Water-tight contracts are the building blocks of an organization. From managing employees and complying with government regulations, to transacting with vendors or buyers, concrete contracts specify how an organization behaves and, thereby, define its existence.
By their very nature, contracts seldom remain frozen forever. As transactions occur, numerous stakeholders subject contracts to various phases like initiation, negotiation, approval, signing, performance, and renewal. This process of formally specifying all the activities throughout various stages of transactions, ensuring appropriate ownership of contracts, and their monitoring and administration is called contract management.
Contract management’s evolving nature
As contracts leave no part of the business untouched – covering operations, payments, pricing, promotions, deliveries, penalties, and incentives – contract management assumes significant importance. They are even more important since they have a direct consequence on an organization’s revenues and expenditures. Understandably, with the high level of risk, compliance, and regulations involved, the BFSI industry must be thorough with its contract management processes.
Contract management in the BFSI industry
The industry’s dynamic nature, along with its distributed functions and voluminous operations, make its contract management system distinct. Here’s how:
Voluminous paperwork while drafting contracts
The industry usually finds itself overwhelmed by the huge volume of documents that need scrutiny while drafting contracts. With multiple stakeholders – customers, regulators, and vendors – involved in documentation, executives find it challenging to extract and process useful information from them.
Visibility and searchability
Customer-facing executives are frequently faced with having to arrange paperwork for customer credit history, loans, insurance coverage, and account maintenance. This creates a bigger need for efficient contract management systems that can quickly retrieve contracts.
Risk-based due diligence
From extending loans to ascertaining insurance premiums, there is a high focus on risk assessment and management in this industry. Customers’ history dictates contractual terms which then undergo alterations based on a borrower’s actual performance or an insured person’s life events. Consequently, executives establish their contract management processes to include all critical parameters, and thereby, manage risk.
Third-party vendor monitoring
BFSI companies routinely engage third-party vendors for cost reduction and expertise utilization. Additionally, central banks, like the RBI, stipulate companies to comply with their guidelines on outsourcing. Thus, monitoring the performance of third-party vendors becomes a crucial aspect of contract management in this sector.
Approval and authorization
Executives require contract management practices to follow the organization’s hierarchical structure. For example, a bank’s branch manager will have the authority to sign a loan contract below a certain limit but not to approve a contract to acquire a banking solution software. Thus, contract management must ensure that only the correct contract is made available to the right person.
Reporting
Organizations require contract management systems that facilitate executed contracts to raise a red flag in case of non-conformity with terms and obligations. Additionally, contracts such as leases come with expiry dates; they require systems to alert the administrators about the upcoming expiry and renewal process. Not adhering to this, would not only lead to a probable loss in business but also a dent in reputation and relationship with clients.
Contract management inefficiencies
Owing to the nature of its operations, this industry can face several challenges if the contract management systems are inefficient. Most often, these inefficiencies arise in organizations where contracts are still managed manually in paper-based formats. Here are a few challenges:
Drafting issues
Before an organization transacts with a customer, it requires a thorough understanding of the person’s risk profile. To achieve this, executives rely on documents from various sources like government agencies, third-party verifiers, and tax departments. This leads to them dealing with a large volume of documents, followed by their storage and monitoring while drafting any contract.
Multiple versions
Once a commercial contract is finalized, it is distributed in multiple copies to various stakeholders. For example, a person who avails a housing loan from a bank shares the loan document with the house seller, local government body, and auditor. In case of contractual alterations, all the versions do not reflect these changes thanks to their distributed nature. Therefore, controlling all the versions of a contract remains inefficient.
Data security
While formulating contracts, organizations in this sector collect highly sensitive client data that can be subject to the risk of manipulation and misuse. Further, the rise of fintech firms and financial aggregators requires organizations to share their client data, making safeguarding customer data and client contracts even more important.
Retrieval difficulties
Apart from their headquarters, BFSI players have their offices and storage areas spread across geographies with decentralized contract management systems. Thus, executives find it difficult to retrieve all the required contracts from various locations. This leads to an unforeseen commitment of various teams, time, and costs in tracing and retrieving all the required contracts.
Collaboration hassles
A contract has to traverse the hierarchical ladder before finalization. However, as all signatories and approvers may not be based in the same location, contract management suffers time delays and cost inefficiencies.
Additionally, management executives struggle to pinpoint the status of contracts when it comes to signing and approvals. The delays become more prominent if payment of government fees, stamp duty, etc. is a part of contract finalization.
Inefficient contract tracking
Contracts fail their purpose if they cannot track the performance of signatories and compare them with the agreed terms and conditions. Contract management systems become a frequent victim of this inefficiency as contracts are finalized, signed, and forgotten. Therefore, tracking various facets of contracts such as their approval stage, renewal requirements, and alteration clauses are essential to an organization’s contract management system.
Risk of outsourcing
BFSI companies have an uphill task of monitoring the risks associated with outsourcing their non-core functions to third-party vendors. Organizations’ contract management systems are inherently marred with inefficiencies in monitoring such vendors.
For example, in March 2020, thousands of customers of a Noida bank were defrauded for close to INR 25 million [1]. Investigations revealed that the bank had outsourced its communications function to a third-party vendor, whose officials accessed customer data and carried out several unauthorized transactions. Such failures in managing contracts with third-party vendors pose a threat to an organization’s financial and reputational standing.
Smart solutions in contract management
The aforementioned inefficiencies result from an ineffective contract management system. They bring with them the threat of losing out to competitors, punitive action from regulators, and, in the worst case, irreparable damage to reputation. The way forward is to embrace an intelligent system that conquers all these inefficiencies, presenting the organization an opportunity to rise above the rest of the pack.
Here’s what a state-of-the-art contract management system can empower companies with:
Paper-free bulk drafting
A smart contract management system is equipped with templates that can replace the need to handle voluminous documents at the contract drafting stage. For example, SignDesk’s contract management solution saves organizations from devoting precious resources to the drafting stage. This also helps in saving storage costs and losing documents from being misplaced.
Version control
A heavily regulated sector, like the BFSI industry, depends on its ability to quickly control alterations to its contracts. This need can be efficiently met by using SignDesk’s intelligent contract management system. It facilitates version control and brings all stakeholders on the same level when it comes to contract terms and obligations. This synchronization of all stakeholders fosters ease of collaboration and better decision-making.
Data security
The contracts available with an organization in this sector consist of a huge amount of sensitive information. Additionally, companies need to share client data with fintech firms and aggregators to achieve their tech-savvy customers’ satisfaction. Against this background, companies must employ a robust contract management system that ensures protection from data leakages and ensures data confidentiality.
Easy retrieval
An e-contract management system enables its users to access the contracts on a dashboard. This means that an authorized executive can retrieve contracts at the click of a button. Such a system also enables the management to compare contract terms and evaluate performance parameters.
Seamless collaboration
A digital contract management system enables organizations to generate quick reports and allows for dashboard access to know a contract’s approval status. E-payments of government fees and stamp duty using digital payments make the process much smoother, resulting in significant savings of time and cost in finalizing contracts. Organizations must consider SignDesk’s contract management system which further enhances collaboration capabilities, allowing stakeholders to sign documents from anywhere, at any time.
Automated end-to-end contract management
A smart contract management system, such as one designed by SignDesk, can easily ensure the timely completion of all the stages throughout a contract’s lifecycle. These stages include drafting, approval, negotiations, signature, insights, storage, and renewal. From automated creation and authorization capabilities to dynamic workflows, a digital contract management system is perfectly well-equipped to deliver fast turnaround times and deliver cost reduction.
An organization employing such an intelligent contract management system stands to gain immensely due to better capturing of contract terms and enforcing them. The ready availability of performance analysis in a dashboard accessible to all teams ensures that the organization never experiences lags in contract tracking. This helps it to unlock the full potential of commercial contracts and stay well ahead of the competition.
Vendor assessment
An intelligent contract management system enables due diligence of vendors for assessing the risk associated with outsourcing. Such a contract system includes data from various sources such as the vendors’ past customers and their banking partners. Additionally, an efficient contract management system ensures a higher level of security and protection of sensitive customer data from third-party vendors.
In conclusion, BFSI organizations must tap into new-age contract management systems to overcome the challenges of traditional processes. Going digital is an essential step for companies in transforming contracts into valuable assets. As the industry witnesses faster internet speeds and rapid internet adoption, it becomes imperative for players to be proactive, rather than reactive, when it comes to managing contracts. This will help not just in being future-ready for serving customers but also in meeting the demands of the rapidly-evolving regulatory environment.
