“In the face of mounting complexity and risk, it is inconceivable that enterprise management teams, compliance teams and auditors will allow enterprises to continue with the inadequate processes that most of them use today for managing contracts.”     - The Gartner Group, 2004

Contract management and the automation of contracting processes are concepts that are relatively new to organisations. However, an increasing number of forward-thinking organisations are researching and implementing a more systematic, automated approach to contract management, and reaping significant rewards.

In most organisations contract management systems are paper-based and usually filed in different departments such as finance, procurement, legal and IT. In addition, important contract details are either kept in the memory of individuals or in isolated and inaccessible spreadsheets. The loss of this collective memory could have disastrous results.  Automated contract management brings system and order to contract management. It provides executives with a single view of the organisation’s contractual obligations.

The role of contract management in corporate governance 

Contract lifecycle management has become a priority for organisations – regardless of the industry in which they operate - because of new compliance risks, the increasing importance of good corporate governance, and the increasingly competitive nature of global markets which requires escalated operational efficiencies.

The number of criminal and regulatory risks is increasing, with new legislation being passed every year that adds to the exposure faced by companies. Also, governments globally have been improving their ability to enforce existing commercial law.

Compliance and reporting

Codes of Corporate Practices and Conduct are explicit about the responsibility of a company’s Board of Directors to manage its risk in respect of compliance with applicable laws, regulations and supervisory requirements, as well as financial and triple-bottom-line reporting on the systems and performance of the company. Globally, laws and principles guide corporate procurement practices, such as the Sarbanes-Oxley Act, the American Bar Association's Model Business Corporation Act (followed by businesses in most states in the USA), the Organisation for Economic Co-operation and Development’s Principles of Corporate Governance, and the World Business Council for Sustainable Development’s accountability and reporting guidelines.

IT tools to assist with compliance

With new IT tools at their disposal, senior managers in companies can manage the systems, reporting and variances in the contracts that are the foundation of business procurement. Information technology, in all its facets, is a key driver of business strategy and decisions, and has now become an integral part of internal controls and reporting information, particularly for procurement. At the same time it has fiduciary implications because of the electronic formation of contracts, the integrity of electronic communications, the retention of records etc. IT systems are also critical for ensuring transparency in governance.

Transparency, risk management and reporting

Transparency is the ease with which an outsider is able to make meaningful analysis of a company’s actions, its economic fundamentals and the non-financial aspects pertinent to that business. This is a measure of how good management is at making necessary information available in a candid, accurate and timely manner – not only the audit data but also general reports and communiqués. It reflects whether investors obtain a true picture of what is happening inside the company. A system of automated contract management ensures that companies comply with all pertinent legislation and principles of good governance, in terms of procurement contracts, the integrity of electronic communications, the retention of records, reporting, transparency, etc.

Companies are encouraged to comply with the Global Reporting Initiative (GRI) guidelines.  Companies quoted on the London, New York and Toronto Stock Exchanges follow the recommendations of their respective national codes. However, they must disclose whether they follow the recommendations in those documents and, where not, they should provide explanations concerning divergent practices. Such disclosure requirements exert a significant pressure on listed companies for compliance to good governance regulations. Contracts are key to any business, having the ability to automatically produce accurate reports that comply with the global guidelines can significantly reduce the burden on human resources to produce these reports and the risk associated with manual reporting.

 Corporate citizenship

A well-managed company will be aware of, and respond to, social issues, placing a high priority on ethical standards. A good corporate citizen is increasingly seen as one that is non-discriminatory, non-exploitative, and responsible with regard to environmental and human rights issues. By taking those factors into consideration, a company is likely to experience indirect economic benefits such as improved productivity and corporate reputation. Converting to electronic contract management rather than a paper-based system, will greatly improve the business’s environmental impact in terms of paper wastage.