According to a recent review by McKinsey, contracts with suppliers and vendors represent the vast majority of companies’ revenues. In fact, within some industries – including utilities, aerospace and food manufacturing – revenues associated with contracts can make up as much as 90 percent of total annual earnings.
With so much riding on these crucial agreements, it follows that any gap in the contract management process can be a costly one. Mismanaged documents reduce efficiencies and increase risks which can impact businesses’ bottom line.
Just how costly is the problem? The McKinsey research estimates that between sub-optimal contracts and poor contract management processes, companies experience an erosion of value equal to nine percent of their annual revenues, on average. “For Fortune’s 2016 Global 500 companies, this nine percent would have equaled $2.5 trillion in value,” says the report.
How can your business reduce this outflow of funds? Here are four common problems that can arise during the contract management process, along with some suggestions on how to fix them.
Problem 1: You’re not engaging stakeholders in the process (or not engaging them at the right time)
Effective contract management requires internal collaboration between the people who will be using said contracts and the contract management team. Done right, this collaboration results in contracts that effectively represent the user’s needs but that also leverage the deep contract-related expertise that lies within the contract management team.
Two key challenges that often stand in the way of this effective collaboration are communication and visibility. When you consider that only one-quarter of organizations have a centralized automated contract management solution, it’s easy to see why these problems occur. Without consolidated storage - either online or offline - tracking comments, revisions, and changes can be difficult and time-consuming.
Additionally, when contracts are handled manually, they are not always accessible to everyone who needs them. That makes involving the right team members a top priority, especially when relying on a single gatekeeper to dole out information.
With contract management software, you can automate the task of looping in stakeholders, setting up notifications around key dates such as deliveries and renewals, and enabling access to contracts for relevant stakeholders. The right contract management solution will also provide access to important information your team may need throughout the contract lifecycle, from pre-contracting through execution.
Problem 2: People aren’t using the right contracts
Because contracts evolve over time, laws and jurisdictions may change, and unfavorable terms may be dropped or amended. The continually changing nature of the law means your organization likely drafts numerous versions of the same types of agreement over the years. If employees are entering into agreements using outdated versions of contracts, then not only is your business not benefitting from the work that has gone into creating better-performing agreements, but they are also introducing risks.
While it would be inefficient, and even unnecessary, to communicate each and every change in standard contracts to employees, it’s essential to ensure that the right versions are being utilized. One way to manage this challenge is to set up an online contract repository. In that repository, your team will be able to find clearly-marked versions of the most up-to-date versions of standard contract types. Setting up a contract library has the added benefit of providing a starting point for drafting agreements for more unique arrangements, speeding up the contract creation and ratification process.
Problem 3: Too many contracts stall without getting signed
While there are lots of reasons agreements don’t come to fruition, lack of momentum resulting from a delay in acquiring a contract signature can be easy to fix. Signature delays don't happen because of anything inherently wrong in the agreement. Instead, the manual work associated with acquiring the signature – printing, mailing, retrieval, etc. – means the document can languish on someone’s desk unsigned.
When the ratification process stalls, it can delay the anticipated deliveries and benefits of the said agreement. Wait too long, and the contract may never get signed at all. That's why it's critical to streamline and simplify the signature process. Thankfully, many contract management software incorporates e-signature tools. With e-signature, parties sign contracts instantly from any device, allowing you to strike while the iron is hot.
Problem 4: You have no smooth post-award handover process
As mentioned above, a key challenge inherent to corporate contracts is multiple stakeholders. Deal teams, management teams, and contract managers are all involved in the entire contract management portfolio. Some are engaged before an agreement is signed, some are brought in after. But all too often there is no clear path to transitioning from pre-contracting drafting and negotiation to post-award execution and monitoring.
Having a handover plan is crucial to ensuring that contracts fulfill their intended functions. While non-standard agreements may require several in-person meetings between parties to determine what an effective handover looks like, the process may be more standard for frequently-used contract types.
One way to standardize and streamline the ratification process involves automation. Contract management software facilitates automation with several tools, including tags and metadata. To use these tools, it's important to start by identifying key milestones common to standard agreements and adding them to the metadata for that contract type at the template level. When creating a new agreement using that template, you won’t have to set up each action item from scratch. While you will need to enter the dates and team members associated with each new individual contract, the metadata will act as your roadmap, simplifying and improving your entire contract management process.