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A Basic Compliance Requirement: A Contract Management System

Assume you are under the influence of a truth serum; does you company have a contract management system?

Some will say yes; I suspect most will say no.  My question is why not?

Lawyers love contracts.  Most business people see the value of a contract and will comply with a requirement that a deal will require a contract in order to move forward.  But there is much more to the issue than a lawyer’s desire for a memorialized agreement as a basic requirement for a deal.

Let’s start with a reality test.  Businesses operate under contracts or purchase orders.  Not every business transaction requires a contract.  Most companies have a threshold below which a contract is not required.  Also, when a contract is in place, companies will use purchase orders to conduct individually authorized transactions pursuant to the contract.

A contract management system is imperative for four important purposes:

  1. To maintain consistency in the formulation and enforcement of contractual relationships;
  2. To mitigate business risks between the company and a party (e.g. customer, vendor, supplier);
  3. To protect the company’s culture and mitigate compliance risks through imposition of certifications, representations and warranties, and specific compliance obligations;
  4. To protect the accuracy of the company’s financial payment and receivables system by verifying the accuracy of payment terms and conditions in accordance with the company’s contractual agreements.

First, a contract management system ensures consistency across the organization when creating business relationships.  Contract templates are critical to ensuring that business negotiations do not lead to changes in corporate policies and procedures.  Of course, changes can be made, if necessary, subject to appropriate approvals.

Second, a company’s use of contracts mitigate business risks by creating specific obligations and remedies should a party fail to perform, provide substandard goods or services, or not meet other terms and conditions.

Third, a company’s consistent use of contracts provides an important mechanism for compliance officers to embed compliance requirements on third parties and customers in order to mitigate compliance risks (e.g. FCPA, sanctions, export controls, money laundering, health and safety).  If the company uses purchase orders for certain transactions, compliance has to make sure that significant compliance provisions are referenced or printed on the backside of a purchase order.

Fourth, and very importantly, a contract management system provides an important check for a company’s receivables and payment functions.  A company has to verify that a payment coming in or going out is the correct amount as specific in a purchase order or in an existing contract.  If a company fails to connect these basic two dots – a payment and a purchase order or contract – the company is simply asking for trouble.

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