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What is contract compliance?

May 25, 2016

Is contract compliance about strategy, process, policies or individual obligations? Is it about specific performance or conformance with regulation? Is it focused on internal operations or external relationships? The answer, of course, is that it is all of those things. But an intelligent compliance system is also about ensuring understanding of when compliance must change, at what point must we switch our thinking.

For an example, I’ll go back to my days in the world of computers and software. I’m talking about a time when pricing varied by country because sales were generally local and customers were organized by country or region, not globally. But networked technology rapidly drove a change in the customer view. They wanted to manage their purchases on a worldwide basis – and they started to demand harmonized pricing. I recall the Finance department fighting tooth and nail to resist those demands. They accused customers of ‘gaming’ and set up rigid control systems to prevent Sales deviating from standard country pricing.

The result was a sustained and fairly rapid loss of market share, especially in portable devices such as personal computers. Finance and Contract Management between them were remarkably successful at ensuring compliance – indeed, ultimately they had 100% compliance, because they ensured the collapse of that segment of the business.

So when we talk about compliance, we must define its role – and the responsibilities of ‘compliance managers’ – very carefully. When I was asked recently about the job role, I tried to develop a high level description:

“Contract compliance management can embrace many different aspects and phases of contract management. It is an important area of business performance which in theory will raise efficiency and reduce risks. However, while compliance monitoring is necessary, it is essential that there are processes which allow insight to the need or opportunities for change. Therefore best practice takes on two forms – one of which is ensuring that there are controls over non-compliance and the other is ensuring that the definitions of compliance are monitored and necessary adjustments are made for changing business or market conditions,

At a strategic level, it might be responsibility for things like:

– ensuring integrity of the contract management process and monitoring compliance

– aligning available contract terms with corporate policies and approved practices

– developing or overseeing availability of standard contract templates and monitoring compliance

At a transactional level, it might include:

– review and approval of proposed variations from standard process, policy or terms

– monitoring of contract and obligation performance to ensure compliance with specified terms

At both levels, it might include:

– input of relevant compliance data to control systems

– identification of compliance variations and / or exposures, including frequencies

– recommendations for changes in compliance rules, policies or terms to reflect changing trends, market conditions or opportunities

– management reporting and change initiatives”.

I’d welcome your thoughts and experiences on how this role is best defined and performed – recognizing, of course, the increasing role that software plays in compliance management.

  1. Nancy Bell-Strole permalink

    As a former contract compliance officer for the State of VA it is my understanding that “shall” means mandatory! Is that not applicable in all contracts where “shall” is used? You response is requested.

    • Nancy,
      Your understanding is generally correct.

      • “shall’ is generally more mandatory than “will”.
      • To avoid confusion, some suggest drafters use “must”.
      • There is some variation across jurisdictions, so the most reliable response needs to know and be based upon case law precedent in the applicable jurisdiction.
      • A quick review of what we state in the learning modules might be helpful. The relevant module script states:
      o “Use ‘shall’ to state an obligation or duty. Avoid using shall to describe events that will occur in the future. If your writing is in the present tense, shall can be reserved for obligations. For example, Buyer shall deliver to seller a listing of all embedded switching equipment at least 20 days prior to seller’s undertaking of site selection. Traditionally the word ‘shall’ has been used to denote obligations, don’t say, “In the event that one of the parties to this agreement shall be in default…” Say “If one party or the other defaults on this agreement”. ‘Will’ can be used as an alternative to Shall, but use one or the other; don’t use both to mean obligation. If you need to refer to an event that will happen in the future, use will instead of shall. Some leading US experts suggest avoiding the use of shall completely. Because of inconsistent findings in US courts, the word shall has become potentially risky.”

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