Contract Management Services: Basics and Best Practices
Contract Management Software
Anyone involved in contract management workflow needs to learn the basics first. At its simplest, contract management is about tracking performance and addressing any issues throughout the duration of the contract. A report from the Journal of Contract Management found that 71% of companies misplaced 10% of their contracts. The International Association for Contract and Commercial Management (IACCM) suggested that contract management services and new technology could spark a contract management revolution, but only if businesses are ready to fully embrace the new tech's potential.
In this article, we'll discuss some of the risk management and cost-saving benefits of effective contract management, and look at how contract management services can dramatically improve your ability to control your contract portfolio.
What is Contract Management?
Contract management refers to reviews, analyses, and other measures that help keep contracts on track throughout the contract lifecycle. Many people may first think of contract drafting, negotiation, and signing as the critical phases of contract management, but contract management is actually the work that starts once the contract has been signed.
Because contracts set the terms for a future agreement between the signing parties, it’s important to conduct periodic reviews to make sure all terms are being honored. General counsel may be particularly concerned with examining the legal boundaries of the contract and catching potential breaches of contracts or liabilities. They may also need to update a contract during the term if new compliance regulations must be included. Other contract managers and administrators may use contract reviews to assess spending or other matters.
One IACCM Benchmarking Study indicated that monitoring compliance remains a primary focus for contract management. Improving the contract tracking and review process within an organization plays a significant role in minimizing compliance risks and helping leaders prepare for stronger negotiation at renewal.
Effective contract management also plays an essential role minimizing risk and controlling waste of resources in the event of a merger or company acquisition. Acquiring a startup that has a significant number of high-risk agreements, or simply lacks the resources and structure needed to achieve visibility into their contract portfolio, presents major legal and financial risks to your business. Additionally, not having an effective contract management process in place during a merger can make it next to impossible to adequately review the hundreds or thousands of agreements you’ll inherit as a result of the transaction.
An effective contract management process means that your contracts are located in a centralized location, organized, secure, and can be reported on easily. People tasked with managing contracts need to be able to locate files quickly, understand how a contract is serving the organization, and identify strategies to help the business operate more effectively.
Dedicated contract management services can make all of these tasks simple and straightforward.
What are Contract Management Services?
Contract management services are solutions designed to facilitate the organization, compliance, and reporting needed to keep thousands of contracts operating smoothly. These services run the gamut in terms of cost and complexity, but some of the most important features any effective contract lifecycle management software plan should offer include:
Secure storage system with the capacity to easily store all of your contracts (and ideally many more, so that the system is able to grow with your business). Cloud-based contract repositories on secured servers are common.
Electronic signature or similar tools to make the signing process quick and easy. Electronic signature features also improve transparency and visibility into the signing process so you know who signed the agreement when.
Security measures to keep sensitive documents in the right hands. These features may include user authentication, digital watermarks, administrative capability to limit user access, and more.
Automated reminders and report generation. Rather than tracking renewal dates and creating reports manually, users should be able to utilize automated alerts as reminders of approaching milestones. The Aberdeen Group report found that organizations operating at Best-in-Class standards reported that 85% of purchases were compliant with contracts, compared to 30% in other organizations. This contributed toward an average yearly savings of 12.8% for Best-in-Class companies, compared to 5.6% for others.
Advanced and/or customizable search options to make locating and comparing documents simple. Contract management services should help leadership identify potential bottlenecks or other issues from a high-level perspective. Ideally, these insights will be available early enough for leadership to make the tactical decisions needed to prevent problems, rather than have to fix them when they’ve already occurred.
How do Contract Management Services Impact the Contract Lifecycle?
A common mistake in contract management is leaving contracts untouched for too long. A missed deadline or unnoticed issue can quickly rack up costs for the company. Some reports indicate that organizations lose 9.2% of annual revenue to unsatisfactory contracts. Other sources warn that looking at lost revenue, without considering lost profits as well, doesn’t capture the true impact of bad contracts on a company. Contract management services can help legal teams stay on top of:
Contract communications, revisions, and updates. A shared interface enables collaborative contract management and eliminates the need to email or physically send documents back and forth. By reviewing the audit log, admins can see which users have viewed or edited a document. Electronic signatures are a legally binding option that can save time and add convenience.
Intermediate audits and milestones. Reviewing contracts regularly throughout their term keeps you on top of deadlines, performance markers, potential discount or rebate options, and more. These reviews are a chance to correct problems at an early stage and to collect any eligible rewards for high performance.
Contract renewal and renegotiation. Preparing in advance of a contract renewal period is a sound strategy to save money for the company. Taking advantage of an opportunity to renegotiate, instead of missing a deadline and finding yourself locked into an auto-renewal agreement, is a key way to pursue more favorable terms. If ending a contract is the best option, initiating that process in a timely fashion can save money and hassle.
Tips for Getting Started with Contract Management Services
Gather all of your contracts. The first thing you should do when preparing to take advantage of contract management services is to locate and gather all contracts across your organization. If you don’t know where your contracts are currently located, or you aren’t able to access all of them, it will be difficult to reap the benefits of a centralized contract repository, one of the foundational components of a CLM software. If necessary, work with colleagues across your company to compile all corporate agreements into one location so you can easily upload your contracts to the repository once you have a contract management service in place.
Talk to key stakeholders. Before getting too far down the road with any contract management service, you’ll want to be sure you have input from stakeholders who will either be impacted by the new process or have a voice in determining how contract management success will be measured. It’s important that teams are on the same page as far as goals and expectations before investing in a service that often requires significant time and financial resources to implement.
Identify and prioritize your challenges and opportunities. Contract management services vary significantly from one provider to the next, and different solutions specialize in solving for various stages of the contract lifecycle. Because of these differences, identifying your greatest challenges and opportunities and searching for services that are best equipped to address those specific areas will prevent your team from wasting money on the wrong solution.
Research and compare contract management services. As mentioned, contract management services can vary greatly as far as features, cost, complexity, and more. By identifying the types of solutions that are designed to solve your highest priority challenges, you can narrow down your search and expedite the process of finding a contract management service to optimize your processes and help your team operate more efficiently.
Developing a structured contract management process will allow your team to effectively monitor corporate agreements throughout the contract lifecycle, which can help reduce organizational risk and unnecessary spending, among other benefits. Contract management services can automate and streamline various aspects of the process, enabling legal teams and contract managers to spend less time on tedious, repetitive tasks, and more time focused on higher value work.
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