Compliance is simply the secret sauce to every successful contract. It plays a crucial role in ensuring the integrity of agreements and upholding the terms and conditions outlined in contracts while ensuring adherence to applicable regulations.
This is why legal counsel are keen on contract compliance tracking to avoid potential pitfalls and safeguard their operations.
Failing to effectively monitor and ensure adherence to contractual obligations can lead to a host of serious consequences, posing significant risks to an organization's legal standing, financial stability, and reputation.
However, achieving effective contract compliance can be a challenging task, particularly for organizations relying on manual contract management processes.
This guide explores the best ways to track contract compliance with tools to make your work easy and efficient.
What is contract compliance tracking?
Contract compliance tracking is the process of monitoring key performance indicators (KPIs), deadlines, payment schedules, and other contractual requirements to ensure they're being met as specified in the contract and within the boundaries of existing regulations.
The purpose of contract compliance tracking is to ensure that all parties fulfill their obligations under the contract and to identify any potential issues or areas of non-compliance that may need addressing.
This process involves keeping tabs on the entire contract lifecycle, conducting regular audits, and communicating with all parties to ensure that everything is going according to plan.
Also read: Contract Compliance: The Ultimate Guide
The importance of tracking contract compliance
Contract compliance tracking is a crucial part of every contract management process for several reasons. In this section, we’ll discuss some of them.
#1 Risk mitigation
By tracking contract compliance, organizations can identify potential risks and take steps to mitigate them. Compliance tracking allows organizations to monitor contract performance, discover areas of concern, and take corrective action to minimize risks.
#2 Cost savings
Non-compliance can lead to costly legal battles, lost revenue, and damaged reputation. Contract compliance tracking can help organizations avoid these costs by identifying and addressing non-compliance issues before they become significant problems.
#3 Improved performance
Organizations are able to monitor the performance of both parties involved. This enables organizations to identify areas of underperformance and work with the other party to improve performance and ensure that the contract's objectives are met.
Tracking contract compliance ensures transparency throughout the contract lifecycle, from negotiation to execution. This promotes open communication between the stakeholders, allowing for issues to be addressed promptly and for trust to be built.
#5 Competitive advantage
Organizations that diligently track contract compliance have a competitive advantage over those that don’t. This is because they are more likely to deliver on their contractual obligations, maintain good relationships with their partners, and avoid legal disputes. Ultimately, this can lead to better business outcomes, increased revenue, and stronger brand reputation.
Common challenges legal counsel face with contract compliance tracking
Tracking contract compliance can sometimes be a tad challenging for legal counsel, especially when managing contracts at scale. This is common in organizations with limited resources and access to technology.
#1 Limited visibility
Legal counsel may struggle with tracking contract compliance when they don't have complete visibility into all the contracts their organization has entered into. This is more likely to occur when organizations begin to take on new deals at scale while maintaining manual contract management processes.
This can be due to several reasons, such as poor record-keeping, lack of communication between parties, or changes in the contract terms that are not adequately documented.
When legal counsel can’t readily access critical information about every contract run by various departments of their organization, it becomes difficult to know which contracts are in effect at any given time, what their terms are, and whether requirements are being met.
#2 Complexity of contracts
Contracts like construction agreements, procurement partnerships, and software licensing deals can get complex sometimes. They may involve numerous parties, technical jargon, convoluted sentences, intricate requirements, contingencies, exclusions, and exceptions, which can require significant resources to monitor and enforce.
This can increase the risk of non-compliance, potentially leading to legal and financial repercussions.
#3 Contract language inconsistency
Different contracts may have different terms and conditions as well as industry-specific technical language. Manually managing these might require shuffling between glossaries and libraries, making it challenging to consistently track compliance across large volumes of contracts.
Due to this, legal counsel may struggle to ensure that all contracts are tracked in the same way and that all parties are held accountable to the same standards.
#4 Limited resources
Legal counsel may not have the necessary resources to track compliance effectively, especially in organizations with large contract volumes. The required resources can include contract management software, dedicated compliance personnel, training assets, and access to contract data.
This limitation can lead to compliance issues going unnoticed or not being addressed on time.
#5 Changing business environments
“With rapidly evolving technologies, the legal framework tends to lag behind. Whenever there is any amendment in a related regulation, you should be able to suggest necessary changes to the product team to ensure compliance.”
~ Juliette Thirsk, Head of Legal at Peach Payments
The Counsel Corner: Streamlining Legal at a FinTech Startup
Changing business environments can present significant challenges for legal counsel tracking contract compliance. Business environments can change due to various factors, such as new laws or regulations, shifts in market dynamics, or changes in business strategies.
For instance, shifts in market dynamics or business strategies may require changes to the performance obligations or deliverables under the contract. Similarly, new laws or regulations may require modifications to the existing contract terms.
Legal counsel must ensure that their contracts remain compliant with these changes. This can be challenging, especially for long-term contracts, as the compliance requirements may evolve over time.
Best Practices for contract compliance tracking
Contract compliance tracking is beneficial in so many ways, as already discussed in previous sections. However, to get the best results with this process, there are proven best practices you must follow.
We’ve explained them below.
#1 Have a clear view of the KPIs and contract requirements you need to track
Before you even begin tracking compliance, you ought to have defined the deliverables, parameters, and KPIs that require tracking.
The most important parameters to monitor during contract compliance tracking depend on each contract's specific terms and conditions and the regulatory environment in which the contract is being executed. These may include contract turnaround time, renewal rates, quality rating, cycle time, Service Level Objective (SLO) Achievement, and more.
By establishing trackable KPIs and requirements in order of priority, legal teams will be better positioned to allocate sufficient resources and monitor contracts efficiently.
#2 Use automated notifications and reminders
Because compliance tracking should be more proactive than reactive, all parties must know their obligations and the schedule for every deliverable.
You can implement automated notifications and reminders using apps like Google Calendar, Todoist, Trello, and Evernote.
With these apps, you can set tasks and deadlines for the right participants, and they'll get automated reminders, making tracking and enforcement easier for you.
These tools will also keep you informed on upcoming contract expiry dates. That way, you’ll not be caught unawares by renewals and terminations.
#3 Maintain a central repository for all contracts and contract data
According to studies by Aberdeen Group, best-in-class companies centralize 78% of their contract data in a secure and searchable repository.
Storing contracts and contract data in a centralized location eliminates half your contract compliance tracking challenges.
It improves transparency, allowing you to access relevant contract data quickly at any time. You also won't struggle with inconsistent contract language and changing regulations because you have access to a central, searchable repository of contract clauses, which you can easily reference to better understand what's going on with each contract.
Here’s how you can store contracts without a CLM.
#4 Provide training and education
“The key with any training is keeping it simple. Complex legal concepts are generally lost on the employee base.”
~ Sterling Miller, CEO and General Counsel, Hilgers Graben PLLC
Ten Things: Building a Strong Compliance Department
Legal counsel should provide training and education to all stakeholders on contract compliance requirements, including internal departments, vendors, and customers. This helps to improve awareness and understanding of compliance obligations, reducing the risk of compliance gaps or non-compliance incidents.
You may start by identifying the relevant stakeholders, including internal departments, vendors, and customers who need training on compliance.
Next, provide access to training materials. This can be online courses, or in-house training for internal departments.
To ensure everyone goes through the training, you’ll need to monitor their progress and offer support throughout the training process.
It is also important to keep training materials up-to-date with changing business conditions, legal requirements, and industry standards.
#5 Get a Contract Lifecycle Management tool (CLM)
A CLM makes contract compliance tracking more productive for legal counsel by providing a centralized repository, automating alerts, enabling real-time monitoring, and facilitating reporting and analytics all in one place. We will get into more detail in subsequent sections.
Also Read: Contract Tracking Tips, Processes and Tools
Key factors to focus on when tracking contract compliance
When it comes to tracking contract compliance, certain key factors deserve special attention. These help enhance your ability to effectively monitor and ensure adherence to contractual obligations.
#1 Clear and measurable performance metrics
To track contract compliance effectively, it is essential to establish clear and measurable performance metrics. These metrics should align with the specific obligations and deliverables outlined in the contract.
- Delivery time: It reveals whether both parties are meeting the deadlines set out in the contract. It is essential to ensure that all parties involved in the contract deliver their respective parts of the agreement on time.
- Cost performance: This tracks whether the actual cost of delivering the goods or services is within the budget specified in the contract. Any deviation from the budget should be investigated to determine the cause.
- Dispute resolution time: This evaluates the time it takes to resolve any disputes that may arise during the contract period. It is vital to ensure that any conflicts are resolved promptly to avoid any further delays
- Contract renewal rate: This measures the percentage of contracts renewed after the initial contract period. A high renewal rate indicates that the contract has been successful and both parties are satisfied with the outcome.
- Changes and amendments: This measures the changes made to the contract, including variations and amendments. It ensures that changes are properly documented and communicated to all relevant parties.
#2 Timely and accurate documentation
Proper documentation is crucial for tracking contract compliance. Ensure that all relevant documents, including the contract itself, amendments, change orders, and correspondence, are consistently and accurately recorded. Maintain a centralized repository where these documents can be easily accessed and referenced, facilitating efficient monitoring and tracking of compliance.
#3 Periodic audits and reviews
Conducting periodic audits and reviews of contract compliance can provide valuable insights into the overall performance and identify any deviations or non-compliance. These audits can be internal or external, involving both in-house teams and independent auditors or consultants. Regular assessments allow organizations to identify areas of improvement, address any compliance gaps promptly, and take corrective actions as necessary.
Tools for contract compliance tracking
There are several tools available that can help streamline contract compliance tracking processes. Here are some popular tools you can try.
Spreadsheets provide a simple and effective way to organize and track contract compliance data, especially for more minor contracts or when you don't have access to specialized software.
You can use spreadsheets to track key contract metrics such as delivery performance, quality performance, SLA compliance, and customer satisfaction.
#2 Notification apps
Notification apps help you receive alerts and reminders for important contract events and deadlines, which can be essential for meeting contractual obligations and avoiding non-compliance.
Notification apps can be handy when tracking deadlines for contract deliverables, renewals, and compliance-related activities such as audits or certifications. Some notification apps can be customized to send notifications via email, SMS, or push notifications, depending on the user's preferences.
#3 Contract Lifecycle Management (CLM) tools
A Contract Lifecycle Management (CLM) tool is a robust system designed to streamline activities and automate repetitive processes at every phase of the contract lifecycle.
An all-in-one CLM like SpotDraft combines all the functionalities you need for managing your contracts from end to end, empowering you to stay organized and productive.
It benefits contract compliance tracking in several ways:
- Provides a centralized repository, making it easy to access contract data and track compliance from a single truth source
- Automates alerts and notifications for key contract milestones and compliance obligations such as payment deadlines and renewal dates, among others
- Provides greater transparency into the status of contracts, including key terms and conditions, obligations, and performance metrics
- Streamlines reporting and analytics, allowing legal counsel to observe compliance performance, identify trends, and present key insights to stakeholders
What’s next for you?
Contract compliance tracking is a critical aspect of contract management that ensures the entire contract process goes according to plan, from end to end.
Nevertheless, many legal professionals encounter hurdles with this task, mainly because of the outdated, manual procedures they employ.
Yet, by harnessing the power of cutting-edge technologies and implementing the recommended practices discussed above, organizations can improve compliance, mitigate risks, and ultimately boost their financial performance.
So, why settle for suboptimal contract management when the right tools and strategies are at your fingertips?
Request a demo with SpotDraft.