The Importance of Enterprise Contracts For Large Companies

Enterprise Contracts

A contract is a legally binding agreement between two parties, in which the obligations and duties of each party are spelled out in clearly documented legal terms. Contracts are the foundation upon which all of business the world over is built. They're so intrinsic to businesses that carved tablets have been discovered from ancient Sumeria (2600 BC) detailing business agreements. Without contracts, there isn't much commerce.

Small businesses may get by with manually managing contracts for awhile, but as the business grows, the maintenance of its contract portfolio quickly gets out of hand. Once a business reaches the enterprise level, it becomes clear that an efficient system is needed.

Whenever someone asks “what is contract management,” that isn’t easy to answer in one sentence. Globally, contract management is a method of organization to maintain all agreements binding an enterprise to its partners, staff, clients, and other business partners. In contract management, the company attempts to oversee creation, execution, and review of contracts with the goal of making the most profit. This isn't a matter of "looking for loopholes," although those do come up occasionally. Rather, it's safeguarding a company's risk exposure and taking all possible advantage of the benefits provided in the fine print.

It can become challenging for one person to grasp all of the contractual terms binding a company at any one time. Rather a legal team is needed, frequently reporting the updated status of contract activity and states. At the same time, when new contracts are forged, they must be carefully cross-checked to ensure that the company not only maximizes its profit potential but also does not break the terms of any existing contracts. Mismanagement of contracts at any given time can result in costly mistakes, sometimes even at a scale that brings companies down.

Which companies need the most thorough contract management?

In theory, even a sole proprietor can benefit from contract management, although the task is likely to be trivial at that scale. There are several scenarios where, without question, a company needs a good contract management strategy in place.

  • Medium to large sized corporations
  • Companies with multiple, decentralized locations
  • The healthcare industry
  • Government contractors
  • Aerospace and military contractors
  • B2B agencies and business support
  • Media companies.

The industries where contracts need the most oversight are those with a large number of obligations to multiple levels of laws and regulations. Even the simplest project can have a complex web of multiple obligations.

The contract management gap

For every company to effectively oversee their contract portfolio, they'd each have to retain a legal team that would quickly exhaust our economy's resource pool. Most companies are woefully understaffed in this regard, and so they just eat losses. Reports in recent years show that 64% of companies experience bottlenecks in their contract management process. As a result, companies lose millions of dollars in business and liability from unchecked mistakes every year.

Software has increasingly become an attractive option for managing this load. Most companies, at the least, have some kind of basic office tools handling their contracts, managed by a complex of spreadsheets and emails. But newer cloud-based storage and artificial intelligence have entered the contract management market. This is happening so fast that about one-fourth of all enterprise corporations already use AI-assisted contract management methods.

One of the biggest bottlenecks in contract management has been the simple act of reading them. Even the quickest person can only read so fast. When they have to manage multiple contracts per day picking out single clauses, liabilities, dates or dollar amounts, it becomes overwhelming. This is where artificial intelligence has come into play, because new deep learning methods have enabled software devices to at least digest contracts down to their basic facts, for easy database storage, retrieval, and machine analysis.

The importance of contract management is easy to underestimate

Managers may be tempted to dismiss contract management as an annoying maintenance nuisance and assign this duty to low-level staff. But increasingly, any company in business today ignores contract management at their peril. With new technology in place and a modern understanding of the importance of this area of business law, contract management might become the competitive factor upon which companies thrive.