Why You Need a Contract Management System

Every company is on a unique growth trajectory and has to deal with distinct challenges and advantages. So it's impossible to pinpoint the exact moment when the company should seriously consider investing in a contract management system.

There are, however, a couple of signs that clearly show that your company will benefit from a more formalised, technology-driven approach to contract management.

In this article, we will discuss six contract-related problems which most growing companies have to face at one time or another. We will also show how a contract management system could provide a viable solution for each.

Sign 1: Chaotic Growth

I'm sure this is a problem that almost all companies wished they had—that of growing too fast!

When a company is in a growth phase, there is an exciting energy in the air. You're on a hiring spree, revenues are up, and customers are trampling your doorstep.

But a growth windfall does come with its own unique set of challenges. For one thing, managing a whole stable of vendors gets more and more difficult, the bigger your company gets.  

Contract management isn't much of an issue for small companies. You only have a handful of contracts  to manage, and it's still possible to track vendor performance manually. At this point, it doesn't make much financial sense to invest in a fulfilling contract management suite.

Furthermore, small businesses usually don't have the luxury of hiring staff members dedicated  exclusively to vendor  contract management.

But as the business grows,  it becomes more and more difficult to keep all these balls in the air. You find yourself spending way too much on certain vendor contracts, while underutilizing others.

You simply have too many vendors to give each the personal attention that is needed for managing them properly.

In fact, you don't really know who all your vendors are anymore. If you did an audit over your vendor spend at this point, you would be quite surprised where all the money went—and not in a good way either.

Which means you've reached a turning point where you need a contract management system to help you bring order to this chaos before things get really out of hand.

When is it absolutely essential for your business to make the switch? There aren't any clear guidelines, and the circumstances for different companies will vary wildly.

Some companies that only manage 25 vendors or less have reported benefitting tremendously from a contract management system.

What we would recommend is switching to a contract management system sooner rather than later. This will prevent your business from running into serious contract management problems down the line that could stifle your growth.

You can always start with a basic contract management system to handle your most crucial contract related tasks and upgrade to a more comprehensive solution  down the line.

But it isn't only your business risk that will grow, but the opportunity for further growth as well.

As your business grows, you will initiate many business relationships—many of which will have to be formalised in a contract. You will also be faced with many scenarios where you will have to make use of  vendors to close the gaps in your business operations. Vendors will also help you take hold of opportunities in the market and give your business a chance to grow.

However, as you sign more contracts with more parties, you expose your company to more vendor-related risk. To manage vendors effectively, you have to keep a tight rein on their contracts.

Which means that using effective contract management software isn't a luxury anymore—it becomes crucial to your very survival as a company.

Sign 2: Chaotic Contract Renewals

One of the biggest mistakes you can make in contract management is to miss a key renewal date. This can have far ranging implications for your business—especially if the contract is with a strategic vendor.

Some contracts have auto-renewal clauses that instantly extend a contract with predetermined amendments to your existing agreement.

But what if you didn't want to renew that contract? Or you wanted to renegotiate the terms of the contract before it automatically renewed? You don't want to be pushed into a corner just because you missed an important renewal date.

And if an important contract lapses because you didn't pay proper attention to the specific terms of that agreement, you might expose your business to unnecessary risk.

Unfortunately, mistakes like these happen all too often—and become almost inevitable if you don't have  systems in place that handle all contractual matters from a centralised hub.

It is not uncommon for the person or team that originally negotiated the contract with a vendor to leave the company before the contract expires.

They might have stored details about the  contract renewal terms in an email account—an account that was never transferred to someone else before they left.

Which means that the contract will either lapse or automatically renew before anyone catches the mistake.

This is the danger of letting important contracts pass through employee email accounts, or languish on desktop computers, in spreadsheets, or dusty filing cabinets. Somewhere, somehow, someone is going to slip up and subject your company to unnecessary risk.

In order to prevent any of these scenarios from damaging your company, you have to switch to a dedicated contract management system.

Sign 3: Chaotic Contract Administration

The third sign is if the majority of your legal team's duties is made up of administrative tasks.

This is unfortunately what happens to many legal departments in big companies, and is something that can easily be verified. Have the legal team log their work hours over a period of time. Have them specifically note how much of their time is used to perform tasks that actually require a law degree.

If most of their time is spent doing admin work, you have a problem.

In smaller companies, the legal team is usually tasked with taking care of all contract-related activities. Which means that other departments send any new contracts or contract amendments to them for verification. Once these contracts are signed, it then becomes the legal team's responsibility to administer the contracts.

This might seem like a good arrangement at first, because isn't that what the legal team is for?

The problem is that, as the company grows, so will the number of contracts that have to be managed. And if the legal team isn't expanded accordingly, they will end up drowning in administering contracts.

This type of work doesn't actually require any legal expertise. What it mostly entails is doing the legwork of getting everyone to sign on the dotted line and giving their feedback during the contract drafting phase.

These are exactly the kinds of functions where a contraction management solution is designed to shine.

If your legal team spends more than about a quarter of their time on legal admin work, your company would benefit greatly by upgrading to technology that can manage those tasks on their behalf.

Legal personnel usually earn higher salaries than the rest of your team. It is worth your while letting technology handle all the mundane tasks so that they can do the work they're actually paid for.

Sign 4: Chaotic Investor Funding

There comes a time in any business where you have to seek further investment and funding in order to keep on growing.

When you approach potential investors, those investors will want to get an overview of all the company's business relationships. They will want to know how much money is being spent on vendors, and what returns are being generated from those partnerships.

In other words, potential investors will want to look over your vendor contracts. This will give them further insight  into your company's financial position and point the way to possible restructuring.

Even if a company doesn't seek funding, this type of information is still invaluable for solid, data-driven decision making. It can also be used to streamline the company's operations.

Better insights into your company's vendor relationships can be used to optimise your supply chain and boost profitability.

Sign 5: Impending Compliance Issues

Often there are major shifts in the market brought about by new government initiatives. Which means that all companies have to make the necessary arrangements to comply with the upcoming legislation.

A good example here is the European Union's drive to safeguard user's data and privacy online. The effect of this legislation will be that f all companies with an online presence in the EU will have changes how they treat user data.

This type of legislation has a ripple effect through a company's operations. You are also responsible to ensure that all your vendors are compliant with the legislation. Furthermore,  you have to track their compliance status through the duration of your contract.

A contract management system  will automatically track the compliance status of your vendors, reappraising their status at periodic intervals. Which means that the technology will minimise your  exposure to the risk of non-compliance from one of your vendors.

With the right technology in place, it will become a lot easier to track the compliance of all your vendors and prevent an unforeseen regulation breach.

Sign 6: Impending Chaos in your Legal Team

One of the most crucial aspects of effective vendor management is maintaining strong working relationships with all your vendors. Which means that when a critical member of your staff leaves the company, you don't want strategic vendor relationships to be harmed.

This might not be a current problem your company has to face. Nevertheless, it would be prudent to make the necessary provisions for when a senior member of your legal team should seek greener pastures elsewhere.

To set you on the right track, take a relationship with an important, strategic vendor and answer the following questions:

• When you think about your interactions with the vendor, who is the go-to person on their side that keeps the relationship going?
• Who is the key team member on your side who maintains contact with them?
• Is there an alternative person on your side who will be able to fill in for them in a pinch?
• If there should arise some kind of misunderstanding with the vendor, do you know the right person on their side to contact to resolve the issue?
• Do you recall the last time you had a meeting with that vendor's team? Who else from their team attended that meeting?

You might not know the answers to these types of questions yet. But you should find out the answers  if you want to maintain a strong, lasting connection with that vendor.

Otherwise, if a key individual on your team left the company, you might be left in a difficult predicament. You have to make arrangements so that you will be able to bridge this type of transition without any damage to your partnership.

Because if this is really one of your strategic vendors, you cannot risk your entire relationship hanging on a single member of your team.

A contract management system will be able to record key contact information for different members of your vendors' teams. It will store the minutes from all your meetings. It will also keep a record of all other vendor interactions and performance reviews.

Which means that the system will be able to show you instantly which members of your team carry too much responsibility in maintaining good vendor relations.
You will also be able to see how you have to distribute your personal resources so that no vendor relationship can be scuttled by a single individual.

This will create a culture of stability and future-proof you for the inevitable event that you lose a key member of your team.  

Conclusion

Making a transition to new technology is always a big commitment. When you decide to switch your company to a contract management system, it will change the fundamental way in which your legal team operates.

Nevertheless, the benefits of this type of technology are immense.

Besides the managerial benefits noted in the rest of the article, the technology will also give you access to automatic contract generation. You will be able to produce various contracts with the click of a button. These might range from something simple like an NDA to complex contracts  such as approval agreements that have to go through multiple levels of management.

Which means you will be able to do a lot more legal work without having to expand your existing legal team.

The goal of this article was to highlight scenarios that show that your company needs to upgrade to a contract management system. Ultimately, it will fall to your management and legal teams to decide when it's the appropriate time to make this shift.

But the signposts in this article will help you analyse the status of your business and help your team make an appropriate decision.