8 Questions to Ask When Auditing Your Contract Management Process
How confident are you in your organization’s contract management process?
Have you ever missed a contract renewal date or failed to comply with a reporting or payment obligation? Are you satisfied with your risk assessment and management processes and the amount of time your team spends on negotiations?
According to research compiled by PwC, most organizations maintain 20,000 to 40,000 contracts—with such a high-volume, mistakes and bottlenecks are bound to occur. The goal of any organization is to preemptively identify those risks and mitigate them before they happen.
This is where contract management audits fit into your organization. Implementing an annual contract management audit process can help you ensure that your organization:
• Identifies revenue leaks
• Knows where and when to shorten (or extend) sales cycle times
• Retains strong, consistent customer relationships
Can auditing my contract management process really make a difference?
It is often difficult for staff across leadership or managerial roles to watch contracts after they have been signed, so the contract management stage of the contract lifecycle is passed on to staff at the operations level who may not have the knowledge or authority to monitor a contract. Poor contract management can lead to missed renewals, breach of contract, and scope creep among other issues.
It’s easy to let the contract management component of your sales process fly under the radar unchecked, but with all of the time, effort, and resources your organization puts into empowering your sales team to administer, execute, and manage contracts effectively, it is worth your time to ensure that the processes in place are carried out as efficiently as possible. When done well, the work that follows a contract’s execution builds long-term business relationships that are critical to the ultimate success of your organization.
Where should I begin?
You can avoid the risks that come with a poor contract management process by implementing a quarterly audit. Most organizations believe there are somewhere between seven to nine stages of the contract lifecycle. While stages for your organization may slightly differ, to navigate this audit, we suggest you consider the contract management lifecycle in the following eight areas: Storage, Generation, Negotiation, Execution, Reporting, Compliance, Review, and Optimization.
For this example, we will identify questions you should address with your staff on a quarterly basis to ensure that your contract management process is running as smoothly as possible.
What should be audited?
1. Storage: Can our contracts be easily accessed by staff who need them in an online repository?
Whether it’s in a folder on a shared drive or in a contract lifecycle management (CLM) software, your contracts should be securely housed in a centralized location that is easily accessed by the necessary staff tasked with ensuring terms and conditions are met on all sides. As staff join or leave your team and responsibilities change, it is easy for permissions and file access to be overlooked, leaving staff without the tools they need to effectively execute and manage contracts. When the right people have access to the right contracts, your organization can better identify potential risk exposure and revenue leakage.
Make sure you have a process in place to do a quarterly sweep of the permissions on your contracts so that the right staff has access to the information they need while keeping confidential data secure.
2. Generation: Are we maintaining up-to-date templates for recurring contracts/contract types? What additional templates should we create for new types of contracts that have been appearing more frequently?
Having easy-to-find, easy to-use templates will not only speed up the time needed for contract generation, but it will save additional time and resources by not duplicating work required of expensive legal staff.
3. Negotiation: What is the chain of command for contract negotiation? Has any staff left the organization or changed departments and left a hole in the process?
Most organizations are comprised of several different departments even amongst the sales team. Standardization across the negotiation process is essential to ensure that individual teams are aware of the terms that may affect reporting requirements, timeline obligations, or other areas crucial to meeting customer expectations.
4. Execution: Where do we house relevant documents related to each contract? If the data in these documents is not machine-readable, how can we make that switch?
An essential piece of managing financial risks related to a contract is by capturing relevant documents in a centralized location. This will also help you manage rights, renewals, amendments, and reporting requirements as they are defined and eliminate issues such as missing a contract renewal date.
5. Reporting: What issues has the last quarter seen in internal and external reporting? Could these reports be automated? Do new reports need to be created/old reports updated to meet new needs or standards?
Across your organization, teams such as sales, finance, and operations will need access to information contained in the various contracts that have been executed (or not) this quarter. Having an automated (or, at the very least, standardized) system for preparing and sending recurring and one-off reports will ensure that your organization runs smoothly.
6. Compliance: In the past quarter, what contract compliance issues have come up? Have we failed to comply with any performance or payment related obligations?
Compliance is the most obvious and immediate challenge facing contract management. Failing to comply to the obligations set out in a contract can disrupt your client relationships and lead to financial losses. Taking the time to identify where these issues occur on your teams can help you mitigate similar issues or bottlenecks in the future.
7. Review: What contracts are we maintaining that are no longer useful in our organization?
Making sure you’re aware of contracts that no longer serve the best interests of your organization is critical to improving your overall profitability and efficiency. Rather than blindly renewing or waiting until the last minute to make amendments, be sure to have a system in place to evaluate your contracts so you can begin the renegotiation process early enough to reach a better agreement for your organization or terminate on good terms.
8. Optimization: What new systems can we implement to avoid the issues identified during this audit?
Once you’ve gathered data across the previous seven layers of this audit, you have the tools you need to optimize your contract management process to provide greater value to clients and lower overall costs and risk outcomes. During this process, for example, you may have discovered that you have been renewing a contract that your organization no longer needs or that your team is repeatedly building the same contract from scratch. Now that you are aware of these issues, you can use the data you’ve acquired to implement a continuous feedback loop between the various departments involved in the contract management lifecycle and your leadership team.