Obligation Management from Simple Tracking to Complex Automation

It is safe to say that most commercial contracts have some form of obligations defined for your organization, the other organization, and/or for all organizations involved. The level of complexity, frequency, ownership and demonstrable success with these obligations will vary as widely as the performance related to the obligation. So, as a contract professional, you have a range of choices, from feigning complete ignorance to adopting a highly sophisticated obligation management strategy. Regardless of your choice, the decisions that you make will play a significant role in your contract risk portfolio.

For practical purposes, I’d like to take a moment to define two reasonable strategies around obligation management with the understanding that burying one’s head in the sand is simply not a pursuit-worthy strategy!  I would also argue that you need to align your strategy with your organization’s appetite for risk, discipline and the nature of the contracts in question.

As a starting point, let me introduce two approaches: “Base Obligation Management" and “Advanced Obligation Management."  While these terms are somewhat self-explanatory, I’d like to provide an underlying set of definitions and examples.

Base Obligation Management

As the name implies, Base Obligation Management is all about the introduction of some preliminary cataloging and tracking of obligations. This may take the form of a piece of paper, a spreadsheet, or a database that is used to track such obligations. Accompanying these catalogs is a need to properly track obligation due dates, deliverables and the completion of the obligations. From a systems perspective, the importance of having a centralized database/repository that you can act upon is a key dimension to base obligation management.

Advanced Obligation Management

As one might expect, Advanced Obligation Management takes Base and extends it significantly. This is typically performed through heightened automation, additional data elements that need to be tracked and the introduction of “obligation outcome automation." Let’s explore each point in greater detail.

• Heightened Automation can include semi-automated or fully automated obligation extraction from contracts. For large contracts that may have hundreds or thousands of discreet obligations, an automated mechanism for extraction becomes very important. Additionally, automation may come in the form of establishing recurring obligation patterns, obligations that need to be performed on a regular basis for an extended period of time (for example, quarterly reports).
• Additional Data Elements may be introduced that provide a more comprehensive view of the obligation. These elements may include obligation risk levels, priorities, regions or other data factors that will help with the execution of the obligation. One example of such a data element is an “obligation interpretation" data field, a field that allows for the person memorializing the obligation to provide an understandable explanation of the obligation which in its original contractual language may be legalese.
• Obligation Outcome Automation takes a substantial evolutionary step forward when contending with obligations. Here we are referring to actions, ideally automated, that can be introduced based upon the disposition or absence of disposition of an obligation. For example, if an obligation is not addressed in a timely manner (i.e., by the obligation due date), it may be appropriate to have the system automatically create a risk that can be managed and tracked. The creation of the risk may then be linked to your financial forecast. Likewise, if an obligation is satisfied and the status is flagged a certain way, an opportunity with the counterparty may be presented and pursued. In this case, the opportunity may be automatically created and this could also have an impact on the financial forecast.

In both Base and Advanced Obligation Management, there is typically a need for reporting, alerting and escalations such that obligation owners can be notified proactively as their obligations are approaching their due dates. When the right obligation strategy is properly employed, risk is substantially reduced, and when architected correctly, new opportunity can be acted upon that would otherwise go unnoticed.

So, we recommend you perform some exploratory work on Base and Advanced Obligation Management and know that Contracts 365 can assist on both fronts.