Obligations matrix: Your ultimate guide to compliance and effective obligation tracking

Published on December 20, 2024 by Akshit Mudgil

Introduction

The rise of modern-day commerce has given way to voluminous and complex contracts that bind different parties in a legal relationship. These contracts entail certain terms and conditions that govern a legal relationship and clearly lay down how the business activities would take place. They play an important role in maintaining the integrity of commercial activity around the world, as they distinctively spell out the rights and responsibilities of different business entities in a contractual setup. In simple terms, the game of business is governed by a rulebook we call “contracts,” fostering a sense of confidence among the contracting parties and ensuring mutually beneficial results. We refer to all legally enforceable agreements as contracts; these find their roots in a number of legal principles, of which consensus ad idem (meaning the meeting of the minds) is the most important. Due to the spike in global trade and commerce, big companies, banks and international corporations are struggling to keep up with the high volumes of complex contracts. To put things in perspective, it is pertinent to note that major corporations and top companies enter and renew such contracts daily (best-in-class companies renew 56% of their contracts annually, according to Aberdeen Group) and are bound to loop in expensive law firms to manage their contracts and ensure robust contract compliance management.

This blog provides a brief overview of the obligations matrix as a contract-management tool and how it can act as a one-stop solution for large corporations to effectively manage their contracts for long-term purposes in a secure environment, making it easier for them to retrieve and use contract-related information to mitigate future risks and losses through contract obligation tracking.

The need for a tool like the obligations matrix

The sheer number of contracts and their varying complexities are enough to overwhelm an organisation as it scrambles to find ways to manage these high volumes. The task of renewing contracts, keeping tabs on upcoming obligations, and tracking changes in existing contracts is not something that can be done easily or taken for granted, as it has significant legal implications. Contract compliance management becomes crucial in ensuring that all contractual obligations are met effectively while adhering to regulatory standards. Managing contracts, keeping track of approaching deadlines, and fulfilling obligations can be both time-consuming and expensive. Law firm-related expenses surge due to increasing volumes, and contract-related complexities place an additional burden on these entities. Therefore, it is in their best interest to find innovative ways of managing these tasks and effectively protect themselves against potential legal action. This is where technology steps in, and the obligations matrix plays a vital role in handling all these tasks with ease and efficiency. This tool helps simplify complex terms of a contract and provides an overview of upcoming obligations in a concise manner, making contract obligation tracking more efficient and reliable. It helps store integral aspects of contractual information in a secure environment and provides an easy method of retrieving necessary data from complex contract databases. The obligations matrix also helps pinpoint key risks that could expose an organisation to legal action and summarises the important terms in a contract. This is the most cost-effective, hassle-free way of archiving all important aspects of contractual terms and conditions, enabling corporations to invest in other areas to boost growth.

Research shows that poor contract management costs companies an average of 9% of their annual revenue.^[3] This typically leads to invoicing errors or unfavourable payment terms, or more indirectly, misunderstanding contractual obligations, which could erode business relationships and hinder renewal. Statistics show that 71% of businesses are unable to locate at least 10% of their contracts. About 47% of sales teams say analysing non-standard agreements for opportunities and risks – in a dynamic regulatory environment – is the most difficult part of the responsibilities.^[4] In varied scenarios of contract mismanagement, companies tend to lose approximately 9.2% of their bottom line.^[5]

The advent of new technological solutions for contemporary challenges has paved the way for the obligations matrix to emerge as a one-stop solution for sustainable and effective contract compliance management requirements. The obligations matrix can be found as a feature in current contract-management tools (such as Sirion, Luminous, and PandaDoc); it is also developed in-house by legal service providers using MS Office tools. Legal professionals could use this tool to help their clients not only to manage contracts but also to design strategies to mitigate risk, improve contract obligation tracking, and reduce potential losses from legal action.

Defining the nature of obligations

Archiving obligations in a standardised manner helps organisations remain compliant and manage key risk areas. To understand the modalities of compartmentalising obligations, we must understand the nature of these obligations in a contractual setting. Obligations can be bracketed into different types to identify their nature and define a commercial relationship between contracting parties.

A typical commercial contract has the following types of obligations:

Payment obligations: In a commercial contract, the terms relating to payment are of great significance and need to be understood with extreme clarity. These would typically include payment terms, payment of taxes and payment of fees.

Delivery obligations: Most often, the essence of a contract relates to the delivery of goods or services in a timely manner, without which the value of such goods or services would be lost. Hence, this makes the obligations relating to delivery extremely important from a performance point of view, and they need to be understood clearly to avoid non-compliance.

Notice obligations: Another important area of commercial contracts relates to the terms of service of notice. How the notice should be served and the corresponding timeframes are central for resolving disputes relating to a given contract. Therefore, the obligations relating to notice must be analysed unambiguously and adhered to.

Consent obligations: Consent plays a key role not only in compiling a valid contract but also in making certain terms of a contract obligatory, triggered by the emergence of specific events. Consent is often required in the event of assignment or subcontracting, change of control or other events that require delegation of duties/responsibilities, as per the terms of the contract.

General commercial obligations: There are a number of generic obligations that need to be fulfilled to meet reasonable standards of care and precautions that need to be taken in handling and maintaining services or goods.

Defining the nature of obligations and categorising these obligations helps legal professionals to systematically arrange obligations and analyse key risks. This could be effectively achieved by deploying an obligations matrix.

The art of tracking obligations

Apart from categorising obligations, we also need to ensure effective tracking of upcoming deadlines and notifying relevant stakeholders promptly, in order to meet compliance goals. Organisations face two major challenges when it comes to tracking obligations and ensuring compliance. The first relates to understanding all the obligations in each contract and the second to systematically compiling these obligations. Organisations try to overcome such hurdles by engaging a number of legal professionals who spend a significant amount of time manually arranging these contracts and breaking down the terms of such contracts into readable summaries to help their clients understand the scope of their rights and responsibilities. Furthermore, updating the status of obligations and keeping track of several milestones could be difficult given the complexities of the contract database and the need to link different ancillary documents to master contracts to comprehensively scope all obligations. Furthermore, the task of notifying the stakeholders concerned is crucial and cannot be left to individuals who have no responsibility for oversight. This time-consuming and expensive process could be simplified by introducing an obligations matrix.

The obligations tracker can segregate, compile and store such obligations with great precision and clarity. Unique features of this innovative tool include providing thorough insight on relevant contractual responsibilities and key milestones and their impact on the overall burden on the parties concerned. The obligations matrix ensures that the client stays ahead of the curve and is confident about their understanding of key obligations and compliance processes.

How the obligations matrix functions

It is easy for an organisation to get lost in the vast amount of information stored in a contract database, and it is, therefore, critical that it invests in measures to effectively manage legally-sensitive information. Engaging expensive law firms or establishing captives to do this work manually is an outdated concept and lacks efficiency and accuracy. Introducing an obligations matrix could prove to be a game changer, solving all these problems with ease.

The tool’s unparalleled ability and large scope of use cases could be better understood by considering all it has to offer. The tasks it can undertake could be divided into the following categories:

Compiling relevant obligations: This starts the process of careful examination of contractual obligations and compartmentalising these into specific categories to give a clear understanding of the nature of these obligations.

Determining their criticality: This helps flag obligations that need to be fulfilled urgently. This enables clients to be prepared and confident about meeting critical deadlines and standard obligations.

Ensuring statutory compliance: The tool delivers an overview of the statutory requirements, giving a clear idea of the specific statutes and regulatory rules under which obligations operate. This enables our clients to be well informed about their statutory duties and rights, promoting transparency and efficiency in compliance processes.

Easy navigation: The matrix enables clients to easily navigate between different clusters of obligations and retrieve relevant terms for review purposes. Instead of reading the entire contract to find the relevant clause, clients can jump to that clause by using the page number, line number, clause number, obligation category, etc. as reference points. This enables clients to swiftly move through several obligations and focus on those that need to be addressed immediately.

Flagging milestones: It can be stressful to constantly revisit the terms of a contract and keep tabs on obligations maturing in a few days or weeks. The obligations tracker can provide clients with an overview of all milestones, helping them on those that require attention, by flagging them, the actions that need to be taken and by when they need to be taken. Timely alerts and notification of approaching obligations are key, and this tool promptly notifies all stakeholders concerned effectively.

Mitigating risk and eliminating “noise”: The tracker provides a comprehensive layout of contractual obligations so clients can analyse risks and benefits associated with a given contract. This helps them understand the scope of their obligations, without worrying about boilerplate clauses and legal jargon, and mitigates risk.

How Acuity Knowledge Partners can help

We have a diverse pool of talented professionals experienced in using reputed contract-management tools and developing features of the obligations matrix internally for clients. Leveraging technical knowledge and legal expertise, our team ensures that we provide them with a comprehensive contract-management solution. Our team is experienced in optimising tools to manage obligation-tracking functions and conducting in-depth analysis of risk factors. By integrating solutions like a marketing compliance tool alongside contract-management platforms, we ensure seamless workflows for businesses operating in regulated environments. Our well-defined workflows and established quality-control processes provide us an edge and help reduce clients’ dependence on external law firms. Our ability to significantly reduce cost and time spent on managing contracts has enabled our clients to focus on growth.

References:

• https://www.google.com/url?sa=t&rct=

• https://intelagree.com/the-cost-of-contracts-why-choose-an-ai-based-contract-management-platform/

• https://www.docusign.com/blog/contract-management-trends-watch

• https://contractpodai.com/news/contract-management-needs-3-stages-maturity/

• https://www.gatekeeperhq.com/blog/the-benefits-of-contract-management-in-numbers

• [1]https://www.google.com/url?sa=

• [2] https://www.gatekeeperhq.com/blog/the-benefits-of-contract-management-in-numbers

• [3] https://intelagree.com/the-cost-of-contracts-why-choose-an-ai-based-contract-management-platform/

• [4] https://www.docusign.com/blog/contract-management-trends-watch

• [5] https://contractpodai.com/news/contract-management-needs-3-stages-maturity/

---

---