Demystifying Contractual Obligation Management: Four Key Patterns
Obligation management is a fundamental part of business operations - how do we squeeze dollars out of our hard-won negotiations? How do we avoid fines and embarrassment? With contractual commitments coming from all directions - financial, compliance, operational, legal, and social - organizations are looking to their CIOs and Enterprise Architects to deliver technology solutions that can handle obligations across their business.
These solutions require enterprise-wide scope and have to connect to an existing technology landscape. Across the business, there are different goals and unique systems of record. And how we define an “obligation” changes as we talk to different stakeholders.
So to get a grip on it, let’s examine four key patterns of obligations: date-driven tasks, unforeseen events, obligations driven by integrated data, and custom commitments. We’ll look at each pattern's significance and how to approach the technology that drives the right outcomes.
Date-Driven Tasks: The Importance of Timing
Date-driven tasks represent obligations that necessitate a specific action at a distinct future date. An illustrative example of this is the delivery of auto-renewal notifications for service subscriptions.
Consider a software company paying a yearly subscription to its services. As part of the contract, the company is required to opt out or terminate 30 days before the auto-renewal date, or else they are locked in for another year. This obligation requires a high level of precision and punctuality. Failure to act can result in unnecessary spending and contractual hassles, so an automated approach is required.
First, you need an accurate way of capturing important dates. Consider artificial intelligence as an accelerant to identifying data points, and leverage people and processes for verifying them as necessary. Once verified, you need an efficient system of storing these dates, which can trigger timely notifications. This will allow you to be proactive in upholding these date-driven obligations.
Unforeseen Events: Navigating the Unexpected
Unforeseen events - Brexit or COVID, as examples - can precipitate obligations that aren't initially planned for. A quite common example would be new regulations that demand compliance - think GDPR or LIBOR.
Imagine any scenario where a new data privacy regulation is introduced, requiring companies to modify their data handling procedures. In this situation, businesses are obligated to quickly identify and recall or amend all agreements impacted by this regulation. Meeting deadlines is crucial to preventing penalties and fines for breaches of compliance.
Effective management of these obligations necessitates a flexible and responsive system capable of recalling all relevant agreements on demand. While text- and attribute-driven search can be helpful, here is a practical place to inject AI. You can augment standard search with semantic analysis that searches for meaning and context within your agreements. Once you have identified the affected agreements, you need a process in place to amend and remediate those agreements.
Integrated Data Obligations: Tracking Progress
Obligations driven by integrated data are often connected to progress toward a specific goal. Payment terms structured around incremental price tiers, rebates, or discounts are common examples.
Let's take a hypothetical situation where a business agreement includes a clause for a 10% discount when cumulative purchases reach $10,000 within a financial year. The obligation here is to track the total purchases and apply the discount once the threshold is met.
For organizations with established enterprise technology, it’s likely that billing and payment systems are already measuring things like annual spending. To manage this obligation efficiently, you must ensure that these systems have accurate data from your agreements. The goal is to integrate real-time agreement data into your existing systems and measure and notify on progress within your system of record(s). Rather than chasing point-to-point integrations, a practical approach is to get real-time accurate data out of your agreements and into your enterprise data platform.
Custom Commitments: Handling Unique Obligations
Custom commitments are obligations borne out of unique conversations and requirements. An instance of this would be a quarterly business review (QBR) arranged with a client.
Suppose a software consulting firm has a contract with a client that stipulates a QBR to discuss progress and future strategies. The firm is obligated to prepare and conduct these reviews every quarter. This obligation demands not only the tracking of time but also the preparation of relevant materials for the review. This is why it is important to have a configurable system that allows business users to identify and engage with any custom agreement language that results in an obligation with implications for your business.
Another example may be related to sustainability commitments. Science-based targets or ESG-specific terms may present unique tracking and reporting requirements.
These examples illustrate the need for customized management approaches that can alert the responsible party to take action in a timely manner while providing the capability to recall the specific terms of the agreement when needed.
This is a challenging landscape, but there’s gold at the end of this rainbow. Proactive management of contractual obligations leads to stronger business relationships and better operational performance. By taking a step back and designing systems that accommodate a variety of obligations, today’s enterprises can tap into all value their teams have worked so hard to negotiate for.
If you manage obligations that fit outside these patterns, I’d love to hear from you. Or if your experience agrees or disagrees with my perspective, I’d love to hear from you as well.
