Best Practices in Contract Management

One of the main goals of any legal team is to improve the efficiency of their contracting activities. There are various best practices related to contract management that will allow legal teams to reach this goal.

In this article we will discuss various means to improve the contracting  efficiency of your business. These best practices are practical steps that you can implement in your legal team straight away.

1. Centralise your documents handling

One of the main reasons for analysing vendor contracts is to generate actionable data that can be used to make the correct decisions when it comes to selecting and retaining vendors.

But analysing contracts is near impossible if all the contracts you signed with vendors over the years are scattered across your entire organisation, or are hidden in a filing cabinet somewhere. Even if the contracts are digitised and the attached metadata is incomplete, erroneous or missing—or there are duplicate versions for a single contract—it will be difficult to get a clear picture of your vendor base from those contracts.

The result will be that you will only have limited information available on your vendors that are readily available to decision-makers.

You will also be unaware of exactly how much risk you are exposed to through your vendor agreements. When you don't know how much you've spent with a certain vendor, or know precisely the obligations you have towards the vendor, you might be exposing your business to unnecessary risk and the threat of disruption. This could lead to unpredicted legal problems that will probably have serious financial consequences down the line.

This is why it's so valuable to have a centralised depository for all your vendor contracts. In fact, it’s probably the most effective change you can make to improve your vendor contract management.

If your vendor contract storage is handled in a haphazard way, you won't have easy access to a complete set of information on all your vendors. This will lead to fragmented information that can cause  problems in your vendor relationships.

Many companies rely on a hodge-podge of different storage and sorting platforms to hold their vendor contract information. So, for example, the contract information for some vendors are stored in a spreadsheet somewhere, while other information is held in NetSuite, while the older contracts are still stored in a filing cabinet somewhere. The result is that there is no single repository that can give a complete picture of all your vendor agreements.

Make it a top priority to create a centralised repository of all your vendor contracts and information. You need a secure location where all the vendor agreements, as well as all pertinent information about your vendors can be stored. You also need this information in a single location, so that the software will be able to process all of this data into actionable data—easily accessed in a dashboard or automatically generated reports.

To make the best possible decisions with regards to your vendors, your managers and procuring staff need to get the full picture of all your vendor agreements. You need a centralised system that stores all current contracts and keeps track of all vendor interactions.

With this complete record in hand, you will be able to make the best decisions with regards to signing up new vendors, or renewing existing vendor agreements.

With the right vendor management system in place, you will have access to an easily accessible document repository. The system will also be able to generate aggregated reports on all your vendors, or on any specific vendor.

2. Choose the right key performance indicators (KPIs)

As in all parts of a modern business, legal departments are also under pressure to produce more with fewer resources. They have to earn their right to exist in the organisation.

One way to achieve this goal is to become proactive in their approach. This means that instead of trying to block legal threats in a reactive fashion, a legal team needs to devise forward-looking strategies that will improve revenue and minimise risk.

In other words, the legal department has to set Key Performance Indicators (KPIs) of its own. In order for KPIs to be useful, however, they cannot just be for show. They have to measure metrics that will have a meaningful impact on the running of the department as a whole.

The goal of KPIs is to improve operations. For example, a legal department might set a KPI to get contracts faster into the hands of all relevant stakeholders. This goal can then be divided into contributing KPIs—for example the goal to shorten contract creation and approval times.

Once again, the legal team will benefit in this regard from a good contract management solution. The program will be able to track these KPIs and highlight ways to improve the efficiency of your contracting process.

3. Keep track of contractual obligations

A running business might have to manage thousands of active vendor agreements at any one time. Each of these agreements describe a set of rights and obligations that define the relationship with each vendor.

Keeping track of all these obligations is no simple task. It's not good enough just to sign a contract, file it away, and then forget what it contained. You need to monitor the fulfilment of each contract and ensure that your business is keeping all your obligations with regards to each vendor.

Your contracts have to be stored in such a way that they are readily accessible. It is your duty as an organisation to monitor the execution of each contrack, track its progress, and ensure that you aren't exposing the company to undue legal risk. How are you supposed to track the fulfilment of a contract, if it's impossible to locate?

Furthermore, it’s probably not a good idea to rely on individuals to keep track of all your contractual obligations. People make mistakes—which could end up having serious legal and financial consequences.

Contract management software will keep track of all your contractual obligations. When a certain action is due on your part, the system will send reminders by email or other messaging services that will give you timely warning when a specific action is needed. In this way, you will be sure of meeting all your vendor obligations and meet all requirements when they come due.

4. Upgrade your communications

When you use emails as the exclusive method of communicating contractual information, you run the risk of making human errors. Emails aren’t always the best communication service in a corporate environment.

It’s impossible to keep track of all the information contained in emails sent by hundreds of stakeholders, gathered into countless threads. When a project really gets going, it’s easy for a crucial piece of information to get lost in an email thread or for a crucial stakeholder to be left out of a mailing list.

Consider using a contract management system with lifecycle management capabilities. This software will send out automated notifications when a contract is sent out or is signed, so that the relevant stakeholders can keep track of all contract activity.

5. Implement electronic contract signing

The bane of many legal departments is getting all relevant contracts signed in the most time efficient way possible.

Nowadays, contracts don't have to be signed by hand using ink and paper anymore. There are various electronic signature options available. One example that has gained widespread online acceptance is clickwrap.

The goal of clickwrap and other electronic signature methods is to provide a seamless experience to all your contracting parties. The basic principle of all these signing methods is that contracts can now be signed with an electronic click.

This is especially useful for getting high-volume contracts signed. A good example here would be the Terms and Conditions for a website or online service.

In this way, it's possible to embed the signing of a contract into the transaction flow for all the relevant stakeholders. This reduces the holding times and administrative burden created by paper and PDF contracts.

6. Assign clear ownership to documents

When it comes to electronic contracts, it's important to assign clear ownership to each document. If no-one is held accountable for keeping a document up to date, your information will become fragmented very quickly.

Often when a contract resides on a shared drive, it will undergo multiple revisions undertaken by different individuals. The result is that the ownership of the document becomes unclear. If one of the document editors or creators should leave the company, the document can easily become lost or difficult to verify.

That is why you have to implement a system of strict ownership and accountability on each document. There must also be a system in place that makes it possible to transfer ownership to a different user.

In this way, everyone will know exactly who is responsible for maintaining a document or contract. This will also eliminate duplicate agreements.

Someone will always have clear responsibility for managing the renewal of every contract to ensure that no money or time is wasted in the process.

7. Date stamp all document activities

A crucial contract management best practice is to mandate that all activity on the document be date stamped. All critical dates with regards to contracts must also be captured without exception.

Here are some of the key dates that have to be registered against every contract:

• Each contract should be marked with the date when it will expire. This can be marked as the contract's "valid until" or end date.
• The renewal date for each contract also needs to be clearly marked. This is the date when a decision is necessary whether the contract will be renewed, as well as the renewal terms. This date will mark the start of the renewal period and must always precede the contract's end date.
• Finally, each contract must be marked with a review date. This marks the start date when an internal review of the contract will commence. This is a crucial period during which the original contract is evaluated for its current suitability and future potential—and which must be concluded before the renewal date of the contract. The results of the evaluation will determine whether the contract will be renewed or not.

It often happens that these dates will have to be calculated from the language contained in the contract. For example, some contracts state that it will be valid for a year after it has been signed. So the signature date will be used to determine the renewal and other dates.

The contract will have to be reviewed by human eyes, or perhaps AI tools, to extract the correct date information from the contracts. Usually it won't be necessary for staff members from the legal team to do this work, as it should be fairly straightforward for a properly trained administrative staff member to accomplish.

When you have the correct dates in the system, it will be able to send out automated reminders to the relevant stakeholders when key dates come up to ensure that they take appropriate action in a timely fashion.

8. Create contract renewal workflows

Another contract management best practice is to clearly define the way you would like your contract renewal process to proceed as it flows through the key dates described in the previous section.

The process of reviewing contracts should be clearly defined. Decisions about contract renewals shouldn't be made in a haphazard fashion but should be clearly described.

For example, you might require an internal stakeholder to score a vendor based on predetermined criteria when the review date comes up. There should be guidelines that describe how the vendor's performance with regards to their contractual obligations will be  evaluated. There should also be clear guidelines on how to look for better alternatives for a specific type of vendor in the market, when necessary.

There could be further requirements for this information to be evaluated by a separate party within the organisation who will also make their own recommendations with regards to the renewal of the contract. Once that internal party gives their sign-off, a final decision can be made with regards to the contract.

These procedures should include SLAs that require all of the necessary steps to be taken before a contract can proceed to the following deadline.

After these processes have been defined and documented, they can be automated with the aid of the contract management system.

Conclusion

A contract management system will allow you to implement the best practices outlined in this article. The software makes it possible to create contract workflows and automate several contractual processes that will drastically improve the efficiency of your legal team.

Automation could be as simple as creating a library of pre-approved, standard clauses that reoccur in your contracts. This will improve the speed of contract creation.

A contract management system will be able to store your contracts in a unified, searchable, and secure repository. This will boost the efficiency of your legal team and allow them to automate several of the most repetitive and error-prone contract management tasks.

In this way, your legal team will be able to work more efficiently and increase capacity as your business grows—which is essential in the current fast-paced business climate of increased regulatory scrutiny.