Survey Reveals Alarming Contract Management Practices
A new AberdeenGroup analyst report reveals some alarming practices in global business today.
The report The Contract Management Benchmark Report: Sales Contracts reveals that 85 percent of responding companies are using manual or only partially automated systems to manage sales contracts and 32 percent of customer contracts are not tracked, improperly serviced or forgotten entirely. Such practices pose significant risk for legal and regulatory non-compliance, financial reporting violations, customer dissatisfaction, lost revenue and more.
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“According to our research, almost 88 percent of survey respondents report that their sales contracts address varying combinations of products, services (including consulting services), warranties, and upgrades,” Vishal Patel, research analyst at Aberdeen, elaborated in a prepared statement about his report. “Despite this complexity and the obvious need to now manage them more carefully, contract management in most organizations usually involves largely manual, labor-intensive, and disjointed processes – resulting in poor visibility into contracts and compliance, as well as missed renewal opportunities.”
As the report explains, contracts are simply becoming more complicated, containing increasing amounts of critical information that demands precise and unblinking attention. At the same time, businesses continue to look for more revenue wherever possible, while navigating a maze of financial and other compliance requirements. Taken together, the logical conclusion is that businesses need to evolve their processes and technology to more proactively manage their contracts. The report also indicates potential growth for the contract performance management (CPM) industry with nearly one-third of respondents reporting they are planning to invest in contract management technology in the near term.
“Given all the risks to which companies expose themselves by not paying attention to this critical issue, the Aberdeen report makes a clear case for large companies to invest in CPM technology,” said Kyle Bowker, president and chief executive chairman of Nextance in a prepared statement.
The analyst reports also recommend best-practices and benchmarks the success of companies identified as “Best in Class” by Aberdeen. For instance, these business leaders are able to achieve contract renewal rates 92 percent on average, or 35 percent better than other companies. They are also able to close deals 75 percent faster by reducing the contract cycle times to about one week, compared to the average of nearly one month.
Accounting and financial professionals should be particularly aware of the potential compliance and reporting issues related to unmanaged or inadequately managed sales contracts.
“Sales contracts now often have very detailed terms and conditions, complex payment options and various channel sales strategies. Partner sales and distributor relationships, for example, can get complicated when it comes to revenue sharing and discounts or rebates,” Patel said. “Also, certain regulations (e.g., SOX and Basel II) require documentation and reporting, requiring management to assess the internal controls and procedures for financial reporting. Regulations also require that revenue be recognized at the right time, not too early or late.”