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Everything You Need to Know About Contract Compliance

Date posted: Dec 21, 2021
Estimated read: 9 min
Author: Dan Townsend

With increased market accessibility for businesses comes increased competition, and so compliance in all areas becomes closely associated with quality assurance and commercial reputation enhancement. This is why it is important to know as much as possible about contract compliance.

Compliance is an integral part of contract management in modern business. As the global marketplace has become more accessible through technological advancements, the emphasis on controls and regulations has grown. This is partly due to the fact that consumer communication is easier thanks to social media and the shifting nature of legislation across different territories and jurisdictions.

What is contract compliance?

The concept of compliance is easily understood as the adherence to a set of rules or guidelines. In the area of business compliance, however, this straightforward notion is complicated by variation in the many elements with which enterprises are complying. In commercial operation, organizations must take into account both internal and external compliance factors.

Internal Compliance – Adherence to rules, guidelines and standards established by the organization as part of its own governance.

External Compliance – Adherence to rules, guidelines and standards established by regulating bodies and government authorities in all territories of operation.

So, when we talk about contract compliance within a business, these internal and external requirements continue to apply.

Internal Contract Compliance – adhering to rules, guidelines, and standards established by the organization, governing the administration and management of contracts

External Contract Compliance – Adhering to rules, guidelines and standards established by regulating bodies and government authorities in all territories of operation, governing the administration and management of contracts.

Why is contract compliance important?

In examining the specific detail of what is involved in contract compliance, it becomes clear that this area intersects with several aspects of overall Contract Management and general business processes, making it a very important commercial discipline. Contract compliance is most significantly related to Risk Management, because the processes involved in ensuring compliance with internal and external requirements, as well as the fulfilment of all legal obligations, mitigate risk of contractual delay or failure and reduce the risk of legal and financial penalties.

In terms of both consumer relations and potential business associations with partners, vendors and suppliers, the careful and meticulous approach required to achieve contract compliance is a positive boost for the reputation of the company. It highlights the likelihood of a stringent policy of quality assurance being in place, with the organization taking great to care to meet the needs of all parties in a timely, appropriate fashion. This is vital for the Risk Management processes of the third parties, as well as the company itself.

The fundamental purpose of mitigating risk through contract compliance is the protection of revenue. Adherence to the detail of a stringent program of contract compliance provides two layers of revenue protection: reputation enhancement and the avoidance of penalties. The potential outcome of reputation enhancement – being known as an organization that can be trusted to fulfil its obligations – is the increase of profit, productive business partnerships, and sales. The outcome of successful penalty avoidance is the retaining of revenue that would otherwise be lost to the consequences of a disorganized and inefficient approach.

Who is responsible for contract compliance?

Contract compliance falls under the purview of both Contract Administrators and Contract Managers. Contract Administrators are responsible for the initial phases of the Contract Lifecycle, including the request, authoring, negotiation, and approval phases. The Contract Lifecycle then passes to Contract Managers, who monitor performance, deal with changes and amendments as necessary, and handle renewals and terminations.

In the context of the Contract Management process, contract compliance is closely related to both Risk Management and the monitoring of performance. During the initial phases of the Contract Lifecycle, Contract Administrators undertake Risk Management measures as they work on the negotiation, authoring and approval of the contract. Internal and external regulatory obligations require that this information be meticulously documented and shared with Contract Managers, because it shapes the way in which amendments and renewals are negotiated as well as the way in which performance is monitored. Specifically, it is the parameters of the commercial relationship established by Contract Administrators that informs the work of Contract Managers.

Contract compliance best practice

While the idea of a full contract compliance program is initially daunting, its close relationship with Risk Management protocols and contract performance monitoring means that it can be built into the Contract Management Lifecycle as part of organizational policy and procedure. This can be achieved through the application of several Contract Management approaches that work as contract compliance best practice.

Standardization

Successful contract compliance requires the standardization of contract documentation and processes. Standardization allows for a streamlined and efficient approach to Contract Management, as well as a system that makes it easier to identify incidents and areas of non-compliance. If all contracts and contract-related systems are standardized, then non-standard items can be surfaced and remedied quickly and effectively.

 Automated workflows

Automation of basic functions is an important part of streamlining processes and increasing efficiency. By automating workflows, contract compliance can be improved and achieved. In Contract Management, workflows ensure that milestones and deadlines are met by moving the contract documentation through the correct sequence of personnel for tasks to be completed. These tasks can involve administrative elements in the early phases of the Contract Lifecycle, and later Contract Management phases that can also reflect obligations and deliverables. As such, automated workflows help to ensure that not only are contractual obligations met, but also that the monitoring of contract performance is made more effective.

KPIs

Monitoring the extent to which contractual obligations and regulatory requirements are fulfilled is central to any contract compliance program, which means that KPIs are an essential consideration. These are Key Performance Indicators and can be set by the business in accordance with the contract type as well as the needs of the parties involved. When used in conjunction with stringent categorization of documents and the consistent application of metadata and data tagging, Key Performance Indicators can underpin a thorough and successful approach to contract compliance.

Reporting

In order to ensure compliance in any area of business, it is necessary to have a clear and comprehensive view of the way processes work and the outcomes they produce. This means that reporting is essential. Using reporting tools specifically geared to deliver insights into data relating to Key Performance Indicators, the business can make decisions based on data analysis at all levels of granularity.

How does software support contract compliance?

Centralization

Contract compliance is much easier to achieve when the Contract Management System is centralized. This is because all processes are streamlined and made more efficient by having all contract documentation stored in a single location. Most importantly, centralization enables standardization, which is a significant factor in any compliance effort. With the consistent application of metadata and data tagging to a centralized contract collection, the analysis of Key Performance Indicators can be standardized, therefore providing valuable insight exactly as required. A centralized repository also allows for the creation of a standardized library of contract templates, clauses and language, ensuring that all contracts meet internal and external regulatory requirements.

 Cloud Technology

Modern Contract Management solutions harness the advantages provided by cloud technology. Digital space is acquired from internet ‘cloud’ providers, who retain responsibility for server maintenance. The use of cloud technology has several benefits for contract compliance efforts.

Permission-based access – Contract Management platforms using cloud technology can apply permission-based access to a centralized system. This means that only authorized personnel can use the system, and all activity is tracked and logged in an automated audit trail. This not only adds an additional layer of security, but also boosts accountability and transparency – all of which is important for contract compliance.

Electronic signatures – The use of electronic signatures is now accepted in many territories and jurisdictions around the world, largely because it is known to be a more secure method of contract approval. Electronic signatures include important digital markers that provide additional security information regarding identity, giving a vital boost to contract compliance.

Encrypted data transfer – Contract compliance places significant emphasis on data security, and cloud technology ensures that Contract Management Software platforms use encrypted data transfer protocols to help fulfil data protection regulations. Since cloud-based software enables authorized access from any web-connected location, the security of data is an essential consideration for contract compliance. This is what is achieved with encrypted data transfer.

Eco-friendly operation – ‘Green credentials’ are a growing concern within all industries and are therefore an important part of contract compliance efforts. International regulations increasingly emphasize the importance of eco-friendly commercial operations and, from the perspective of consumers and vendors, the reduction of carbon footprints is a notable enhancement to business reputations. Cloud technology allows businesses to greatly increase ‘green credentials’ by reducing the resources and space required for effective Contract Management, while also reducing the emissions associated with personnel travel and the manual delivery of documentation.

Third Party Risk Management

As contract compliance is so closely related to risk mitigation, Third Party Risk Management measures are an important part of the process. The best Contract Management Software platforms incorporate a comprehensive suite of Third Party Risk Management tools for the purpose of ensuring compliance. These tools include standardized intelligent questionnaires to support the completion of risk assessments, as well as links to leading external databases such as Dow Jones and LexisNexis. Such databases enable businesses to conduct thorough background checks on both individuals and organizations, to establish and monitor actual risk levels in real time. These facilities help to prevent fraud as well as helping to ensure that businesses are making fully informed decisions about connections, partnerships and business development.

 Automated Workflows

The automation of tasks contributes significantly to Risk Management and, as such, is an important element in contract compliance. Contract Management Software that uses automated workflows can help businesses meet external compliance regulations across multiple jurisdictions, while also helping to ensure that internal and contractual obligations are also met. Automated workflows ensure that the right task is flagged up to the right person at the right time, which means that the risk of missed deadlines or delayed deliverables is greatly reduced.

Powerful Reporting Tools

In order to properly manage any contract collection, it is essential to have a comprehensive and constantly updated picture of what is happening, to all levels of granularity. The powerful reporting tools of Contract Management Software provide this type of data analysis, with facilities that can be fully customized to reflect the specific Key Performance Indicators of any business. This ensures that any incidents of non-compliance can be identified and addressed at the earliest opportunity, while forecasting and business planning can be supported with analysis of industry trends and contractual relationships.

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About the author

Dan Townsend

Dan has been a leading executive across all areas of Contract and Compliance Management applications since 2001 in both Sales and Implementation. Dan has over 30 years management experience in a wide range of business applications such as ERP Implementations, Business Process Reengineering, and Operations Management.

See authors posts
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