Obligation Management: What You Need To Know

Companies today are ever vigilant to monitor incoming revenue, but how many take the time or effort to identify lost revenue inside their own organizations? Obligation management is an area where bleeding revenue may be occurring. Additionally, if obligation management is not something that you have considered there is a possibility that you may also be hemorrhaging revenue, sacrificing their reputation in the industry AND NOT EVEN KNOW IT.

Let’s look at an example of this:

Company A does not have a digital repository of their contracts much less a contract management system. Inside a file cabinet somewhere, inside of that paper contract for Acme Inc., is a clause that allows Company A to automatically increase (uplift) the charges for all products and services with Acme XYZ Inc. by 5% per year (a.k.a. Obligation). Assume the total annual license fees for Acme is $50,000 annually and it is a 3 year contract. Failure to enforce the annual uplift obligation by Company A over the life of that contract is equal to $7,625…AND THAT’S JUST ONE CONTRACT. Multiply that times the number of contracts where obligations like that are not enforced and you begin to see the problem.

If you are the CFO of Company A, should you be concerned?


Here’s another example:

Company B has a service contract with Vendor Inc. and even though Vendor Inc. has a contract management system in place, they are not keeping track of a Service Level Agreement (SLA) that commits Vendor Inc. to be on site in 1 hour or pay a $250.00 penalty to Company B for each occurrence of a missed commitment. Assuming several missed commitments, what a surprise to Vendor Inc. when they have to refund money to Company B in the hundreds or even thousands of dollars. And after missing several commitments, what are the chances that Vendor Inc. will be competing for Company B’s business when this contract expires?

If you are the COO of Vendor Inc., should you be concerned?


Company A vs Company B

In the examples above, both parties had financial impacts as a result of obligations not enforced or met. In the first example, Acme Inc. may have budgeted for the 5% uplift per year, and as a result of Company A not enforcing the obligation, saved $7,625. Company A on the other hand, failed to recognize revenue that may have been part of their forecasting. But revenue is not the only impacted area. Missed obligations can also diminish your service reputation, adversely affect Sales ability to upsell, and increase the risk of litigation.

To address obligation accountability requires an Obligation Management tool. On the input side of the tool, it should be capable of describing the obligation, capturing a risk rating, defining timeframes, summarizing financial impact, assigning responsibility for ownership, and identifying the state of the obligation. On the output side of the tool, it should provide meaningful reports, dashboards, and metrics along with capabilities to proactively send alerts and assign tasks for key dates associated with any obligation. And it might be prudent to be able to approve an obligation BEFORE it makes it into the contract and you become legally obligated.

Now that you know more about Obligation Management, if you hold a significant position in Finance, Sales, Operations, or Legal, should YOU be concerned?


About Ken:

Ken McCumber is an Architect with Statêra and a recognized SME for Contract Lifecycle Management

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