Contracts Auditing
”Do We Even Know What the Contract Says?”
Many companies never see the final contract, don't know who signed it, and don't know what's in it, even when the deal is for millions of dollars. A great many contract management software tools have come on the market in recent years to help companies organize their contract files and to track important terms. These tools are indispensible in large companies for tracking thousands of contracts and the related spend, but they will never fully address the problem not knowing how well their contracts support their business goals, whether the contracts protect against probable risks, whether the contracts are in or out of compliance with current regulations and policies, or where opportunities exist within the contracts to increase the value being received.
Not knowing what is in contracts leads to all sorts of problems for both buyers and sellers. Not knowing can mean a lot more than missed expiration dates or duplicate supplies and services. Terms that were won in hard fought negotiations are never performed. Exceptions to standard terms go unnoticed. Hidden options and risks are never identified. Contract requirements violate insurance policies and do not comply with regulations. Corporate governance initiatives, implementation of standards and security measures, financial filings, reports to equity owners, and business proposals are left unsubstantiated. Problems and delays arise during due diligence in mergers and acquisitions.
Re-Discovering Revenue and Cost Savings
Simply reviewing existing contracts can do amazing things for a company. According to a 2004 Aberdeen Group Contract Management Center of Excellence study, ineffective control and management of contracts cost businesses more than $153 billion per year, and improved contract management would result in an average 7% reduction in supply costs and a 2% increase in revenues. Unrealized revenue for sellers and cost savings for buyers are recouped numerous ways through contract auditing including the following:
- Sellers-Enforce payment terms. Identify additional business outside project scopes. Exercise pricing adjustments.
- Buyers-Enforce acceptance criteria. Identify runaway projects. Exercise spending caps and most favored nation pricing.
James River's Contract Auditing Process
James River's Contracts Auditing Process goes beyond listing basic terms and conditions and important dates in a spreadsheet. Our auditing process builds strategies for successfully enforcing, renegotiating, or ending existing contracts. Intelligent templates are used to identify 1) the business deal underlying the contract and opportunities for value creation, 2) the most threatening risks and how they should be treated through the contract, 3) how well the contract complies with both internal corporate governance initiatives and policies and external laws and regulations, 4) how external market and other factors shape relative bargaining power, and 5) terms important to management of the contract such that would also be input into an enterprise contract management (ECM) system. Potential for renegotiation is fleshed out, identifying the terms most critical to increasing value and how the parties can engage in value trading, along with other strategies.
Recession-Proofing Contracts
Recession-proofing a business means providers working to retain and extend existing business, customers working to derive greater value from providers, and both providers and customers working to control and reduce costs. There is no less expensive and more effective way of fighting a recessionary economy than through simply managing contracts better. Better contract management doesn’t require any investment in any special software. It just requires some careful reading and knowing how to affect simple changes. With its experience in negotiating and managing contracts in both good and bad economic times, for both providers and suppliers, James River helps companies get more out of their existing customer and supplier relationships as well as prepare for new business in ways such as the following:
- Better define scope of service to avoid give-aways
- Establish exclusivity provisions in an environment of uncertainty
- Understand how to better contract with multiple internal corporate customers to increase inside sales
- Proactively offer service levels to reduce termination likelihood
- Minimize contracting transaction costs like unnecessary order processing