The company was at risk of heavy losses in contract liabilities, thousands of contracts had to be reviewed, there was only two or three months time to do it and it was just me…..
The root cause of these contract liabilities? an aggressive growth strategy with no monitoring on the terms agreed with clients. Growth at all costs?
Few articles ago I said that I would explain a way of reviewing thousands of contracts within a reasonable amount of time. So here it goes….
I had to review thousands of contracts to check whether they included a limited liability clause. There could easily be some 10,000 contracts in total, globally. The clause could be a separate standard paragraph easy to spot or a non-standard paragraph included in other clauses. This meant the full contract had to be read in many cases. There was only two or three months maximum to do so…….
So I turned towards the wonderful world of statistics. Yes, those hard-to-diggest statistics that we studied at school and we did not know what for at the time. I had finally found a good use for them. I had to demonstrate that such a big universe (i.e.: 10,000 contracts) could follow a normal distribution and then apply the rules. Random selection of the sample was extremely important. With all this, the sample size was reduced to few hundred contracts. These were reviewed in few weeks. The findings were supported by this robust method so senior management could easily understand them. Further, when some of these findings were challenged, an additional detailed review was carried out, only to demonstrate the robustness of this method.
This way I had enough time to support senior management on designing ways to implement cost efficient solutions to address the findings.
The final root cause of all the issues with these contracts was the lack of controls at the very beginning when the contract was signed with the client. Too much permissiveness at the basis of growth amassed a collection of weak contracts seriously impacting the liability of the company and hence, its financial stability. The question then is: growth at all costs?