Contracts are one of the most important parts of running a successful business. No matter how large or small your business is, odds are that you’ve needed to sign contracts with other entities in order to get your business running.
Business owners pay lawyers huge sums of money who in turn spend huge sums of time working on the intricate details and terms outlining the contractual obligations of both parties when drafting a contract. However, these complex legal documents can often be difficult to parse and specific terms can easily fall through the cracks once the contract is signed.
Contracts can’t simply be tossed into a dusty binder once they’re signed. The work of organizing and managing contract obligations is extremely important, or else your business is easily vulnerable to losing money if contract terms are being violated that no one is keeping track of.
Whether your business is tied into hundreds of complicated legal agreements or only has a couple of employment agreements and a lease to oversee, here is everything you need to know about obligation management in order to make sure your business is running properly and efficiently.
What Is Obligation Management?
Obligation management refers to the process of keeping track of and enforcing obligations of signatories to a legal contract. A contract is a binding legal document between two or more parties for a specified purpose. In essence, contracts ensure people carry out their promises once they’ve come to an agreement.
Contract terms tend to be highly specific and numerous. While keeping track of a business contract may seem simple at the outset, it’s very easy for the specifics of the individual terms to be forgotten about over the years once the contract is signed.
Contract enforcement requires one of the signatories to a contract to initiate a lawsuit against the party violating the terms of the contract. If no one at your company is ensuring that contractual obligations are being met, then you might not even realize that you’re being cheated out of the full value of your contract.
Why Is Obligation Management Important?
Obligation management is important because failing to notice a contract violation can cost your company a lot of money in the long run. This isn’t just exclusive to a breach in contract against your company. Your own company may not realize that it’s in violation of a contract without adequate obligation management.
This is dangerous, as contracts generally include penalty clauses in case the contract is not fulfilled in its entirety. You could end up losing a lot of money for your business, both by failing to collect penalties or by having to pay penalties without adequate contract management.
Additionally, without sufficient obligation management, you can’t be sure that your contracted services are operating at the efficiency that you’re entitled to per the terms of the contract. If a contracted company fails to satisfy its contractually required promises on important logistical issues such as shipping, delivery, or availability, the operating ability of your company could be compromised.
It is estimated that companies lose around 9% of annual revenue on average due to mismanaged contracts. This leads to grave ramifications over time in terms of company expansion, growth, and revenue. By making sure you manage contract obligations appropriately, you can avoid losing a lot of money and make sure that your company is running as well as it possibly can.
Manual Obligation Management
So, how exactly do you go about obligation management? Traditionally, contractual obligations are managed with the use of spreadsheets, documents, emails, and in-house records. Although this method of obligation management has been used for many years, as businesses become more complex in the modern age and technology advances, attempting to manually oversee obligation management is becoming less and less efficient.
Furthermore, manual obligation management requires the retention of a lot of in-house staff dedicated to the task, taking up resources and office space. At the end of the day, even with sufficient staff overseeing obligation management, human error is still highly possible when contracts are being managed manually, leading to mistakes and missed opportunities for contract enforcement.
Automated Obligation Management
With the advent of automation and AI-driven software innovations, jobs that used to have to be tediously executed by a team of employees can now be streamlined and eased by various software-based solutions. New solutions for obligation management make use of modern technology in order to more effectively manage and organize contractual obligations without the need for significant human intervention.
Obligation management software is able to use AI-accelerated algorithms to set up and analyze contracts, manage obligations and report outcomes to employees, all without manual data organization, verification, or number-crunching.
By generating an electronic repository of contracts and obligations and automatically overseeing enforcement, obligation management software can more reliably and efficiently manage contractual obligations compared to traditional methods.
Maintaining Proper Compliance
Although many organizations still rely on traditional methods of obligation management, modern technology offers significant improvements that are worth the upfront cost of transitioning to a software-based solution.
Obligation management is one of the most important parts of running a business and should never be dismissed or overlooked. By ensuring that contracts are being fulfilled to their fullest extent, you can protect your company from liability and opportunity losses today.