Best Practices in Contract Management: Are You Using Them?
Is your organization committed to adopting contract management best practices? Evaluate how well your company upholds the following standards, and you may find areas to develop more effective processes that lead to improved contract outcomes.
Standardize Contract Creation
Effective contract management can lead to more efficient work processes. The legal department can achieve significant improvements by standardizing and pre-approving as much contract language as possible. For many businesses, a standard set of terms, conditions, and legal language applies to a large subset of contracts. Using identical, pre-approved language enables general counsel to reduce review time and concentrate on the specific sections unique to the contract in question.
Set Contract Management KPIs
Articulating contract management KPIs offers a more transparent set of goals for the entire organization. It’s easier for department leaders to develop practices that generate results when they know what results to aim for. It’s also possible that unmet KPIs may reveal leaking costs or productivity issues that were harder to spot without a clear benchmark to set the standard.
Balance Storage Security and Visibility Requirements
The best contract management approach meets two objectives that, at first glance, appear to be at odds: Keep sensitive documents secure, and make contract access quick and easy.
The solution is to use a secure storage system with robust verification of user identity. Keeping unauthorized users out protects confidential documents. A centralized system simplifies contract organization and access. System administrators can also create different levels of access, so users only see files they’re authorized to view.
Track Contract Approval Time
Streamlining the contract approval process benefits the organization in several ways. First, the organization gets the advantage of receiving contracted goods and services sooner, which can save money and hassle. Second, a shorter cycle from initial conversations to finalized agreement contributes toward a positive relationship by adding convenience on both sides. Finally, organizations that are quicker and more responsive may have an easier time seizing opportunities with relatively tight turnaround times.
Automate Contract Communications
If you’re still emailing or shipping contracts back and forth, you’re following an outdated practice that can cost time and money. A central, cloud-based repository allows multiple points of contact to access contract files at the same time. Collaborative discussion is easier because all parties access the same version immediately. By setting automated reminders to alert essential parties to review the document, you eliminate the risk of forgetting one party’s address on a group email reminder.
Cost-saving is one of the top goals companies have for their contract management. Anything from more informed negotiation, better supervision of contract performance, and lower incidence of auto-renewal can save costs.
Make financial metrics a dedicated part of routine contract management reviews. Include financial officers on a regular schedule that suits the company’s needs to compare contract performance to the organization’s budget expectations.
Conduct Regular Compliance Reviews
The other essential area to check in routine contract reviews is compliance. Plan to review two major categories of compliance: Federal, state, and other legal regulations; and compliance to the contract itself.
Most companies must adhere to a set of federal, industry, and other external regulations. Failure to comply results in fines and penalties. In some cases, a company’s business license may be at stake if there’s a serious enough breach of compliance. Protecting the company against this risk is a core responsibility of contract management.
Tracking compliance to the terms of the contract itself is also critical. A case study in a report from the Cullen Group described a federal government department that found that a provider on a multi-year contract was only 40% compliant. Missed work cost the organization $200,000 per year. An independent audit firm determined that the government department was the root cause, for not following up with the provider or taking other steps to manage the contract competently.
Resolve Disputes Promptly
Thorough reviews are only as good as the action the organization takes to resolve any problems the contract managers discover. In the case study from the previous section, the government department finally did appoint a seven-person contract management team, four years into a five-year contract. Imagine the cost savings and performance improvement that could have been captured with a more proactive response!
Anticipate Evolving Business Needs
A business’ needs at contract signing won’t necessarily remain the same five or ten years down the road. Successful contract management takes a long-term view at the organization’s demands and capacities. Make a plan to address fluctuations in demand and upcoming changes to the business that could affect current contract relationships.
“Scope creep,” for example, is an infamous problem for both sides of a contract agreement. Providers may reach a point where they struggle to scale to new requirements. Financial officers at the organization may not know what costs to factor into the operating budget without a clear reassessment.
Compare Contract Trends Against Market Insights
Another benefit of consistent contract review is that your company is better positioned for favorable negotiation. Make a practice of tracking available market intelligence on vendor pricing, technological developments, and market standards that apply to vendor and client relationships. During the negotiation window before contract renewal, review the contract to see if terms are still a competitive offer in the current market.
The Master Checklist for Contract Review & Management
Tips and best practices for a successful contract management process.
6 Tips for Getting Started with a Document Repository