Contract risk and compliance for all economic seasons.

• Author: Zechnich, Dave
• Position: RISK MANAGEMENT

Over the past decade, many firms have stepped up their use of outsourcing, licensing, sales channel and other relationships to extend their enterprises. These relationships are especially beneficial during tough economic times as they help organizations cut costs, boost revenues and stay competitive.

But these arrangements also pose risks that financial executives must recognize and systematically address. The most obvious are the risks of contractual nonperformance or noncompliance. Other, more specific, risks include: financial viability of counterparties, deteriorating service levels in outsourcing arrangements, intellectual property violations, misreporting of revenue in sales channels as well as breaches of discount, rebate and warranty policies and procedures.

Given that risks are generally exacerbated during economic recessions, the downturn has prompted many firms to review programs for monitoring their extended enterprise.

Known as contract compliance, contract management or vendor management, these programs are often viewed as a "good enough" housekeeping function already in place. As many firms have discovered, however, reviewing and revamping these programs can generate significant returns. And lessons learned and discipline adopted during a downturn will typically stand a company in good stead when business conditions improve.

Overall management of contractual relationships can best be achieved in the context of a contract risk and compliance (CRC) program. CRC expands contract compliance and vendor management to address a broad range of issues and risks in business relationships. It also imposes greater discipline on contracting than a purely compliance-oriented program while improving collaboration between parties.

Indeed, a CRC program helps companies improve virtually every aspect of relationships, from defining goals, to screening vendors, to negotiating terms, to managing the relationship to reviewing results.

The current economic climate is a good time to review contract and vendor-management programs or to institutionalize gains realized from any recent ad-hoc improvements. In either case, a strong CRC program will enable organizations to derive the greatest benefit from business relationships.

Surveying the Landscape

A 2007 Deloitte survey found that a majority of contract risk and compliance programs suffer one or more of the following shortcomings: lack of clear ownership and standardized processes; contracts without...