The True Cost of Contract Management
Keeping a lid on expenses is a top concern for banks, credit unions, and other financial service companies. Is your institution overlooking a prime opportunity to improve efficiency and better control costs?
Poor contract management costs American companies billions of dollars every year. Experts estimate that failing to properly manage contracts and engage in vendor risk management can impact the bottom line by as much as 9 percent of annual revenue. Another study from research group Aberdeen estimates collective losses of around $153 billion annually.
What Is Contract Management?
Contract management is the process a financial institution uses to organize and oversee third-party vendor contracts and agreements. A good contract management system creates value by ensuring contracts are accessible, tracking key dates, and making it easy to identify important contract terms, including cost and performance expectations.
Many financial institutions rely on manual and uncoordinated contract management processes. Contracts are stored in desk drawers, filing cabinets, personal hard drives instead of a centralized location, making them difficult to retrieve and review. Contracts can be lost when the person who filed it forgets where he or she puts it—or leaves the company. They can be damaged or destroyed in a fire, flood, or other disasters. The contract may be at one company’s location when it’s needed at another—or needed by someone working from home.
As a result, employees responsible for monitoring vendor performance (including IT, compliance, and accounting) don’t have all the data they need. This includes contract information relating to:
More than a simple document, a third-party vendor contract serves as a blueprint for the entire relationship. It contains the basic building blocks needed for vendor management—a regulatory requirement for banks and credit unions. Vendor management the process of identifying, measuring, monitoring, and controlling the risk of third-party vendor relationships. This includes vendor risk assessment, vendor due diligence, contract structuring and review, and oversight.
Related: Creating Reliable Risk Assessments
Why Mismanaging Contracts Is Expensive
From cost and performance impacts to compliance risks, poor contract management can hurt a financial institution’s bottom line in many ways.
- Contract creation, routing, filing, and retrieval all take unnecessary time and trouble.
- Amendments and other changes aren’t attached to the original contract, leaving the impression the original contract is complete and current.
- Off-contracting buying can happen because the relationship isn’t documented. It’s usually at a higher price than was negotiated, and it can invalidate lucrative contracts with important suppliers.
- When there is no previous contract to draw on or refer to, sourcing and sales cycles are longer because document drafting and approvals take longer. The contract ultimately negotiated may be uncompetitive or even risky because any well-crafted terms used in the past (prices, protective clauses, restrictions, and penalties) aren’t included.
- If those charged with monitoring a vendor’s performance aren’t aware of contract stipulations and service level agreements (SLAs), the vendor may fall short.
- Regulators make no distinction between the action of a financial institution and the action of a vendor working on an institution’s behalf. If financial institutions can’t access contracts, they can’t monitor performance.
- Rebates and discounts may be unclaimed or lost.
- Inadvertent renewals (auto-renewals) may prolong an unprofitable relationship or cause an institution to miss an opportunity to negotiate for better rates or terms.
- Inadvertent terminations may cause an institution to incur fees, spend significant time reinstating the agreement, or find itself suddenly unable to provide a product or service.
- Sarbanes-Oxley (SOX) makes executives at publicly traded companies attest to the company’s adherence to contract terms. They are putting themselves and their companies at risk if they don’t have access to the contracts.
- Duplicate vendors resulting in overpayment for goods and services.
- Failing to meet regulatory requirements for vendor management due to missing information.
Any one of these oversights can cost a financial institution. Put several of them together and the cost of poor contract management really starts to add up.
Good contract management has many benefits, including the ability to fully realize contractual discounts and rebates, better manage regulatory compliance, and save on administrative costs. Have you considered what your current contract management practices are costing your institution? Now is the time to find out, we invite you to learn more.