5 ways contract obligation management changes the game

Signing a contract is a big deal. It can take weeks or months of negotiations, multiple back-and-forth cycles of redlining, and, often, sign-off from a broad array of colleagues and counterparties. Once the work is done, though, you have a well-crafted, clear outline of everything each party has committed to doing as well as a roadmap for how to operate both when things are going well, and when things go awry.  

Actually tracking those commitments and ensuring everyone gets what they expected, however, can be tricky. 

What is obligation management?

As the name implies, obligation management is the process of ensuring that all parties to a contract are meeting their commitments and responding to any shortfalls according to the guidelines codified in the signed agreement. Key obligations for a contract might include:  

• Delivery of promised goods and services 

• Payment rendered for goods and services received 

• Application of volume discounts as they are earned 

• Application of credits for shortfalls, late delivery, or service disruption  

• Negotiating the renewal or cancellation of the contract within a pre-agreed timeframe 

Why is obligation management important?

The contract itself only describes the agreed-upon parameters of a future business relationship – if its details are not incorporated into the counterparties’ operations, the chances are good that the long-term outcome of the agreement will miss expectations. Volume discounts from a supplier, for instance, might offer a reduction in production costs over time for a manufacturer – but only if it successfully recognizes it has reached thresholds and confirms its bills are going down. Similarly, buyers must know the renewal negotiations dates for recurring contracts in order to avoid automatic renewals. 

5 ways strong obligation management changes the game:

1. Avoid auto-renewals

These days, a stunning percentage of contracts are designed to renew if not actively cancelled. These recurring contracts, as they are known, will define a period within which the buyer must either re-negotiate, or cancel, if they do not wish to simply renew the contract at the supplier’s proposed rate. At Agiloft, we hear all the time from organizations that realize they have missed the re-negotiation period and are now stuck with another year – or more! – of a product or service that they no longer require. When the renegotiation date is properly surfaced on all contracts, and entered into an automated notification flow, you can be confident that you will not end up with “zombie contracts” that continue for no better reason than that someone forgot to cancel them. 

2. Never miss a discount

Discounts may be triggered by all sorts of things, from reaching volume thresholds to service disruptions. One thing that tends to be consistent all the way across the board, however, is that these discounts need to be claimed. Elevating the profile of all discount possibilities and connecting them to operational systems like CRM and ERP, can mean the difference between knowing it’s time to claim a discount or rebate, or not. Contracts that specify compensation for high volumes, exceeded quality levels, or unanticipated disruptions, can be exceptionally valuable – so long as the details are folded into operational execution. 

3. Manage compliance risk

Contracts between organizations entail not only the risk that the deal won’t work out, but also the risk that the deal will steer both entities afoul of regulations. When a manufacturer, for instance, purchases production capacity from another entity, a failure to meet labor practices can impact both organizations. Obligation management ensures both that appropriate commitments are included in all contracts to ensure regulatory compliance is promised, and that the failure of one party to meet its commitments is a clear reason for the other to cancel the agreement. In a global economy that is increasingly subject to complex and critical regulations (not to mention consumer expectations that directly impact brand value), failing to plan for managing compliance risk is planning to fail the test. 

4. Build unbreakable business bonds

When a company expects its supplier to deliver goods every Monday, but only receives shipments every ten days or so, it’s inevitable that friction will threaten the long-term relationship. When both sides are carefully managing their obligations, however, the problem can be identified and addressed before it becomes a crisis. A supplier that has its arms around its obligations will either ensure that they meet the contractual Monday delivery, or, if they cannot, will proactively reach out to their partner to negotiate a change in terms that best serves both entities’ needs. By staying on top of the agreement, partners can develop mutually-beneficial, open, and collaborative relationships that thrive over the long term. 

5. Drive meaningful efficiencies

With a data-first, automated approach to obligation management, companies can relieve their administrative teams of low-value manual work and shift from a reactive to a proactive approach to deriving full value from each and every contract they sign. Processes that surface key events during the lifetime of the contract automatically ensure maximum value from each agreement, at the lowest cost in human resources. 

How to optimize your obligation management

The foundational element to obligation management is a data-first contract lifecycle management (CLM) solution. That means a CLM tool that prioritizes data (the specific details of an agreement) over documents (the agreement in its entirety), so that the contracting team can easily and seamlessly build processes that surface eventualities that call for intervention, whether it’s to claim a discount, negotiate a renewal, or acknowledge and fix a failed promise. 

In conclusion

Effective contract obligation management is a game-changer for any organization. By proactively managing commitments, companies can avoid costly auto-renewals, ensure they never miss out on valuable discounts, mitigate compliance risks, strengthen business relationships, and drive operational efficiencies. Implementing a data-first CLM solution is essential to achieving these benefits, enabling organizations to seamlessly integrate contract details into their operations and maximize the value of every agreement. With strong obligation management, businesses can transform their contractual processes from a potential liability into a strategic advantage.