What is Effective Contract Management?

Good contract management can have a huge effect on the success of a business. When contracts are managed properly they become stimulants to business growth. But when they are mismanaged, contracts will only encumber a business with unnecessary risk.

In other words, contract management should not simply be seen as an administrative duty conducted in a dusty office somewhere—it has very real consequences to the bottom line of your business.

In fact, some research indicates that mismanaged contracts produce a hit of over 9% to the annual revenue of businesses. Which means that effective contract management isn't a nice-to-have, it's crucial to the survival of your company.

What is contract management?

Simply put, contract management is the process of stewarding contracts from the point of their creation, right through their execution.

Contracts are documents that are crucial to the running of your business, because they define all your most important business relationships—those with your customers, employees, partners, vendors, and contractors. They stipulate the terms of your relationship and interactions with these parties.

So what is effective contract management?  It is setting up a system of managing your contracts in such a way that they help, not hinder, your business to function. This would include a system of monitoring the execution of the contracts and measuring them against predetermined rights and obligations.

Every contract includes critical deadlines such as renewal dates. Good contract management tracks these important dates and gives them the appropriate level of expertise and attention. In this way, a critical contract renewal date will never slip past unawares.

Contract management also ensures that all vendors comply with relevant regulation and established business practices and keep the appropriate certification up to date.

Benefits of effective contract management

Effective contract management is crucial to the success of any business and will have the following positive outcomes:

1. Handle contracts efficiently

When contract management is conducted effectively, your  organisation will handle contracts more efficiently.

One way to achieve this aim is through automation, where certain repetitive contractual tasks can be inserted into preprogrammed workflows. For example, the system could create a depository of standard clauses that keep appearing in contracts. This will speed up the contract creation process.

The system will also ensure that all contracts are stored in a centralised repository that is both searchable and secure. Other repetitive tasks can also be automated, which will both improve your contract handling efficiency and minimise human error.

2. Minimise contract-related risk

A hallmark of effective contract management is risk mitigation. Which means that the execution of all contacts are tracked to ensure that all parties fulfil their obligations as stipulated in the terms of the contract.

These obligations would include important stipulations such as keeping predetermined deadlines, providing the exact products and services agreed upon, as well as the terms of performance verification and payment. The result is that vendor risk towards your company is reduced.

Another way that effective contract management can minimise vendor risk, is through monitoring vendor compliance.

Another way that good contract management mitigates risk is by keeping company contracts strictly confidential. Most contracts contain important and sensitive company information that you would not want to be shared with competitors or other vendors. This is why it’s important to ensure that only authorised stakeholders have access to specific contracts. This also ensures that privacy regulations aren't breached.

3. Minimise costs

Although it takes time and resources to implement, effective contract management will end up saving you money in the long run. When your contract management runs as a well-oiled machine, contract creation will be faster and you will save money on outside counsel.

Further cost-savings can be achieved by correctly handling every contract renewal. For instance, with effective contract management you will always know which contracts to renew and which to let expire if it is determined that it's in your best interests to do so.

4. Build long-lasting legal relationships

One of the main aims of effective contract management is to ensure that you always meet all your contractual obligations to your partners and vendors. This will not only allow you to avoid the legal costs and risk should you be sued, but will also save you from suffering reputationally.

If you make a habit of breaking your contracts, vendors and partners will be wary of doing business with you. But if you conscientiously keep the stipulations of your contracts, you will build long-lasting relationships with satisfied business partners.

5. Gain valuable business insight

Many companies don't realise the treasure trove of data that is stored in their contracts. Contracts aren't simply records of rights of obligations, but contain useful data.

When you input these contracts into an effective contract management software platform, the system will be able to extract valuable information and business insight from contracts.

Spreadsheets are ill-equipped to provide this level of insight, since they are usually used to store superficial information such as the active status of contracts, the amounts involved, as well as milestone dates.

A contract management system will be able to shed light on the process of how you negotiate and then create contracts, as well as the way you execute and manage them.

The effect of poor contract management

When you don't manage your contracts properly, it can cause lost revenue for your company.

When the contract creation process is inefficient, the cost of producing those contracts will skyrocket. It is expensive to go through an arduous negotiation process or to delay the contract approval process.

A slow contracting process will also make it impossible to be a fast mover in the marketplace. Over half of all business leaders report that slow contracting processes have caused them to miss out on promising opportunities.

You need a system that will automatically track deadlines and send out notifications to the relevant stakeholders to take appropriate action. Otherwise, these deadlines will fly past, and catch everyone unawares. This can expose your company to unnecessary risk. Even if someone tracks deadlines on a spreadsheet, there will always be some deadlines that speed by unnoticed.

It will also hamper the communication with your partners, leading to ineffective collaboration with them. A business can scarcely be run profitably without effective collaboration—both internally and externally. Emails are not always effective at nurturing effective communication, as some information always seems to fall through the cracks.

If the electronic handling of contracts aren’t monitored effectively, parties will be able to make changes to a contract without tracking changes. This can lead to confusion and repeated work—while some critical changes will go unnoticed until it's too late.

At the very least, different people will end up working on conflicting versions of the same contract, which will slow up the contract generation process considerably.

Principles of effective contract management

1. Create standardised agreements

Creating a contract from the blank page is an extremely slow process. A much better approach is to have a repository of standardised contract clauses and terms. This means that a contract can be cobbled together from pre-approved snippets, which will speed up the whole process.

There is an added benefit that other groups in the company will be able to create draft contracts without waiting on legal to do the job.

Contracts based on a preset template are also easier to verify and edit, since you only really have to pay attention to the new clauses in the contract.

2. Use a centralised contract depository

To effectively manage your contracts, they must be stored in a location that is searchable for easy document retrieval. It is also crucial that this document repository be secure, especially if the contract undergoes litigation.

When contrasts are stored in a central depository, it allows you to implement stringent legal record management. For example, each contract  should be assigned the following key data points:

• The person responsible for approving the agreement.
• An indicator that points to the final version of the approved agreement.
• Finally, data regarding the document's creation and approval. For example, the document could be marked with the exact date and time when it was approved.
  

3. Build contract management workflows

One of the ways to improve the efficiency of your contract management, is to define specific contract workflows and then to automate them with the use of software.

For example, if the legal department receives a request for a new contract, the workflow would be to gather the appropriate data, running the contracts through the relevant departmental reviews, taking the contract through a negotiation phase, and then finally stewarding the execution of the contract.

The system will take the contracts through the designated steps of the workflow automatically. This will reduce the administrative burden of managing contracts.

It will also ensure that all of the contract management steps are followed, in the correct order, and that none of the steps are left out. The added benefit is that you will be able to track the progress on all  contracts.

The system can be set up to monitor the contract for key dates that will automatically inform the appropriate stakeholders to perform the appropriate actions within predetermined deadlines.

The system can also introduce checkpoints. If a step isn't completed within the right time frame, the process will be escalated to management. This will reduce the contract processing times and maintain the contract processing momentum.

4. Institute document submission protocols

When you have a document repository ready and running, you need to specify the way documents need to be submitted into the repository, as well as the data that have to accompany every submission.

Submission protocols bring order and data integrity to your document handling. Instead of people sending emails to the legal department with attached documents, they have to submit documents through a dedicated portal. Certain fields can then be mandated at the time of submission to ensure data consistency and accuracy.

You will also be able to mandate specific compliance certifications when appropriate. This puts a lot of the administrative duties for compliance on the submission agent, rather than on legal.

For certificates that need to be renewed as specified periods, the system will be able to send out reminders to ensure that all certificates are kept up to date in a timeous fashion.

5. Automate the contract request process

With a good contract management system, you will be able to take charge of the contract request processes. For example, you will be able to create separate portals for vendors and employees to initiate any contract work.

These can be integrated with your contract workflows to ensure  that the right person is given the responsibility for each contract task. In this way, all contractual work can be done securely since access to any specific contract will only be granted to a limited number of people.

This is another measure that will minimise the administrative burden on your legal team. Since the intake process is standardised and automated, they will have fewer reasons to intervene manually.

The relevant stakeholders will be able to log into the portals and check on the progress of their contracts, further saving time for the legal team.

6. Nurture collaboration with legal

In most organisations, all legal work is carried out by a legal team. Even so, to do their work properly, the legal team needs to collaborate with the relevant stakeholders in the different company departments as well as with external partners when appropriate.

Legal shouldn't become a repository of information that no one can access when they need it. Their goal is to ensure compliance across your entire organisation and minimise contract risk while simultaneously making the right information available to the right parties at the right times.

The answer is the use of standardised workflows and pre-approved contract templates. This ensures that legal doesn't have to do all the legal work that carries on in the company.

The system can specifically be set up to ensure that the legal department approves documents before they go to external parties for comment and approval.

The system will enable you to make contracts visible to the relevant parties without compromising confidentiality.

The software will enable you to strike a balance between sharing information and keeping a tight control of who has access to that information. This is done by allocating access permissions to specific records, at specific periods in contract workflows.

7. Limit document access

Finally, as was already mentioned in other parts of this section, it's important to enforce strict access control over all documents. You want to strike the right balance between granting visibility into the contracting processes and limiting permission to who can read privileged information.

There are many benefits to implementing secure document access. But something that is often overlooked is that it will actually allow you to open up contract access to more people in your organisation. This will improve company-wide engagement in the contracting processes and increase awareness of all the agreements being negotiated company wide.

With wider input in the contract creation and negotiation processes, you will be able to pick up on key details that might have been overlooked by limited teams and employee involvement.

Conclusion

The main aim of good contract management is to ensure that you always fulfil all obligations stipulated in your contracts. With good contract management, a key deadline will never go by unawares.

Key employees will always be informed with regards to the terms and conditions stipulated in a vendor agreement—so that they will be able to check the product or service quality of a vendor, or if they kept to predetermine delivery schedules, or if vendors have been paid according to the conditions set in the contract.

You will also properly manage the renewal process for every contract. Contracts will be renewed on time, or cancelled before unfavourable contracts are automatically renewed. If a contract is no longer in your best interest, you will be able to cancel it in time.

In other words, effective contract management will save you money and lower contract risk. With the right contract management systems in place, the contract creation process will be sped up, and you will save legal fees spent on outside counsel.