What is Contract Management and how does it work?
Table of Contents
- What is contract management?
- What is contract management software?
- Why contract management is important?
- What are the 7 phases of contract management?
- 5 Key elements of successful contract management software
- Getting started with a leading contract management software
- Frequently asked questions about contract management
Whether you run a small local business or a large international corporation, it’s likely you have a few agreements in place. After all, businesses rely on contracts as the basis for many of their interactions with customers and partners. Having said that, there are various ways to approach contract management.
Businesses that value efficiency invest in the best available processes for managing contracts. However, not all contract management strategies are efficient and effective, which can put your business at risk.
This begs the question, what exactly is an excellent contract management system and how do you select the right one for your business?
So you don’t fall outside the curve, this comprehensive guide touches everything you need to know about contract management for businesses. That includes the mode of operation, elements, and all other key concepts.
Right, let’s dive in!
What is Contract Management?
Perhaps, we can define contract management better if we know what a contract is. Contracts are foundational arrangements for defining business relationships. They consist of agreements between two or more entities, whether written or spoken. In this case, between a business and a customer, partner, investor, employee, etc.
Therefore, contract management otherwise known as contract lifecycle management, is the process of managing agreements between a business and associates. It touches on every aspect of the contract, from drafting and creation to review, execution, and renewal or termination. Other crucial activities in contracts management include negotiation, performance expectations, timelines, obligations, financial details, the scope of work, warranties, etc.
Contracts are legally binding on the business and parties involved. Therefore, proper contract management would be essential in ensuring the business stays within the legal portions of situations. Since contracts are critical, effective management will significantly enhance employee performance. In the same vein, businesses can find themselves in various unwanted circumstances without proper management.
How does Contract Management work?
In the past, firms managed contracts in many forms. They include hard copies that fill up office spaces and pdfs that get lost in inboxes. Today, it has shifted and expanded into using contract management software.
A Gartner report reveals that contract lifecycle management has evolved from a relegated record-keeping system to an indispensable business practice. The report posits that contract lifecycle management addresses costs, risks, and revenue maximization.
What is contract management software?
Contract management software is a type of software that enables businesses to manage their contracts. It helps to organize, streamline and simplify the contract lifecycle, from creating contracts to getting approvals and signatures.
Contract management software typically provides features that allow users to manage contract clauses and templates, self-serve contracts, collaborate on contract terms, track contract expiration dates, redline changes, and create reports.
This software will streamline your contract processes, help you save time and money while offering a range of other benefits.
Who uses contract management software?
The legal team oversees the creation and management of contracts, making them the primary beneficiaries of contract management software. The legal team can use contract management software to draft, edit, and approve contracts. These tools help to get new contracts approved faster, which in turn generates revenue for the organization.
Human resources department
The role of the human resources department has evolved. In addition to hiring and firing, HR professionals are now responsible for many other critical functions, including employee benefits, compensation, training and development, and performance management.
Given this shift in workforce dynamics, it’s no wonder that contract management software is becoming a priority for HR reps to streamline their day-to-day operations.
The sales team is not left unaffected by contracts and their bottlenecks. If the sales department does not have an effective contract strategy or management, it may be left wanting with delays and contracting issues. These contract management issues can often be related to PDFs in sales.
As such, an effective CMS is a valuable resource for them to close deals faster. It informs sales reps on targets they need to meet.
Procurement is another department that deserves huge consideration when debating on who needs a contract management tool. This is the department that procures goods and services from vendors on behalf of the organization.
The procurement department often has to request contract processing through the legal team. However, they can increase their efficiency with access to a contract management system that allows self-servicing.
Like the sales and procurement teams, a CMS is invaluable to the marketing department. For instance, a good handling system lets them deal appropriately with service and other working requests like campaign agreements, agreements with vendors, influencer agreements, etc.
Contract management software aids the finance team in making decisions concerning targets, budgets, revenue, and billing. The department can identify the company’s financial obligations and opportunities in the wake of an unexpected situation such as pandemics. And with this information, they can prepare for the future and advise subsequent contract negotiation.
Why Contract Management is important?
A typical Fortune 1000 company manages about 20,000 to 40,000 contracts at any time.
Is it a tedious task? No doubt.
The businesses have to create, negotiate, review, approve, and execute 20,000 to 40, 000 contracts in a day.
Perhaps the processes of creating as many contracts may be fairly straightforward, but what happens to the review process. Then, each contract needs to be monitored with a series of reviews and amendments in-between before completion and renewal. It's an across-the-board process that requires hands from different departments, including legal, procurement, finance, sales, etc.
From this, you can see that manual management of contracts will not only be time-consuming but will also require high costs. Moreover, it makes the contract prone to errors, compliance issues, unmet deadlines, and financial risks.
There are many benefits you can achieve with contract management. The key benefits of contract management include time-saving, increased contract visibility and lower costs and risks. Below you can find additional reasons on why managing contracts is important for your business.
1. Improvement in business performance
The overall performance of the business is a reflection of how contracts are handled. That is, when contracts go through efficient management, it serves as a bedrock on which other business activities stand.
It can also help the organization or business identify different opportunities. And through this, the business can project and make necessary preparations for smooth operation. Managing contracts takes business objectives as a foundation and makes sure other activities are in line.
The process of managing contracts emphasizes enhancing the efficiency with which a business is run. It identifies the right tools, such as software or platform that best automates the company’s contracting processes.
The efficiency that results from automation also comes with added advantages and they include reduced errors and overall improvements. It also means personnel can spend more time on improving other business areas or strategic contract processes like evaluation.
3. Yields profit with less risk
On the surface, contracts management appears like an expensive task with little value for a business. That is because some notable aspects focus on abstract and not easily measured ideas. However, managing contracts properly has serious economic value for a business. Learn how you can measure ROI of a contract management software here.
Business executives may attempt to quantify the value. And while quantifying risks and benefits may not be straightforward, the legal team or contract manager can leverage an excellent management system to show this important aspect. The reality is that any business that manages contracts better will experience a marked increase in business value through other benefits.
4. Improves financial performance
One way of establishing an increased business value is through financial performance. Contract automation and management make it possible to track transactions and financial performance. This is made possible through properly coordinating the relationship between a business and stakeholders, customers, clients, investors, etc.
Businesses thrive on financial transparency which is exactly what proper management of contracts does. By identifying the sources of income and spending direction, businesses can cut out unnecessary expenditures. That is in addition to identifying cost-saving opportunities.
5. Efficient risk control
Another factor that is usually challenging to quantify is risk. However, companies can measure risks. Risks are sources of losses for a business and a major factor for determining risk is uncertainty. One of the benefits of contracts management is it clarifies business activities, thereby reducing uncertainty and risk.
With an excellent management system in place for contracts, companies can easily recognize ongoing and expired contracts. Contracts that have insurance obligations or indemnification clauses are brought to light. They can also identify contracts with auto-renewal or termination provisions.
All these combine to give certainty and an acceptable risk level. Each data point will also be essential in other business decisions that assist with adequate risk control and management.
6. Contract management enhances contract compliance
Managing contracts benefits companies through enhancing complete compliance with contracts and contract terms. That’s because the management system specifies each contract’s conditions, expected procedures, and required timeframes with individuals in charge.
This helps the organization maintain a high compliance level. And the higher the compliance level, the lower the risks and higher the overall business value.
7. Increases accountability
Most organizations cannot function properly without a partner, supplier, or client. They are an essential part of any business because they provide numerous services and goods that enhance company performance. With a good management system in place, you can monitor your partners' and suppliers' performances.
The system lets you compare performance to roles specified in the contracts and evaluate necessary adjustments. This also helps the business improve supplier compliance and foster better relationships with the right partners.
What are the 7 phases of Contract Management?
When managing contracts for any level of business, some fundamentals define the quality of the process. These fundamentals include request, creation, review, approval, analytics, and termination or renewal. Each one is explained below.
1. Contract request
Contact request is where the contract process begins. It involves identifying relevant details and documents to the contract. Depending on the department where the contract originates, the specifics of each contract are likely going to be peculiar. Usually, management software will accelerate the process.
2. Contract creation
Contract creation involves the process of authoring contract details, usually from a template. The process sees a combination of different clauses and business objectives. In the past, this was achieved through Word documents; a method that features several errors and risks.
Meanwhile, when contract processing software is used, less experienced personnel can create contracts just by inputting certain details. Also, each department can self-service within the business rules and goals.
3. Contract review
The contract review process involves collaboration with team members and third parties to confirm details and finalize negotiations. The management system must incorporate adequate features for comparing, tracking, and changing document versions for this process without creating confusion.
4. Contract execution
After the review, a contract is approved and execution begins. The contract approval process could require passing the contract through certain parallel or serial flows to ensure all-around agreement and compliance. After that, the contract is put into motion with necessary signatures. Contract lifecycle tools have an e-signature function for making the process seamless.
5. Contract performance tracking
Contracts can last for different timelines with milestones in-between. While the contract process is ongoing, it is essential to analyze performance from time to time. This is just as important as previous steps in the system since it ensures compliance and tracks progress. Contract tracking is also important for terminated contracts for more encompassing performance analysis.
6. Contract amendment
Contract amendment involves changes to the initial contract agreements. This happens when there is a new development that did not exist when original negotiations were in progress. However, an amendment is tricky and needs to be addressed carefully to avoid compromises. Contract managing systems are equipped to deal with such developments because they keep document backups and track changes.
7. Contract termination or renewal
At the end of a contract process, involved parties must agree to terminate or renew the contract. Terminated contracts are archived in the database while renewals begin the cycle all over again. Keeping track of all these details is crucial to contract processes. The contract lifecycle management software has features for tracking these details and notifying relevant teams or individuals.
5 Key elements of successful Contract Management
When businesses follow contract management best practices, their contracting processes can produce better outcomes and achieve their set objectives. These are the elements of any successful business contract.
1. Define roles and responsibilities
As a contract manager or CEO you need to clearly define the people who will manage each contract and the specific tasks for which they are responsible.
2. Standardized contract processes
A standardized contract system will reduce time and cost and also improve how employees collaborate.
3. Collaboration among teams
When the necessary departments collaboratively oversee a contract, there will be ease in communication, making it easier to accomplish tasks.
4. A centralized contract repository
Having a central repository that enables easy access to all of your company’s contracts is critical for effective contract management. A centralized contract repository makes it easy to manage and track contracts.
5. Compliance with contract procedures
All parties involved in a contract must comply with the set policies throughout the contract lifecycle management. This is usually difficult to achieve without an effective management system in place for contracts.
Getting started with a leading contract management software
The contract management process has greatly improved by introducing systems like automation. Automation incorporates management software that creates viable solutions to problems that have plagued the process in the past.
Therefore, businesses can better create, review, track, oversee, and execute contracts. And as a result, they can get more economical and financial value amongst other advantages. There will also be more streamlined processes, greater accuracy, security, and efficiency.
That is why you should choose contract lifecycle management software that can offer all the solutions your business needs to achieve an efficient contract workflow. Excellent management software can scale with your organization through long-term solutions that are reliable and easy to use.
We are the present and future of contract automation and our software helps you manage contracts while giving a wide range of solutions.
Frequently asked questions about contract management
Why is contract management required?
A contract may involve complex relationships with customers and multiple stakeholders with differing interests. On top of this, a contract will include an agreed set of deliverables or outcomes to be achieved by all parties involved, along with key performance indicators (KPIs) and service levels that must be met. There may also be penalties for failure to meet certain targets. All of these factors can make it extremely difficult for you to keep track of contractual obligations. So, you need an effective contract management tool in place.
What are the best practices for contract management?
1. Start early on contract creation and be specific about what you want. Starting early on the contract creation process helps ensure that you have time to address all the important issues before signing. Before signing any contract or binding document, research the other party and its legal background. At a minimum, determine whether the other party is legally able to enter a contractual relationship. If there are existing commitments, take the time to review those relationships and obligations and determine the impact of a new agreement on them.
2. Make sure your contracts contain performance clauses that spell out specific consequences for non-performance, such as penalties or fines. This works best if it's backed up by a cap on damages that allows one party to void a contract after a certain number of infractions.
3. Define your contract management KPIs. Once a contract is approved, it’s critical to measure its performance and establish clear objectives for success. Measuring the contract’s results and reporting that information indicates whether the contract is delivering on expectations or if you need to make any changes.
4. Expect changes. The contractual terms in your agreements may change due to: evolving business needs, industry standards, or federal regulations. Change management strategies help you assess how such changes could affect your business and develop actionable plans to address them.
5. Monitor compliance with key metrics and milestones. This assessment would help you avoid huge penalties. Unless you have an automated system in place, this will require you to manually check for compliance with key metrics like quality standards and deadlines. Automated systems can help ensure that contracts are approved in accordance with specific rules and regulations.