Table of Contents:
Contract management generally involves effectively planning, administering, and managing commercial contracts with various entities such as vendors, partners, customers, and employees at all stages of their engagement with a business.
Contract lifecycle management (CLM) is the process of digitally managing agreements made with customers, vendors, partners, or employees through every stage of the relationship, and encompasses such tasks as creating, revising, reviewing, negotiating, executing, renewing, terminating, administering, and archiving commercial contracts.
A contract management system uses contract subject matter experts alone or in combination with a software, tool or platform to standardize contracts; improve workflows, and cope with volume as new contracts are added.
Businesses employ a contract management system to enhance, improve or scale their contract workflow, typically without increasing headcount. Fast-growing businesses with increasing contract volumes gain the most value from implementing contract management systems.
Such systems may also be used by different teams within a business, such as legal, sales, procurement, finance, marketing, operations, and HR.
Contract management enables businesses to improve their approach to existing and proposed contracts. It can control costs, improve productivity, reduce errors, and enhance the bottom line.
The benefits companies achieve through contract management include:
Contract management processes vary depending upon the stage of the contract, such as creation, negotiation, execution, tracking, and renewal.
The contract management process begins by identifying contracts and pertinent documents to support the contract’s purpose.
Drafting a contract by hand is a time-consuming activity but using contract subject matter experts and/or CLM tools and platforms, the process can be expedited, cost-effective, and streamlined.
Contract negotiation is the process of coming to an agreement on a set of legally binding terms. When parties negotiate, they seek to obtain favorable terms and minimize financial, legal, and operational risk.
Executing a contract essentially is the signature stage. This step may be shortened using electronic signatures. Obtaining management approval prior to signature may cause bottlenecks.
Users can pre-emptively combat this by creating tailored approval workflows to keep decisions moving at the pace of business.
Contract tracking may take several forms:
Contract audits are important in determining both organizations’ compliance with the terms of the agreement and any problems that might arise.
Overworked and stressed businesses may miss renewal opportunities and lose potential revenue. Having contract subject matter experts and CLM tools and platforms can provide businesses critical opportunities to identify renewals and revenue streams.
Businesses are always buying something significant, selling something important, partnering strategically, or hiring someone new. They need legally binding paperwork to move a business process forward and protect their company’s interests.
Once a contract request is walked through the door to the corporate legal department, people, processes, and technology all shift into high gear. The request might be satisfied by a standard contract like an employment offer letter, credit application, or a rental property lease agreement.
Or it might require a complex contract with custom terms that need more preparation, research, and planning.
It may be easy to generate a simple standard contract with “boilerplate terms”. However, a bespoke contract requires specific language and provisions, but may still be generated using existing templates and playbooks.
When a draft agreement has been assembled and approved in principle, it’s time to negotiate the contract.
Contract data may be mined for insights. Contract subject matter experts and analytical tools may be used to extract critical information to gain perspective about your contracts and make data-driven decisions.
Once a contract has been drafted, negotiated, and meets defined goals, it’s time to sign. These days contracts are rarely signed in ink; rather, companies typically use e-signature apps.
Once contracts are in force, it’s important to monitor whether each party is living up to the deliverables, milestones, and promises made during negotiation.
One challenge businesses face in contracting is missing contracts, and it’s more common than you think.
Missing contracts are a significant concern for businesses, posing major challenges to operations and profitability. Companies often struggle to locate a significant portion of their active agreements, leading to increased legal risks, missed opportunities, inefficiencies, and financial losses.
Implementing robust contract management systems and adopting best practices is essential to navigate this widespread issue and ensure smooth business operations.
Contract redlining, or editing, is a major component of contract negotiation. However, a standard agreement that is frequently redlined is a sign that using such standard agreements isn’t particularly useful and may mask bigger issues with contracting processes.
Many businesses are swamped, stressed and unable to keep up with their contracts. The situation is made worse when they don’t truly understand the contracting process, which undermines confidence.
Understanding the contracting process means you know just how much time it typically takes to move from one contract stage to another, the contract stage that causes the most delays, and the reasons for it.
Contract visibility means more than simply finding them when a dispute arises. Contract visibility is a 360-degree view into all the details and obligations contained in a contract. Anything less is unacceptable.
Without visibility, not only may contracts not be effectively managed but also, they may not be legally compliant.
Contracting demands gathering reliable data, analyzing it, and taking effective actions. In the past, tracking contracts involved spreadsheets and countless hours spent gathering the information you needed. This was a slow, inefficient, and error-prone process.
Today contract subject matter experts and technology can provide necessary contract metrics.
Given how frequently contracts go back and forth between counterparties and internal teams, you may lack control of the many versions — or lose it altogether.
This makes it difficult to know whether you captured all of the necessary changes during a negotiation and identify which version of a contract is the approved one.
Ultimately, having poor control over your contract versions — and having conflicting contractual information — can create risk and adversely affect your business.
Failing to put in place a robust contract tracking system, including contract compliance, is a critical mistake. For example, missing a deadline for cancelling an agreement can lock you into a renewal that is against your business interests.
Do you store your contracts in filing cabinets, local hard drives, email chains or shared drives? Do you lack access controls, based on roles and user-permissions, on your contracts? If that is the case, you are not alone.
But by using disjointed contract storage systems and overlooking these accessibility controls, you may find your sensitive agreements and associated documents falling in the hands of those who should not access them in the first place, and important files being misplaced or accidentally deleted.
Even authorized users may have difficulty accessing contracts from any location, at any time, in the absence of a secure central repository for all of your agreements.
Failing to involve the appropriate stakeholders, like legal, sales, procurement, and HR team members, is another significant mistake made when managing contracts. This is especially true during the contract negotiation process. You could find contracts completely misaligned across the enterprise.
The best way to ensure your business uses consistent language and terms in contracts is to implement contract templates, where pre-approved provisions are accessible and may be incorporated into the contract.
It is critical to include all relevant contract stakeholders in contracting. Nonetheless, it’s not unusual for commercial teams like finance, HR, sales and procurement to be left out of the contract process or included only near the end of a negotiation.
Many businesses will have experienced being locked into renewed contracts simply because they missed the deadline to cancel. Cumulatively, these missed renewal dates can affect your bottom line and create frustration within your business.
Contract renewal reminders can eliminate this scenario.
Even a company without a formal CMS tool or platform may still toggle through multiple systems to execute a contract. For better contract management, businesses need contract technology that allows them to manage contracts from start to finish, all in one place.
The level of stress in contracting varies depending on contract type, its complexity, your deadline, your expertise, workload, support, and technology, among other factors.
Contracting can become less stressful with the right combination of contract subject matter expertise, contract workflows and technology. Whether contracting is stressful depends on how well prepared your company is to handle agreements (e.g., experience, training, tools).
Financial risks, often categorized as credit, liquidity, asset-backed, and equity risk, are contract risks associated with the loss of money regardless of whether it impacts your top or bottom line.
From a contract management perspective, it could be caused by missing a key contract date — such as a renewal — and either losing business or inadvertently continuing the contract term due to an automatic rollover clause.
Another example would be a contract termination or compensation associated with missed delivery dates, milestones, claims, or warranty problems.
Legal risks arise when a company is in breach of contract with the potential for litigation. Legal risk may occur from missing contract compliance obligations or a result of IP infringement or confidentiality disclosures, among other disputes.
Security risks and breaches stemming from contracts may result in financial, legal and brand damages. Security risks may stem from storing contracts in insecure locations, allowing unrestricted access to sensitive contract data, leaving confidential contract data unencrypted, or by using email to communicate sensitive contract information.
CLM software gives legal, sales, financial, procurement, marketing, HR, and contract administration teams an integrated set of tools for improved administration of their entire contract management approach.
Organizations benefit by automating and accelerating contract creation, from negotiation to approval. It offers users a secure contract repository to ensure the safety and security of all documents and contract-related data.
The goal of CLM software is to mitigate contract risks while enhancing efficiency and velocity that is secure and adheres to regulatory compliances.
There are plenty of factors to consider when searching/evaluating for a CLM solution. Simply put, though, think about your business’ current needs and your plan for the future, then weigh these against a list of relevant contract management solutions.
First, CLM software should automate mundane, repetitive tasks so you can focus on your contract priorities. Second, it should provide a method to structure, interpret, and visualize data. Third, it should provide customer support help answer your questions about the software and troubleshoot issues.
Digital contract management is an innovative approach on how contracts are created, managed, and optimized, by converting paper contracts into digital formats.
Digital contracts, also known as electronic contracts or e-contracts, are agreements that are created and executed using digital technology. Instead of dealing with stacks of paperwork, these contracts are created, stored, and managed using electronic means like emails, online platforms, or digital signatures.
You can create, sign, and store contracts online without the hassle of printing, scanning, or mailing documents. It’s all done electronically, which saves time and money. Plus, digital contracts come with extra security measures like encryption and authentication, making them a safer option.
Digital contracts effectively streamline the workflows of contract stakeholders by enhancing their collaboration, expediting time to execution, reducing potential errors, and resulting in time-saving, cost-effectiveness, and improved document security.
There are quite a few contract management providers, so look for one that has a good reputation and a proven track record of delivering effective contract management services to businesses like yours.
Also look for a provider that uses advanced contract management software that is easy to use and may also be integrated into your existing systems.
Make sure they have robust security measures in place to protect your sensitive data. And inquire into whether the provider has a dedicated support and service, including contract experts.
Determine whether the contract management service provider offers scalability as your company – and its contracting needs – grows. Finally, ask yourself whether this vendor’s solution fits your budget now and in the future.
Contract solutions vary based on the provider’s specialization, industry focus, and the needs of their customers. Common types of contract solutions include:
Contract compliance measures how well your business follows internal and external standards. Each contract you enter will have a set of goals and checkpoints.
Contract compliance usually forms part of a broader contract management strategy, and it seeks to ensure that contracts are executed properly.
Contract compliance may be enforced through best practices including:
Contract management software can track obligations and contract data. Compliance means acting proactively. Know what goals you are meeting and were complying with the contract is headed. To do this, adopt best contract compliance practices including monitoring metrics.
Common types of contract compliance include:
The future of contract management is marked by innovation, efficiency, and a heightened focus on compliance and ethical considerations. Embracing these trends will not only enhance the way contracts are managed but also drive better business outcomes.
Top contract management trends to watch out for include:
