3 Common Pitfalls of Legal Contract Management and How to Avoid Them
Risk & Compliance
Though they’re designed to reduce risk and maximize profit and opportunities, it takes more than just signing and then filing away a contract to realize these benefits. Poorly-managed contracts can be time-consuming, creating backlogs and bottlenecks for legal teams. They can also be expensive: according to the International Association of Contract and Commercial Management (IACCM), nearly 40 percent of contracts don’t deliver the financial benefits they were intended to. On the flip side, IACCM also found that good contract management can help businesses grow their bottom lines by nearly 10 percent annually.
How do you ensure that your contracts fall on the winning side of this equation? The first step is knowing the most common pitfalls of legal contract management and taking some simple actions to avoid these risks throughout the contract lifecycle.
Pitfall 1: Not taking into account stakeholders’ needs
The problem: How many times have you tried to find a plug for your phone near your bed in a hotel room or to add a bullet point to an Excel document without success? While these two scenarios may not seem to have anything in common with contract management, here’s how they’re alike: in each of these situations, the person designing the solution and the end-user are not the same. And in each of these cases, considering user needs as part of the design is an important opportunity to ensure optimal functionality.
Typically, contracts are written by legal teams and designed to be used by various departments, from human resources to procurement. And while no other department within an organization is better positioned than legal to craft agreements that clearly set out terms for compliance and mitigate risks, a well-crafted contract also considers the perspective of its user, taking into account the real-world applications of its terms and contingencies that may be required.
The fix: Though companies may work in silos, contracts should not. From involving in-house counsel in operational and strategic planning to ensuring that all stakeholders have access to relevant information throughout the contract management lifecycle, making two-way communication a part of the process can help to improve contract usefulness and compliance and better mitigate risks. This extra collaboration need not add to the workload of contract management or in-house legal teams – contract management software can reduce the manual work of sharing information via features such as permission-based user roles, which allow administrators to enable individual access to specific contracts (without reducing the security of the entire contract portfolio).
Pitfall 2: Poor – or no – contract handover
The problem: Many assume the hard part is over once a contract has been negotiated and signed. But the real work often lies in ensuring that all signatories uphold their side of the agreement. Successful contract execution relies on numerous players, typically across more than one team (or company), each of whom must be aware of their obligations and other key information. Poor handover processes can derail the effectiveness of contracts, making enforcement more challenging and diminishing the opportunity to bring to life the benefits set out on paper. The all-too-common “out of sight, out of mind” mentality, in which executed contracts reside with legal and aren’t given much thought by relevant employees unless problems arise, doesn’t help either.
Though no team is more invested than legal in ensuring contract compliance, few in-house lawyers have the bandwidth – or desire – to act as company enforcement officers. As the volume of contracts grows, this only becomes more challenging, especially in scenarios where contracts reside with legal and the flow of information to other relevant parties can become bottlenecked.
The fix: While it makes sense to centralize contract management, it’s important to balance access and security requirements. Many companies use shared drives as a solution, but this can challenge both of these needs: if contracts are stored on an internal drive, remote employees, such as sales reps, may encounter access difficulties or need to log onto a virtual private network (VPN). It can also be technically difficult, if not impossible, to enable individual access to documents on shared drives, meaning anyone and everyone on the network can read sensitive documents.
Instead, consider a secure contract management system, in which contracts are stored securely in the cloud and are accessible to anyone from anywhere, so long as they have been granted permission from an administrator. To further protect documents without limiting visibility where it’s needed, look for a platform with varying permission levels – depending on their role, some employees may only require ability to view a contract while others may need download access or more. A platform with unlimited storage and no limit to the number of users can also reduce costs.
Pitfall 3: Failing to monitor key dates and other milestones
The problem: The success of any contract lies in an organization’s ability to stay on top of key dates and other milestones. Without an efficient way to stay on top of the timelines set out within a contract – whether for deliverables or renewals or some other aspect – these can take unprepared stakeholders by surprise. Whether the result is missing out on perks such as early renewal discounts or not leaving enough time for a full review of the effectiveness of the original agreement to inform renegotiations, such inefficiencies can be costly.
The fix: Define a plan for monitoring the effectiveness of your contract at the outset: liaise with all stakeholders to determine which metrics to monitor (for example, did the turnaround time for deliverables meet internal needs? If not, you’ll need to consider negotiating changes before you get locked into the same terms) and determine which milestones will require attention through the contract period and when. The next step is finding an efficient system for tracking these dates; a contract management system that offers milestone alerts and customizable reporting features can make these tasks less onerous.
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