Contracts are business-critical to medium and large enterprises. For such businesses, they play an all-important role in sustaining relationships with employees, vendors, partners, and customers. However, effective contract management is what makes these relationships profitable and beneficial to your business.
In this comprehensive 10-minute read, we’ll cover the basics of effective contract management in detail, including its process, lifecycle, and how it drives sales. Then, we’ll explain how contract management softwares can automate the process altogether.
Continue reading to find more insights about contract management.
What is contract management?
Contract management is the process of handling, analyzing, reviewing, updating, and approving business contracts from vendors, customers, employees, and partners. Ultimately, the goal of contract management is to improve the financial returns and operational performance by reducing the costs from legal actions and loss of business.
Contract management vs contract administration: What is the difference?
Although both terms are used interchangeably, contract management and contract administration aren’t the same things.
Contract administration involves the agreement between two parties before the contract is finalized. The process includes sourcing contracting partners, detailing contract arrangements, working hand-in-hand with partners on contract issues, etc.
On the other hand, contract management occurs after a contract is executed and finalized. Therefore, it involves ensuring both parties live up to the ends of their bargain.
Contract management and contract administration involve strategic thinking and expertise.
Stages of contract management
The contract management process, also known as contract lifecycle management (CLM), is quite different for various enterprises. However, irrespective of the industry of the business, it can be divided into the following stages:
1. Contract request: This is the first stage of contract management. It involves;
- Identifying the content of a contract
- Outlining the needs of both parties
- Outlining the documents to support the contract
A business user initiates the request. When such a request is informal and disorganized, processing the contract and moving to the next stage can be slow and inefficient. This emphasizes the need for a contract management software that is centrally located and accessible to people who have the right permission.
Although this stage appears straightforward, it could delay contract execution if you submit vague requests or don’t get key stakeholders’ input.
At the end, you should have the contract request information in a dashboard for other stages.
2. Contract authoring, reviewing and red lining: This stage involves drafting the contract after a business user puts in a request. In some firms, this step is also known as ‘drafting a contract’.
Drafting a contract usually requires the input of a legal counsel or an attorney. Since contracts are binding documents, it is standard practice to choose the wording carefully. Ambiguity could create loopholes and lead to issues.
Manually drafting a contract is painstaking, time-consuming, and a gateway to costly bottlenecks. Therefore, the ideal situation is to avoid writing contracts by hand without introducing risks in the process. Using templates for frequently-used contracts is one way to resolve this problem. That way, your team will only need to make changes to one-off contracts.
Nevertheless, the easiest method to avoid manually drafting a contract is to use customer management automation tools. Contract Management experience (CMx) is a trusted one-stop solution that simplifies all stages of the contract management process. It includes cutting edge features that allow you to manage contracts on the cloud or premise. At the moment, you can get the software free for the first 14 days.
The output of this stage is a contract agreement document. It contains the clauses, terms and conditions and other contract request information.
3. Contract approval: Upon reaching common ground, the next thing is to get to the stakeholders to give the go-ahead to the contract. In this stage, you will also require the input of a legal counsel to ensure you protect your business’s interest, and the contract is airtight.
In many businesses, approving a contract can be slow and inefficient. Therefore, companies have moved towards contract management systems like Contract Management Experience (CMx) that allow parallel and serial approvals by stakeholders electronically. The software allows for adaptive changes to approval workflows.
4. Contract execution: At this stage, both parties sign the contract, and it goes into effect. Ideally, the contract document is then stored in a centralized location. And while some businesses still use file cabinets, managing contracts through electronic channels is a cost-effective and risk-mitigating strategy.
E-signatures make signing a contract a lot easier, irrespective of the country the parties are in. Storing your business’s contracts on a management software is also more secure than in cabinets.
All parties should have a copy of the signed and approved contract document.
5. Contract database or repository storage: The contract is then stored in a retrievable database once it has taken into effect. From there, interested parties can reference the contract and its related documents.
A contract database helps to improve the visibility of executed contracts. Moreover, it comes in handy in managing information exchange between partners and preventing contract leakage.
6. Contract records management: In this stage, critical documents and contracts are controlled using reliable record storage means. This storage media usually has backup and retention policies that ensure your contract agreements and documents are secure.
Record management systems are usually incorporated in contract management software.
7. Contract search and retrieval: Often, a business will need to pull out a contract for various purposes. For example, a transportation enterprise may need to review a contract document it agreed with an e-commerce business.
This stage allows the easy search and retrieval of documents using filters and quick search features.
8. Contract auditing and reporting: When the contract has been retrieved from the records management system, a business can then audit and create reports from it.
This stage ensures that partners and interested parties can access and use the reports for audits and reports. Here, you input contract repositories that include agreements and get custom reports.
9. Contract renewal, disposition and amendment: Contracts are not set in stone. Therefore, they’ll need to be changed and renewed often. This will ultimately lead you back to the first stage of customer lifecycle management.
Manual contract renewals can be tough, especially if you have other business functions to attend to. This is another area where a contract management software can come in handy by providing you with notifications and reminders of contract renewals.
Benefits of contract management for businesses
Managing contracts isn’t just another thing to consider in your business. According to the Journal of Contract Management, 71% of businesses can’t find at least 10% of their contracts. This alarming issue can be fixed using effective contract management strategies.
Here are some of the top advantages of managing contracts in your company:
1. It improves revenue and saves cost
Naturally, contracts can be expensive and cost as high as $50,000 for one-off agreements. However, when not adequately managed, other costs from legal issues, contract defaults and negotiations, and poor practices could make businesses spend almost twice this amount per year.
However, sealing up the loose ends with top-notch contract management strategies can help you make more money. Moreover, managing contracts allows you to quickly renew contracts of parties that provide top business opportunities. In the long haul, this will lead to more profit for your business.
Getting a contract manager to handle all contract aspects will incur more costs for your business. An entirely cost-effective strategy is to use a secure and reliable contract management software.
2. It improves relationships with other parties
Another benefit of managing contracts is that it bolsters stronger bonds with customers, vendors, and employees.
By managing and monitoring contracts, it’ll be easier for you to follow up on contract performances and identify issues quickly. In the same vein, managing contracts helps businesses in identifying cooperative suppliers.
3. It helps you save time
Another benefit of contract management is that it saves time that would have been spent in unscheduled actions and trying to spot amendments. In practice, a contract management software like CMx, with contract review, analytics, activity logs, and report features, does this better than any other system.
Considering that leading companies renew up to 56% of their contracts yearly, it’s wise for a business to manage their contracts. Furthermore, managing contracts improves workflow efficiency by providing more time for business processes.
4. It helps to mitigate business risks
Compliance and obligation are two essential stages in the contract management lifecycle. Although a vital aspect to both, many businesses still don’t have searchable repositories. Studies from Aberdeen Group shows that only 78% of top enterprises have central repositories.
In the end, contracts have to be treated like every other business document. The risks that could come from breaking government regulations or defaulting on a contract are alarming. However, your business will be exposed to fewer contract risks if you manage these contracts.
Best practices in contract management
Companies handle contracts in different ways. However, according to Professor Tim Cummings, the International Association for Contract and Commercial Management (IACCM) president, poor contract management can cost businesses 9% in revenue.
Therefore, here are the top ways to get the most out of contract management:
1. Ensure you centralize your company’s contracts
If your business nails every other contract management stage but doesn’t keep all contracts in one place, then you should expect a downpour of problems.
For starters, decentralizing contract management forces the responsibility of managing contracts to come down on several people in your business. Managing different repositories is a big ask and an inefficient method of handling contracts. In the end, it nullifies the need of contract management software altogether since different people have their methods and documents.
Furthermore, decentralization creates an avenue for approved terms and conditions to be altered or not be adhered to.
Although shared-systems isn’t all there is to managing contracts, it helps you search, report, get notifications about contracts effectively.
2. Define key performance indicators (KPIs) and use analytics to your advantage
As in every other business process, you must have a target and a way to measure whether you’re hitting it or not. In contract management, you can track the following KPIs:
- Periodic contract value
- Rate of contract compliance
- Contract trends
- Contract life cycle length
- Rate of renewal
- Contract approval time
For most companies, the easy way to track metrics is to get a software.
3. Ensure the communication lines are open
There’s a tendency for companies that implement contract management to let the software do all the work. However, contracts affect several departments at a time. Therefore, you should take advantage of centralized systems and communicate with other stakeholders.
For example, picture an e-commerce business that is contracted to expedite, inspect and ship goods to one of its partners. For the terms, conditions and clauses to be met, everyone within the organization should know what they need to do through effective communication.
The best decisions come when everyone is in sync.
4. Make sure you properly execute the negotiation stage
Subcontractor issues, overpricing disputes, and inappropriate contract structures all arise when the negotiation stage is breezed over. Since it is one aspect that can cause the lifecycle to take days and sometimes months, you should invest time into it.
Following a successful negotiation, both parties are then expected to live up to their end of the bargain.
5. Automate complex, time-consuming and tedious processes
No hard and fast rule states you should oversee everything you need to make a contract. Therefore, you should automate stages that require back and forth propagations.
For example, picture that you intend to draft a contract for a food supplier. Sending each draft or making changes to the first one will take much time. However, having a software handle this for you allows you to focus on other business aspects. Moreover, you’ll find fewer errors when dealing with repetitive tasks.
Contract management in practice
Here are some industry-related implementations of contract management:
1. Contract management in government
Contracts in public sectors are handled in the same way as in the private sector. That is, government agencies and organizations follow the entire CLM process. However, a few things differentiate contract management in government:
- A large team oversees the whole process from start to finish.
- Governmental agencies the past performance evaluation (PPE) metric to award contracts.
- The Federal Acquisition Regulation System (FAR) governs the contract management process.
One of the top contract management challenges in government is abiding with the stringent regulations. The government agency can adjust terms when the project is in process or terminate contracts. However, the contractor will have to be compensated for changes and the work previously done.
This issue is primarily due to contract negotiation and request problems. However, a contract management software can help in keeping both parties in the loop of the required regulations.
2. Contract management in construction
Construction contracts involve the supply of goods and services required to build an asset. Generally, there are five types of construction contracts:
(i). Lump-sum contracts: These are the basic and most common types of contracts in construction. As the name implies, it involves a single fixed price for everything that needs to be done.
(ii). Time and material contracts: Your guess is as good as ours on what this contract entails. They underline an hourly or daily wage for vendors, suppliers, or employees.
(iii). Cost-plus contracts: This contract involves two things:
- The incurred cost during the project
- A cost which is a percentage of the total project investment.
(iv). Unit price contracts: Here, the contract pricing is based on the unit work required to complete the project. These contracts are usually used for repetitive projects.
(v). GMP contracts: Guaranteed maximum price (GMP) contracts have a ceiling on the price that an employee or vendor can earn.
In construction, keeping an eye on contract costs and the financial health of the business can be challenging. However, a suitable contract management software can make this easier by offering a central location and tools to monitor contract details.
3. Contract management in Healthcare
Effective contract management systems help healthcare businesses to care for patients while reducing operating costs. As the stakes are quite high in this system, here are some of the best practices when managing healthcare contracts:
- Ensure you standardize the contract process to ensure that each stage is executed promptly.
- Create a database of frequently used contracts and legal clauses.
- Automate the process and workflows and improve audit preparation.
Keeping tabs on physician contracts and office leases is a daunting task, especially when other things need to be completed. The financial penalties and losses from poor contracts can affect a healthcare business significantly.
A top contract management software provides a secure location for all sorts of agreements and regular updates on those that require renewals.
4. Contract management in legal firms
As in other industries, legal firms have to pay keen attention to the best strategies we’ve highlighted above. The most common types of contracts for legal practitioners are:
- Litigation documents
- Service agreements
- Rental lease agreements
- Deeds of trust
- Commercial agreements
In legal firms, many contract managers are kept in the dark of critical stages until later on. In such firms, a contract management software can help to keep these managers in the loop of all contracts so that they can focus on those that are top priority.
Automated vs. traditional approaches to contract management
Any business can take one of two roads in contract management: the smooth, automated path or the bumpy manual route.
Managing contract using the manual approach is tiring, time-consuming and prone to errors. For example, it takes a long time to manually make reports, and sign contracts for a business, primarily because these tasks can’t run concurrently from one person to another.
With the digital path, you have two major options: manage contracts with Excel Spreadsheets or use a contract management software.
Contract management software vs Excel for managing projects
Firstly, Excel can take an insane number of row and column inputs. However, top contract management softwares also have this feature and allow contract centralization. Excel spreadsheets, on the other hand, are difficult to centralize. Ultimately, this disorganization with spreadsheets can lead to confusion on whether you have access to the latest file or not.
Secondly, contract management softwares automate the CLM process, which is a function that Excel spreadsheets can’t do. For example, a healthcare business can decide to update and input every physicians’ contracts detail on an Excel spreadsheet. However, a contract management software can automate the updates in split seconds and help in other stages in the CLM lifecycle.
Furthermore, creating reports with Excel requires technical skills, some of which many employees don’t have. For example, a government worker may decide to update and fill contract details on a spreadsheet. However, creating reports will require a comprehensive understanding of Excel tools, graphs, and formatting options. Moreover, the worker will have to repeat this task for each report while trying to prevent business losses.
Contract management softwares allow quick and easy creation of reports for different industries.
Contract management tools also have the upper hand over Excel because they offer artificial intelligence benefits. For example, imagine a small-sized fashion business that partners with a transportation business. If the fashion company’s business owner wants insight on the risk involved in picking a particular contractor, then a contract management tool will suffice.
Therefore, using a contract management tool is faster, more efficient, cost-effective, and risk-mitigating.
For example, picture a medium-size law firm whose contracts are handled by a clerk. Asides the insane number of contracts to manage, this clerk is also under immense pressure to meet deadlines and ensure the business doesn’t lose money due to non-compliance or contract terminations.
Such clerk likely uses Excel to manage contracts. But with a software, she can automatically update, generate, and send out electronic copies of contracts for approval and execution. In turn, the tool will ease her work and make it less prone to business-threatening errors.
Contracts are the dynamic force that drives productive business processes. As managing them correctly can yield many benefits, you should incorporate an effective contract management system.
CMx is one of the best software tools that can help you manage every contract aspect while you focus on driving your business to achieve your goals. It offers easy configurations, self-service features, contract reminders, analytics and reports, and airtight security. But the best part is that you can try out the 14-day trial or request a demo to see these features yourself.