Hidden costs

The costly consequences of poor contract management

If you don’t have a complete overview of your agreements and contracts, you lose transparency – therefore you risk overlooking costs if your contract management is not in control. An independent study by World Commerce & Contracting shows that good contract management can improve your bottom line by up to 9%. Here’s why and how to avoid the costly consequences.

Hidden costs, what are they?

What we call hidden costs refer to those expenses that aren’t always obvious or easy to identify – but still impact your organisation’s finances and performance.

An example could be that you have more mobile subscriptions than employees with company-paid mobile phones.

These costs can have a significant impact on the company’s cost level and are often overlooked as the cause is not immediately visible in either the big or small financial overview of costs.

“Lack of visibility and analysis leads to new issues”

Quick decisions can hide costs

The focus on costs increases with management responsibility, but what if your employees don’t have the same focus on a day-to-day basis? As a result, employees don’t always have a clear understanding of the financial consequences of the choices they make on behalf of their employer.

You’ve cancelled the contract with your current cleaning service with immediate effect due to poor service – and you’ve put your receptionist in charge of finding a new supplier.

“The seller’s terms and conditions are a good
hiding place for hidden costs”

There’s a risk of not thinking long-term and focusing on the quick fix – we need to clean and empty the bins. It often happens that you as a company are faced with a problem that needs to be solved and here it pays to look at the long-term consequences – so that your choice of solution does not create unnecessary or hidden costs.

Which terms and conditions have you accepted?

When you do business with other companies, there are often longer binding periods than you are used to as a private individual and companies are not protected by the Consumer Protection Act – however, the Danish Sale of Goods Act applies to both private individuals and businesses within Denmark. For business-to-business purchases, the Sale of Goods Act only becomes relevant if there is no contract between the parties.

Here, the term contract also covers, for example, in the case of an online order where you have accepted the seller’s terms and conditions by ticking the checkbox in the shopping basket.

How often do you read the terms and conditions when you make a purchase on behalf of the company? – The seller’s terms and conditions are a great hiding place for hidden costs. Here, the seller can make reservations for increasing operating and production costs and there may be an annual indexation of the price.

An example could be cloud-based solutions (Software As A Service), where you use a third party that either stores or processes data on your behalf – but when the collaboration ends, have you given up the right to have your data handed over or is it simply deleted by the vendor? – Remember: Read the small print.

The costly consequences

We don’t have a simple formula to calculate the financial consequences, but imagine you have entered into an agreement, which your employees use several times a day and which is the subject of informal conversations. Of course, it’s the automatic coffee dispenser for which you’ve made a lease agreement, with ongoing delivery of consumables (coffee beans, milk and cocoa powder) and ongoing servicing of the machine.

The agreement runs for 12 months and is automatically extended by 12 months unless cancelled. To cancel the agreement, this must be done no later than 3 months before the end of the agreement.

How do you make sure that you are aware when the coffee dispenser has brewed bad coffee, that your agreement is cancelled – no later than the last day of the ninth month of the agreement, so that it is not automatically extended for twelve months and so that your employees don’t have to drink bad coffee for at least another year?

And it’s not limited to the coffee machine, it could be:

  • Phone subscriptions
  • IT software
  • Fiber/Broadband
  • Window cleaning
  • Electricity supply agreement
  • Sponsorship agreements
  • Loan agreements
  • Cleaning agreements
  • Rental agreement
  • License payments
  • Canteen agreement
  • Coffee maker
  • Leasing agreements
  • Customer contracts
  • Insurance policies
  • IT hardware
  • Employment agreements
  • Consultancy agreements

Many a little...

… provides a big or maybe a small revelation – by getting a handle on your company’s contractual relationships, costs can be reduced – but where to start? Do you need to explore binders, search the network drive, ask accounting for a list of all your suppliers or find a smart solution to help you get an overview – once you’ve found all your company’s contracts?

Our recommendation is that you first define which information (metadata) in your contracts will give you a better overview and remove hidden costs – and then find the digital solution that best supports your objectives.

This is information (metadata) such as:

  • The contract type; is it a subscription, leasing, cash purchase, etc.
  • Supplier name, address and contact person
  • Where in your organisation the cost is allocated
  • Which employee is responsible for the contract
  • When was the contract signed
  • For how long is it valid
  • What notice period do you have
  • The payment terms
  • Are there any special conditions that apply
  • Does the supplier have a guarantee scheme
  • Will the price be indexed
  • And of course, what is the cost

“Proactivity pays off in the long run”

Save up to 9% on your bottom line

It’s hardly surprising that we believe you should choose a dedicated solution like the COMAsystem – at minimum, our solution can support this for all your purchase, sales and employee contracts.

We store all relevant documents related to each individual contractual relationship in the cloud. Contracts can be assigned to the manager, who can easily view all their contracts. Alarms (notifications) can be set up to notify you directly in your inbox before important deadlines such as contract expiration and notice periods are reached. And reports can be pulled across all contract data.

Of course, there may be many different reasons why your organisation has hidden costs, and we recognise that it takes resources to address the issue.

Proactivity pays off in the long run – so by reviewing your contracts and taking control, the World Commerce & Contracting study shows that companies can improve their bottom line by up to 9%.

If you want us to help you create an overview and support your goal of eliminating hidden costs, book en online demonstration here.