leading to significant risks. The financial consequences of non-compliance can be minor, such as accrued interest on late invoice payments, or they can be major, such as the termination of agreements altogether and fractured partner relationships, as well as litigation, government fines, and reputational damage.
Granularly speaking, those who manually track contract obligations fail to get a complete picture of obligations by supplier category, customer type, or business unit. Also, they do not see clear ownership when it comes to obligation fulfillment.
On the other hand, legal and other departments can prevent these productivity and financial losses with proper obligation tracking from the start.
3 Factors of Effective Contract Obligation Tracking
Transparency
A lack of visibility into the entire contract management process makes it difficult to maintain compliance obligations. But by implementing a dashboard, legal and other teams can view all data within contacts and all patterns related to agreements. This visibility of obligations goes a long way in understanding if contract parties are meeting their commitments — either individual or joint — and achieving high levels of compliance. For the purposes of risk management, obligation compliance levels should be reported regularly. And this obligations compliance report should reveal the total number of agreements. It should reveal those contracts that have been checked for compliance during the course of the year, along with other important contract details (e.g. contract purpose, critical obligations, obligation holder, compliance level, planned remediation approach and date, and rolled-up overall compliance level).
Notifications
Every stage of the contract cycle includes strict deadlines meant to speed up the contracting process. Not adhering to them can be costly for companies. However, alerts and notifications around deadlines and essential terms can be sent to necessary contract parties. Such a notification system facilitates the gathering of information and discussions with stakeholders, as well as any activity that follows (e.g. ranking, addressing, and reporting non-compliance.) It helps to prevent breaches and make sure opportunities are not missed in the contractual sense. And as circumstances dictate, the calendar of events can be reviewed and updated.
Teamwork
Poor contract workflows can make it difficult to uphold obligations made to other companies. By enhancing workflows properly legal and other teams can better keep track of contracts together — through their various stages. For example, they can ensure that terms are fair and straightforward and that goals are met during the creation phase.
Using Smart Contract Lifecycle Management Tools to Meet Obligations
The latest contract lifecycle management (CLM) tools provide the enterprise with a 360-degree view of contractual obligations for customers, suppliers, service providers, sales partners, and other parties. The best systems offer AI-enabled contextual search, for example. With this kind of functionality, legal teams and companies can discover key contracts obligations and monitor compliance status automatically, as well as collaborate with relevant stakeholders. In other words, they can find and fulfill obligations that are otherwise hidden in complex contractual language.
More specifically, organizations that employ CLM tools can:
- Automate obligation fulfillment process through a workflow engine
- Experience shorter obligation identification cycle times
- Fulfill contract obligations on time
- Increase compliance and reduce overall business risks
- See cost savings with centralized obligations fulfillment
- Gain and leverage insights for future contract negotiations and renewals
Conclusion
Ultimately, the best way to minimize organizational risk is to manage compliance with agreements, regulations, policies, and processes — as optimally as possible. Experiencing a high level of obligations compliance is not only a worthwhile goal but also a really attainable one. You merely need to put in place a solid compliance program supported by advanced legal technology. Thanks to contract management systems — embedded with AI technology — you can streamline workflows and improve insights related to agreements, to strengthen the business and improve the bottom line. On top of that, you can demonstrate true value to the organization through a higher obligation compliance level.
Are you struggling to track all of your contract obligations? To learn more about modern contract management, read ContractPodAi’s Primer and use our handy contract management checklist. And to find out how to begin your digital transformation journey, contact us today to request a demo.
Author:
Jerry Levine
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