A friend of mine related his experience with contract management, and it raised a question. How many people first experience contract management this way? More importantly, is this how you do it?

Because if the answer is “yes,” then you’re doing it wrong.

My friend was working for a small investment management company that handled some very prestigious accounts. His role was temporary; he really wasn’t doing very advanced work, but it wasn’t mindless work either. Nonetheless, one day his department head came to him and had a new assignment.

“These are all of our outside contractors/advisors,” he said as he plopped down a pile of paperwork. “We need these contracts verified – are they doing the work we’ve contracted them for?”

My friend said the first thought that occurred to him was “Wow. They don’t already know this?” and the next thought was “How do I do this?”

As it turned out, the only way he could figure out how to do the job was to compare the contract he had in one hand with the furnished reports that the contractors produced. My friend is actually fairly good at interpreting legalese, but he’s not a lawyer. Nonetheless, this is how he “verified” contracts – by checking what the contract said versus the end product.

This scenario is probably a lot more common way of “contract management” than providers of solutions (like us) like to admit. The problems with this approach, however, are many – and can have serious implications for your business. Here’s exactly why you don’t want to do contract management this way.

Problem 1: Contract management is too important to give to low-level employees

My friend knew he was the wrong person to be doing such an important job, but what temporary employee is going to turn down the work? By assigning a piece of contract management to a temp, it was obvious the company placed this contract work in the “nice to have” pile – not the “urgent” or “important” box.

By some estimates, such as those by the International Association for Contract and Commercial Management, the “leakage” from poor contract practices to cost companies as much as 9 percent of annual revenue. Others put the estimate lower, but the point is: unmanaged contracts are affecting your bottom line. Is that really something you want to put a temp in charge of?

Problem 2: Ye olde manual method of doing things

“Sure computers and digital information are helpful, but if you really want to get things done these days, do it manually, on paper and ensure it takes as long as humanly possible” – said no one ever in the last quarter century.

If you are trying to verify contract information by either printing out or reviewing printed documents, you have an efficiency problem on your hands. There is no doubt this is time-consuming and the method all but guarantees human error. My friend, for instance, had to record key contract requirements separately … by hand … then check on the contractor’s in-house records. How many eyes could double-check his work? (Answer: not many).

A contract management solution, at the very least, makes it possible for contract records to be created and reviewed for accuracy by many sources. For instance, in Contract Assistant, users can separately record key clauses or terms of a contract – exactly for the purpose of ensuring that key deliverables/commitments can be easily retrieved for review.

A manually conducted “confirmation” of a contract also leaves open the problem of future access. Who can use this information in the future may be limited by simple access and storage method. An assigning manager may, for instance, be the only one who holds the Word doc or Excel files. These files may be stored on a local hard drive, or just on a user’s laptop. Who would know where to find these files without someone telling them?

Problem 3: One time versus real time

The other major problem with handling and using contracts for “manual” verification is the problem of future usability. In a contract management solution such as Contract Assistant, users can access digital records of contracts to review status at any time, quickly and easily.

You don’t need someone to troll through a pile of documents (even if they are Word documents on a shared drive) to remind yourself of key deliverable dates or upcoming end dates every time you need to know an answer.

A contract management solution makes it possible for users to simply use a search function to find such information – literally with just a few clicks. There is simply on comparison between a database that stores information for quick retrieval and any system of unorganized storage – even if digital.

Problem 4: No database, no usable data

In the end, any method of trying to “confirm” or verify contracts that are currently in place that doesn’t include a database of contracts means you are losing the ability to report on all contract information. Without a database, you don’t have data that can be sorted and easily retrieved for reporting purposes.

Many companies, we’ve found, are surprised by just how many contracts they actually have in-house once they’ve built their contracts database. That often means that no one, up until that database was created, had the ability to produce financial summary reports that showed the full value of all contracts.

Without the ability to track the value of all contracts – how can your organization know the trends of contract values? Most companies do a good job of tracking the value of sales contracts. But when it comes to operational expenditures, many organizations find it difficult to gather this data in detail.

The “net” part of a net profit can come down to just how much efficiency a company is squeezing out of operational expenses. Without a database to record and track financial summaries of vendor contracts, how can your organization really know the value it is getting from vendors – or what direction costs are trending over time?

Low priority, low benefits

Coming back to my friend’s experience, in the end, they indeed were able to match contract data with reported deliverables and determine who was delivering on their obligations and who wasn’t. As it turns out, all the contractors were living up their commitments (albeit some better than others).

When my friend found out that there was such a thing as contract management software, he immediately knew its value. He also knew that without a software solution and a database, this kind of work he did would be repeated over and over in the future – creating nothing but more cost and more room for error for the company.

In the end, organizations that place a low priority on contract management are not only missing an opportunity to be more efficient: they are missing an opportunity to recover costs, lower financial risk and improve their agility. In today’s economy, those are not “nice to haves”; they are, increasingly, must-haves.

[Photo Credit: B Rosen via Compfight cc]

[About the author: Todd Hyten is a former business journalist who now writes about B2B topics and consults on content marketing. You can find him on Twitter and Google+.]