Contract Compliance: Improving It in 3 Steps

A study from the Aberdeen Group indicates that best-in-class enterprises demonstrate rates of contract compliance that are over 2.4 times higher than their competitors.

A higher compliance rate isn’t just for show. The top performers showed three outstanding metrics:

• Reduced contract creation and approval cycle-times by 15% to 20%
• Rate of compliance of 88% per contract expenditure
• Improved savings rate per contract expenditure

Here are three ways to increase the focus on compliance in your contract management processes.

1. Automate Contract Processes for Auditing

With so many ongoing projects, your team may be spread too thin. While it’s understandable that employees need to focus on attracting and maintaining business relationships, it’s also important to maintain contract history for auditing purposes. The stats from the Aberdeen Group show that a higher compliance rate lower your contract expenditures and acerbates your contract lifecycles.

The report from the Aberdeen Group indicates that approximately 50% of companies admitted to having poor visibility into their supplier contracts. The major culprit is the lack of a contract management system. As many as 80% of the companies surveyed reported using manual, partially automated, or incompatible systems.

One of the major challenges of keeping a full audit trail is that the process is too tedious or manual. However, an enterprise contract management system automates the processes to maintain compliance standards and generate compliance reporting. The investment in a contract management system does not only streamline contract processes but also improves compliance across contracts.

2. Institute Internal Compliance Audits

However, it’s not just a matter of keeping the necessary documents in case of an audit. Your organization needs to be ready for an actual audit. For example, what would happen if your organization is audited tomorrow for Sarbanes-Oxley compliance?

Running internal audits on a quarterly or annual basis should be part of your strategy to increase contract compliance. Think ahead and identify potential red flags for auditors:

• Clerical errors in capturing contract data
• Unusual discounts in terms of volume or cost to vendors
• Lack of justifications for write-offs or miscellaneous expenses
• Vendor overpayments
• Records for valuations and allocations

By investing the time in internal compliance audits, your organization will most likely accelerate the audit process. As in any other business process, neatness counts. The more ready that you are for auditors, the less disruptive they will be on your business activities.

3. Standardize Contract Creation

The findings from the Aberdeen Group indicate that the more standard that the contract creation is, the fewer deviations from pre-approved contract language there are. A contract management system can also help in this respect through a centralized library of contract templates and clauses.

A standard workflow for drafting, revising, amending, approving, and executing leads to faster contract creation and improved compliance. The Aberdeen Group indicates that best-in-class companies benefit from contract creation in three main ways:

• Increased operational compliance to both external and internal processes of governance
• Improved transactional compliance to terms and commitments
• More accurate regulatory compliance to financial regulations

Takeaway

Three ways to improve contract compliance in your organization are to automate contract processes for auditing, to institute internal audits, and to standardize contract creation.