Contract Compliance: Leveraging Risk-Based Solutions

Contract Compliance. How much are contracts costing you? The root causes of compliance failure lie in a variety of factors that occur after agreement terms
are finalized, some of which are listed below.
Key contract provisions are poorly understood by
those responsible for the administration of them.
Although terms may be clear to legal counsel
drafting the agreement, complex provisions are not
communicated to those responsible for implementing
financial, operational or other terms.
Ownership of a third-party relationship is often
split between business functions without clear
delineation of responsibility for monitoring ongoing
compliance. Calculation and self-reporting of data by
third parties is always a risk area that increases with
the complexity of the reporting.
Changes in business operations within either
party to the agreement can trigger errors in the
implementation of contract terms. New system
implementations, turnover of experienced
resources, mergers and restructurings each raise the
risk of contract noncompliance. Often times, more
than one of these conditions are present, thereby
exponentially increasing noncompliance risk.
Poorly designed processes or internal controls on
the part of a business partner are risk indicators
that provisions of complex agreements are not
being followed as agreed. Likewise, when a partner
is experiencing operational or financial stress, the
likelihood of errors in compliance is greater.
Compliance agreements that do not include
appropriate penalties when errors occur are at higher
risk for non-compliance. The right to terminate
an agreement for an unremedied compliance
failure is a penalty that is not appropriate in most
circumstances. Instead, well-crafted monetary
penalties can act as a disincentive and a way to keep
attention on compliance.
These root causes of compliance breakdowns involve
people, process, and systems across each organization
in a contractual relationship. Making process
improvements to raise the level of compliance is a
significant challenge. Companies are instead focusing
on implementing strong detective controls to identify
areas where non-compliance is having the most serious
effects. It is no surprise that well-designed compliance
audit processes are delivering benefits that often
exceed the cost of conducting audits. Audits are not
only identifying cash savings but are surfacing issues
that erode brand value or damage business operations.
The development of a risk-based contract compliance
process is clearly a best practice to controlling
this important and growing part of the business