How to Identify and Correct Poor Contracting Strategies

By Guest Author
contract practices

By Joe Alphonse

As more organizations realize the benefits of high-performing channel partners, companies are seeking new ways to extract the most from their partner relationships. For many companies, channel contracts remain a premier tool for business growth.

Partner agreements drive sales and boost revenue, making them a strategic piece of corporate success. As organizations continue to add partners to extend their market reach and develop creative incentives and promotions to encourage greater partner performance, having a solid contracting strategy becomes more important.

While channel activity can boost overall sales performance, the growing number and increasing complexity of partner contracts can be a source of numerous problems, crippling ineffective contract management processes.

Companies often spend months developing and negotiating what they believe to be high-performing contracts, then store them in a dusty drawer or unopened computer folder until it's time for renewals (and sometimes not even then). This causes companies to forgo valuable insights from contract data that can help improve their business operations in the long run.

If your organization is lacking formal processes, or doesn't evaluate and periodically amend your processes, you're not alone. In fact, many companies fall victim to poor contract lifecycle management (CLM), whether relying on the set-it-and-forget-it approach of ending the contract lifecycle when the contract is signed or simply running contracts through an underperforming contract management solution.

According to the International Association for Contract and Commercial Management, companies, on average, lose 9.2 percent of their annual revenue due to poor contracting. That's just unacceptable.

Identifying Bad Contracting

Fortunately, these massive losses can be prevented. The first step is identifying the signs of a bad contracting process. Here are some of the most common symptoms.

Slow contract cycles. We've all been there. After crafting a channel contract, we wait weeks, even months, as it circles through a web of approvals until it eventually gets buried somewhere in the process, only to be seen again after it is too late. Slow contract cycles are a key indicator that you have poor contract processes. Usually sluggish approvals are due to an improper workflow, which can cause contracts to be overlooked, lost in overflowing inboxes, filed incorrectly or just forgotten entirely. This is the bane of any contracting professional's existence, as delays cause companies to miss out on valuable revenue streams.

Inconsistent legal terms. When contracts finally make it to the legal department, multiple teams and employees have touched them, often with every member adding his or her own sets of terms and conditions. Without a centralized system for authoring, negotiating, redlining and signing contracts, poor tracking and overlooked language errors can put companies at significant legal and financial risk.

Lack of visibility. With channel partners functioning as huge revenue drivers for many organizations, it's easy to assume that every impacted department has a keen understanding of how each partner is performing, yet this is not the case. Companies often lack visibility into partner performance, preventing them from distinguishing the stellar relationships from the faltering unions. Without this visibility, companies are forced to consider all partners as equals (and we know they aren't). This approach can cost you significant revenue in the long run. If your company can't answer the question "what's the value of each of your channel partners?" there's a serious issue within your contracting process.

Manual contract management. If your company still relies on spreadsheets and other manual processes to track channel contracts, it's time to rework your contracting process. According to KPMG, 90 percent of all spreadsheets contain errors, and these small mistakes can cost companies a great deal in revenue, can compound over time and may never be discovered. These losses are not only unacceptable, but they are avoidable. Additionally, manual processes tie up human capital that can be working on other revenue-generating activities. By implementing an automated system, companies can redistribute employees to higher-impact tasks.

Poor channel performance. If your channel partners aren't performing at the desired levels, there's a chance it's you, not them that is the problem. Lackluster contracts with poorly crafted, generic incentives and promotions can de-motivate potentially productive channel relationships. The key is to better understand your partners—what motivates them and what doesn't—and develop incentives to meet those requirements. Yet without visibility into partner contract data, companies often can't identify failing relationships, let alone develop more lucrative terms. 

Partner dissatisfaction. If your company's channel partners are fleeing in swarms, there's obviously a problem. This degree of channel partner dissatisfaction can be caused by missed, late or inaccurate incentives payments or unfavorable agreement terms. All this stems from a poorly managed contracting process. By implementing a better contract management system, companies can stay on top of incentive payments, ensure timely payments and develop more powerful contracts overall, encouraging better partner sales.

These are just a few of the telltale signs that your company's contracting process isn't performing as well as it should. Every organization must routinely identify partner success criteria and evaluate performance. After acknowledging the flaws within your contracting process, it's time to right the ship.

Ask Tough Questions

The first step in improving your contracting process is identifying the questions that you wish you could answer about your contract, partner and channel performance. For example, how much revenue does each partner generate? Are your partners meeting your expectations? Do your contracts generate expected outcomes? By pinpointing what you want to know, you're one step closer to solving your contracting woes.

Analyze Channel Processes by Department

After identifying the higher-level questions you wish to answer, it's time to dig into the different departments in your organization and determine their needs before establishing better channel processes.

Sales. Sales teams are primarily concerned with two things: meeting quotas and signing deals. For those reasons, slow contract cycles can really eat away at a sales team's bottom line. The longer a contact is delayed, the longer it takes before sales can meet their quotas or gain commissions. This can cause tension within any company and can hurt overall revenue.

Contracting. Contracting teams often strive to develop as many contracts as possible. However, without accurate visibility into contract success, a greater number of contracts might not always be better. Instead, these teams need to worry about contract quality as much as quantity to ensure they're developing the best agreements for their organization. To help ensure all contracts meet quality guidelines and move through the organization effectively, it is imperative to implement a streamlined contracting process with identified workflows and an approved repository of terms and conditions.

Finance. While sales teams dream of developing complex and creative incentives to drive revenue, finance teams often live in fear of these intricate promotions. Finance departments must ensure they accrue the appropriate payment for each incentive. When organizations over-accrue, they aren't using their precious revenue in the best way, and when they under-accrue, they're left scrambling to find the dollars to make their payments. Enterprise resource planning (ERP) systems simply aren't able to handle the volume and nuances of complex incentive calculations, which often drive finance departments to revert to their old friend, the spreadsheet (a compliance department's worst nightmare). 

Legal. Legal teams strive for compliance. However, compliance is difficult to ensure when teams lack visibility and control over contract terms and conditions. Without a streamlined system in place to promote compliance and eliminate errors, organizations are at risk of lawsuits, penalties and damaged partner relationships.

Channel management. Channel management teams have their hands full keeping track of old and new partnerships and driving corporate revenue. The channel team is also tasked with helping design promotions and incentives to attract partners and drive new revenue.  Without insight into partner performance, channel management teams can't properly manage existing relationships or secure new ones.

Building a Better Contracting Process

After identifying overall company needs and aligning them with departmental requirements, it's time to start building a better contracting process. The most noted source of ineffective contracting is a slow contract cycle, caused by a disconnect between phases of the channel agreement lifecycle. The eight stages of the channel agreement lifecycle include agreement creation and authoring; reviewing, redlining and approvals; signatures; invoicing and claims for incentive payments; validating eligibility and accuracy; payment execution; monitoring and executing milestones; and analysis.

Each stage flows into the next, so a disconnect anywhere within the process puts contracts at risk. For that reason, companies need to seek an automated and integrated solution that unites each aspect of this process to ensure that they develop high-quality contracts that don't leave any money on the table. The system should also connect each department involved in the contracting cycle to ensure speedy, accurate approvals.

Companies should seek eight core capabilities when choosing a CLM solution:

1. A centralized library of templates and legal terms and clauses. Companies should implement a solution with a unified repository that holds the most up-to-date legal terms and templates. That way, all departments can access the database to ensure legal language remains consistent throughout the contracting process. Not only does this ensure contract consistency, but it also reduces the burden on legal teams and streamlines the process.

2. Automate workflows. It's time to ditch the spreadsheets and opt for an automated system for authoring, reviewing and approving. By choosing an automated system, companies save manpower and reduce the chances of human error within their contracts.

3. Mobile access and e-signature. As more and more employees go mobile, it's crucial that key players can access important contracts on-the-move to speed up the approval process. For that reason, mobile access plays a huge role in modern-day contracting. It isn't simply the ability to view a contract that's important, but team members now need the ability to manage the entire process while on the go.

4. Validation of incentive transactions. Contracts are full of events and qualifying terms. However, most organizations simply can't reconcile transactions and payments against actual contract terms. Connecting contracts with their transactions is where most contracting processes fall flat.

5. Calculation and tracking of payment accuracy. All too often, companies overpay or underpay their channel partners due to an inability to track and calculate accurate payments. For that reason, companies must seek a solution with the ability to automatically manage payments. This removes manual errors and ensures consistency throughout your partner network.

6. Link performance with contract terms and conditions. Organizations must be able to identify the effective terms and conditions within their contracts and the ones that fall flat. By utilizing the best conditions, companies can create more impactful contracts and eliminate the terms that fail to produce revenue. Organizations should seek a solution with advanced visibility into partner contracts in order to dig into effective terms and conditions.

7. Milestone management. It's not uncommon for companies to enter into a contract, forget about it and then miss a renewal milestone—forcing them to auto-renew or end an agreement, potentially against their wishes. This can cost companies millions of dollars, which is why organizations should seek a solution with milestone management capabilities that alert them about looming deadlines.

8. Analytics. Analytics are a key piece in the contract management puzzle. Without visibility and insight into contract data, organizations cannot identify contract successes and failures, assess partner performance, pinpoint roadblocks in the contracting process and decrease total cycle time.

In conclusion, it all boils down to three big steps: ask tough questions, analyze channel processes by department and commit to building a better contracting process. By implementing an automated and streamlined contract management system to better track channel partner relationships, companies set themselves up for success by decreasing operating costs, increasing visibility, reducing compliance risks and improving their financial performance as a whole.

Joe Alphonse is a product marketing manager at Revitas, which specializes in optimized profitability and enterprise-class contract, revenue and compliance management software. He is a blogger at www.revitasinc.com/blog.

This article was originally published on 2014-12-05