SLAs are a critical component of any vendor contract. A Service-level Agreement (SLA) helps you define the metrics by which the services provided by your vendors are measured. It clearly defines what level of service is expected from a vendor, their responsibilities and the penalties involved if they are not achieved.
Some vendors consistently meet their SLAs, yet don’t deliver on the business value for the client enterprise. While SLAs are crucial to measure service quality, they aren’t enough to capture the full scope of contractual obligations. SLAs primarily focus on service delivery and performance metrics and often do not address other critical aspects of a contract like transition deliverables, business continuity, policy and regulatory compliance, continuous service improvement, training requirements, intellectual property rights, dispute resolution etc. Which is why enterprises need a broader framework that includes a wider range of obligations than just service delivery.
What is Obligations Management?
Obligations management is a systematic approach to managing vendor relationships that goes beyond the traditional SLA tracking. It involves identifying, tracking and fulfilling the contractual obligations other than the obvious deliverables, such as payment terms, risk mitigation measures, intellectual property rights, regulatory requirements, dispute resolution mechanisms etc., depending on the type of contract.
Types of Contractual Obligations
Contractual obligations are the specific commitments outlined in a contract. These obligations can include delivering goods, performing services, or avoiding certain actions. Non-compliance with contractual obligations can lead to legal issues. Here are some of the common types of obligations:
- Milestone-based Obligations – These obligations are triggered by achievement of specific milestones in a contract. These are usually about project deliverables, but can also be about reaching certain development and regulatory milestones within the contract. For example, a software development contract might include milestones such as completing the design phase, developing the core features, and conducting beta testing.
- Event-based Obligations – These obligations are triggered only when specific events occur. These events can be external or internal and are usually less predictable than milestones, which are more planned and structured. It could be any event like changes within the market, or any regulatory changes etc. These obligations help maintain contract compliance, even with changing circumstances like a natural disaster or changes in regulations etc.
- Regulatory Compliance Obligations – These require adherence to specific laws or regulations, based on the nature of the contract and the type of industry. For instance, a healthcare provider may be subject to HIPAA compliance requirements, while a manufacturing company may need to comply with environmental regulations. Effective management of regulatory compliance obligations is essential for avoiding legal penalties and maintaining a positive reputation.
- Payment Obligations – This obligation is related to financial aspects like pricing, payment terms, timeline of payments etc. It ensures that both parties fulfill their financial commitments as agreed upon within the contract.
- Dispute Resolution Obligations – Dispute resolution obligations outline the procedures for resolving conflicts or disagreements that may arise during the contract’s execution. These obligations typically include mediation, arbitration, or litigation as options for resolving disputes.
- Intellectual Property Obligations – These obligations require enterprises to protect the sensitive information including intellectual property, confidential documents, customer data etc. These obligations define ownership rights, non-disclosure agreements, and other provisions related to the use and protection of intellectual property.
- Transition Obligations – These obligations arise when there is a transition phase within a contract where either of the parties need to be handing over assets or responsibilities to the other. Transition obligations help ensure that both the enterprise and the vendor are aware of the expectations when the contract is ending, or when services or operations shift between the parties, covering aspects like knowledge transfer, resource realignment, training period etc.
- Termination Obligations – Termination obligations are different from transition obligations even if they both are triggered at the end of specific phases in a contract’s lifecycle. Transition obligations occur when there is a planned transfer of services from one party to the other, while termination obligations are triggered when a contract comes to an end, either at the planned schedule or before that. Termination obligations often focus on resolving the financials, returning assets and ensuring compliance and formally closing the contract.
When either of the parties involved fails to meet contractual obligations, there can be serious consequences including penalties, legal actions, contract termination, or reputational damage.
The Business Value of Obligations Management
In order to understand the business value of obligations, it is important to recognize how they align with business objectives and how their fulfillment can lead to positive business outcomes.
Improved compliance to applicable regulations
Vendor managers work with multiple third-party suppliers, and every supplier must meet certain regulatory standards in order to avoid penalties, and operational issues. For example, if your enterprise has a cloud services provider as a supplier, one of the obligations of the supplier could be to comply with data privacy laws like GDPR. The contract has multiple obligations that specify specific deadlines, encryption standards and regular audits.
Manually tracking these obligations using emails, spreadsheets and depending on reminders from the internal teams, can leave room for errors or you could miss some mandatory audits because of which your enterprise might have to pay a penalty.
Having an obligations management system in place allows you to automatically identify the obligations from vendor contract and create alerts and reminders for upcoming audits, track key compliance deliverables, reducing risk, saving time and ensuring operational continuity
Improved compliance to enterprise policies
Vendor managers are responsible for ensuring that vendors comply with both external regulations and internal regulations of the organization. It is important that vendors align with the organization’s internal policies like data protection, ethical sourcing etc. These enterprise policies are often more specific and directly impact the company’s reputation, operational integrity, and long-term goals.
Enterprises today have multiple internal policies like security protocols, sustainability or ethical sourcing policies requiring vendors to meet certain standards like sourcing ethically produced materials or environmental standards. It is a time-consuming and complex task to monitor and track if the vendors comply with all the internal policies of an organization. The more vendors you have, the harder it becomes to stay on top of all compliance requirements. It becomes extremely difficult to understand who is responsible for what obligations and which departments are responsible for ensuring the alignment of certain vendors with specific policies.
Having an obligations management system in place helps you track all these obligations ensuring that the enterprise and its vendors both adhere to enterprise-specific policies, protecting enterprise reputation, and enhancing accountability. The ownership of these obligations is clearly defined and you can track who is responsible for vendor certifications or renewal. Everyone involved has access to the same dashboard, creating full transparency.
Business continuity and disaster recovery preparedness
Business continuity and disaster recovery preparedness are some of the most critical aspects of an enterprise’s risk management plan. Large businesses utilize multiple vendors for key services such as a company’s cloud infrastructure. It is important to have an obligation in place that ensures that the systems recover as fast as possible during a disruption or an incident such as an outage or a natural disaster.
The disaster recovery plan usually requires vendors to perform regular disaster recovery drills and provide backup for the company’s data every 24 hours. Not having a proper system for ensuring business continuity and disaster recovery can have severe consequences including extended downtime, data loss, operational failure and financial losses.
Obligations management systems on the other hand help identify key disaster recovery obligations that are logged and monitored automatically. The system tracks the disaster recovery drill, sending notifications to the team responsible before the due date. The obligations management platform integrates with the vendor’s system to monitor the daily data backup obligation and send alerts if any schedule is missed. This reduces operational risks, prevents downtime, and results in increased operational resilience, and long-term vendor reliability.
Improved utilization planning and budgeting
Obligations management plays a critical role in enhancing the business value when it comes to utilization planning and budgeting. Vendor managers who oversee large IT services contracts that contain obligations related to resource allocation, utilization limits and budget caps must keep track of these obligations and ensure that the vendor resources aren’t overused or allocated inefficiently. They also need to ensure that the contracts are being optimized at any possible opportunity, preventing any overage charges and staying within the budget while managing the necessary level of service.
Without an obligations management system in place, it is not possible to track budget obligations in real-time. For instance, vendors might purchase a license necessary for contract compliance and exceed the agreed limit. This might incur an extra cost at the end of the billing period. Similarly, you can’t track usage fluctuations when the hours exceed the contractually allowed amount without an obligations management system in place. Having a proper system to manage obligations helps you with scenario planning and financial projections, depending on scenario-based historical data, contract terms and expectations.
Also read: Key Performance Indicators for Successful Vendor Management
Common Challenges Facing Obligations Management
Effective contract obligations management is essential for maximizing the value derived from your contracts. Without a proper system in place, it’s challenging to ensure that all parties are fulfilling their commitments and that the contract is being executed according to agreed-upon terms. Here are some of the main challenges that enterprise leaders face in managing these obligations effectively:
- Manual Processes & Inefficiencies
Manual contract management processes usually involve spreadsheets, emails and sometimes physical documents to track contractual obligations. It is manageable to track obligations when an organization has a limited number of vendors, but as the organization and its vendors grow, relying on manual methods can pose a significant risk of errors.
For instance, for an organization with hundreds of vendors, each with different kinds of obligations including license renewals, performance KPIs, there’s a high risk of errors, missed deadlines because of which the operations within the organization might be disrupted.
Creating a report on contract performance or upcoming renewals could take days with manual methods, where vendor managers would be required to gather data from various contracts and update data across multiple spreadsheets. Without automation, vendor managers face an uphill battle, trying to track thousands of obligations manually, leading to missed deadlines, non-compliance, and overwhelmed teams.
- Vendor Scalability and Fragmented Data
As mentioned earlier, with growing organizations and the increasing number of vendors, there is always the challenge of managing large volumes of contracts and obligations involved. Large managed services contracts can have 1000s of obligations. Having a handful of vendors could still be manageable but when the number scales to hundreds or thousands, keeping track of obligations, compliance, performance and vendor relationships becomes more complex.
Enterprises often use multiple tools or manual systems to manage their increasing number of vendor relationships. There’s a lack of visibility due to this fragmented vendor data, because of which teams spend a lot of time tracking down the correct information. This also increases the risk of non-compliance with some critical obligations falling through the cracks
It becomes crucial to constantly assess vendor performance with the increasing number of vendors in an enterprise. Manual systems and fragmented systems cannot handle the high volume of data required for regular performance assessments at scale. When vendor performance is not regularly monitored, it might result in issues like service disruptions, regulatory non-compliance, operational risks etc. Without proper obligations management systems in place, scaling vendors can introduce more risk than value.
3, Interdependencies of Obligations
Interdependencies of obligations between clients and vendors are often overlooked and cause significant challenges in obligations management. The cost of material third-party incidents can range from a few million $ to over 0.5 billion $. When obligations are tied to both client and vendor deliverables, missing certain obligations has a cascading effect on both parties leading to penalties, and operational disruptions.
In many contracts a vendor’s obligation may directly depend on the client fulfilling certain obligations first. If the vendor doesn’t fulfill their obligation, because of this dependency, there is no way for enterprises to do a root cause analysis to find out the problem.
For example, An enterprise hires a consulting firm to perform an audit, but the audit’s success relies on the enterprise’s internal teams gathering data from various departments. The enterprise’s team is slow to provide this information, and there’s no system in place to track whether these internal steps have been completed. As a result, the consulting firm cannot meet its deadlines, but the root cause of the delay isn’t visible to either party.
These missed deadlines can lead to strained relationships, financial penalties, or even project failure. Both parties might blame each other for the delay, leading to disputes. It is important to have a structured way to manage these situations to ensure smooth contract execution. Both parties need a streamlined, mutually agreed-upon process for reviews and approvals to ensure that neither side becomes a bottleneck.
Streamlining Obligations Management Using Purpose Built Solutions
AI-based Identification and Extraction of Obligations
AI-based obligations management tools can read through contracts and automatically identify, categorize, and extract critical obligations, deadlines, and other relevant information regarding the contract. This replaces the need for manual contract reviews and freeing up time for legal, procurement, and vendor management teams to focus on higher-value tasks.
After extraction, these obligations can also be categorized and monitored in real time. These AI-based obligations management systems often integrate with contract management platforms, where all identified obligations are managed in a centralized system. All teams involved in the obligations have immediate access to the data, improving cross-functional transparency.
AI can monitor contract terms in real-time, sending alerts for upcoming deadlines, reducing the chances of penalties or missed deliverables. Additionally, it can also track updates to regulations and notify vendor management teams if any new obligations need to be added.
Dependencies between obligations can also be identified helping both vendors and clients to stay ahead of any potential risks. If the client delays fulfilling its obligations, the system can notify both parties and suggest adjusting the project timeline or providing an alternative solution, like a waiver. This proactive management of interdependencies helps avoid disputes, ensures smooth project progression, and maintains strong vendor relationships.
Review and Activation of Obligations
Even with advanced AI-powered systems, there’s still a risk of duplicated or missed obligations. This is why a structured review and activation process is essential. A tool-supported view allows vendor managers to thoroughly review extracted obligations before they are officially activated.
These tools categorize the obligations and provide an organized display of all of them, enabling users to cross-check, validate, and refine them for accuracy. By ensuring that no key obligations are overlooked and that duplicate entries are eliminated, these systems help create a reliable, actionable obligation list. Once reviewed, obligations can then be activated for tracking and execution, ensuring that the organization remains fully compliant and on top of its contractual commitments.
Additionally, once obligations are activated, AI systems can automatically set reminders and trigger workflows to ensure compliance. This helps organizations stay on track with key deadlines, avoid penalties, and maintain smooth vendor relationships.
Risk Mitigation
Every contract has potential risks ranging from missed deadlines to regulatory non-compliance. With increasing obligations, the risks also increase. While identifying risks has traditionally been a reactive process, AI-based obligations management offers a proactive risk assessment approach. It reads through the contractual documents to identify high-risk clauses that could result in penalties, financial exposure or non-compliance.
After identifying the risks, the risks are categorized based on the level of risk and type. This helps you develop an effective mitigation strategy beforehand.
For example, an enterprise in the healthcare industry manages a contract with a medical equipment supplier which includes obligations related to compliance which carry severe penalties for non-compliance. The AI-based obligations management tool identifies these high-risk obligations tied to equipment delivery timelines and compliance with changing healthcare regulations. These obligations are prioritized for attention and risk mitigation strategies, like closer monitoring of vendor performance and the addition of contingency plans for equipment delivery delays are suggested. In fact, an AI-based obligations management tool like Enlighta reduces risk of failure to monitor obligations by over 95%.
By proactively identifying risks, prioritizing them, and enabling real-time monitoring, organizations can take strategic actions that reduce exposure and improve contractual performance.
Dependency Management
AI-based obligations management tools can identify and track dependencies across contracts, ensuring that no obligation is missed or delayed due to unfulfilled prerequisites. For instance, if a vendor’s delivery of services depends on the client providing necessary resources or approvals, the AI system tracks these conditions and flags any delays or misalignments in the process. If one party misses a deadline, the system immediately flags the related obligations that could be impacted. This proactive approach helps both clients and vendors address potential delays before they escalate into larger issues.
For example, in a software development contract, a vendor is responsible for building a new feature, but their work depends on the client providing specific data and design specifications on time. The vendor cannot start work until the client submits the necessary materials.
An AI-driven obligations management system monitors this dependency and sends reminders to the client about the pending deliverables. If the client fails to meet the deadline, the system alerts the vendor, giving them time to request a waiver or reschedule their work. This reduces the risk of delayed projects and ensures better collaboration between both parties.
Audit Tracking, Root Cause Analysis & Corrective Plans
AI-based obligations management systems can automatically track the performance of multiple vendors, ensuring that all deliverables are met according to contractual agreements. These systems simplify the audit process by providing a comprehensive view of each vendor’s obligations, performance metrics, and any missed milestones.
A centralized dashboard where vendor obligations, compliance records, and performance metrics are stored makes it easier for procurement teams to access detailed audit trails for each vendor, saving time and reducing administrative overhead.
If a vendor fails to meet a deadline, AI systems automatically generate alerts, flagging the missed deliverable. Teams can quickly take action to address the issue, whether it’s seeking a waiver or enforcing penalties. When a deadline is missed, it is crucial to understand the root cause to prevent it in the future. AI-driven obligations management systems analyze data from multiple vendors, to identify the patterns and analyze the root cause. Once the root cause is identified, AI-based systems can recommend corrective action plans.
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