Track and Manage Contract Obligations To Prevent Revenue Leakage

A newbie in the field of contract management might find the notion of revenue leakage surprising.

As per statistics, you can lose between 1-5 percent from revenue leakage. This can add up to the significant loss of revenue in the long run.

According to The International Association for Contract & Commercial Management (IACCM) on average 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 lost revenue has a high probability.

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 pretty decent contract management system in place. 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 USD 150 penalty per hour in case of a missed commitment. The amount sounds negligible, of course, when the purchase order is in thousands or lakhs. However, assume several missed commitments remain unnoticed to the COO of Company Y. The penalty amount associated with this vendor contract can easily bump up in thousands and lakhs! Top of it, when it is due for the payment to Company X, it can shake the financial planning of the organization. Apart from financial loss, there is reputation damage as well. When this vendor contract will due for expiration, Company X will think twice before going into renewals with the same supplier.

Looking at the above scenario, it is obvious that your sales and operations teams will need actionable insights from the contract information since they rarely possess a strong legal background. So, it all depends upon how well they understand, analyze, interpret and act. Simply reading between the lines won’t save the situation for them. Misinterpretation of failure to give attention to details will only result in delays and failures, which ultimately invite severe operational and business risks.

In a nutshell,

Attempting to track agreements manually is a time-consuming effort that, if done incorrectly, might result in unneeded litigation.

If you can't guarantee that the other party will fulfill their part of the contract obligation, the relationship has next to no value.

When it comes to the technical side of contract management, you could use readily available free Excel contract management templates or tweak the contract worksheets based on your needs.

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

To make sure that contractual obligations are tracked throughout the company, try automation over manual efforts.

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

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 personnel of your legal department should be aware of the details, including document contents and correct nomenclature.

A 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 well, 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 tracker like Aavenir Obligationflow, built on ServiceNow can:

Verify that the vendor is adhering 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.