The Importance of Contract Management
The contract management process is vital for any organization, regardless of size. At its most basic, contract management covers three essential elements:
- Overseeing the creation of contracts
- Overseeing the execution of contracts
- Analyzing contracts post-execution
Maximizing the creation, execution, and post-execution elements of contracts can lead to significant operational and financial performance improvements. A recent study conducted by the International Association for Contract and Commercial Management (IACCM) found that organizations that excel at contract management can generate revenue that is, on average, 9.8 times greater per employee. Leveraging contract management systems to increase productivity and reduce risk can deliver outcomes that have a direct impact on the bottom line.
What is Contract Management?
Contract management involves the complete lifespan of contracts, starting from their initial drafting and proceeding through not just their signing but also their vigilant monitoring and, when necessary, their amendment or renewal. And it is not only the signed documents that must be managed, but also the non-signature-life ones in the pre- and post-signing phases.
At its best, contract management goes far beyond the filing of signed documents and requires a strategic rather than purely tactical approach.
Management of contracts in an effective way:
- Makes sure that all involved parties do the things they agreed to do in the contract.
- Spots and reduces possible risks that are present in the contract.
- Makes the contract work better for the company.
- Regulates the company so that it obeys laws and rules that it is supposed to obey.
- Makes the world a better place in which to do business.
The Contract Lifecycle in Brief
Contract management cannot be comprehensively understood without grasping fully the contract lifecycle’s key stages. These are:
- Creation and drafting
- Review and negotiation
- Approval and execution
- Obligation management
- Amendments and changes
- Auditing and reporting
- Renewal, termination, or expiration
Each stage of the lifecycle presents unique challenges and opportunities for optimization. Organizations can derive maximum value from their contracts by implementing best practices across the entire lifecycle.
Essential Steps in Effective Contract Lifecycle Management
Standardize Templates and Processes
- Build a library of suitable, pre-approved contract templates and clauses.
- Assemble a comprehensive list of standardized, approved clauses to ensure consistency.
Ensure a Clear Workflow
- Define a clear and structured workflow for creation, review, and approval.
- Use reliable tools for version control to ensure the latest templates and versions are always used.
Improve Workflow with Suitable Tools and Processes
- Implement tools that enhance workflow efficiency and visibility.
- Store all contracts in a centralized and secure location.
- Ensure contracts are easily searchable and retrievable.
- Control access to sensitive information.
Automate Where Possible
- Utilize software to automate repetitive and routine tasks.
- Set automated reminders for important dates, deadlines, and milestones.
- Implement e-signature tools to facilitate faster and easier signing processes.
Monitor Performance and Obligations
- Clearly define and monitor key performance indicators (KPIs).
- Set up systems to track performance against these KPIs.
- Regularly review performance and address any issues promptly.
Conduct Consistent Reviews
- Perform regular audits to ensure compliance and reveal opportunities for improvement.
- Review language for consistency and alignment with organizational goals.
- Evaluate the overall condition of the portfolio to maintain high standards.
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Common Mistakes and How to Avoid Them
Even organizations with established processes can encounter common pitfalls:
- Decentralized storage: Creates inefficiencies and increases the risk of lost documents. Solution: Implement a centralized repository.
- Over-reliance on manual processes: Time-consuming and prone to errors. Solution: Adopt software to automate key tasks.
- Lack of visibility: Without proper tracking, organizations can easily lose sight of performance and obligations. Solution: Implement robust reporting and dashboard tools.
- Inconsistent language: Increases legal risks and complicates management. Solution: Use pre-approved templates and clauses.
- Inadequate training: Leads to mistakes and inefficiencies. Solution: Invest in comprehensive training programs.
Leveraging Technology for Smarter Processes
Specialized Software
Software designed for specific industries can address unique challenges. These solutions typically offer:
- Centralized repositories
- Workflow automation
- Document management
- Alerts and notifications
- Business intelligence and analytics
- Integration with other business systems
Revolutionizing Processes with AI and ML
Artificial intelligence and machine learning are transforming operations by:
- Automating review and analysis
- Identifying and assessing risks
- Extracting key terms and clauses automatically
- Using predictive analytics to forecast performance
Blockchain in Contracting
Blockchain technology also holds great potential:
- Enhances auditability by maintaining an immutable history
- Improves security by protecting records against tampering and fraud
- Streamlines execution through the use of “smart contracts,” which automate fulfillment
Best Practices for Negotiating and Drafting Strong Contracts
- Clearly define terms and expectations with unambiguous language
- Establish measurable KPIs tied to positive performance metrics
- Address potential risks through well-drafted clauses
- Set clear procedures for dispute resolution
- Allow flexibility for amendments and changes as needed
- Ensure regulatory compliance by staying updated on relevant laws and standards
Ensuring Compliance and Risk Mitigation
To effectively manage compliance and mitigate risks, organizations should:
- Conduct regular risk assessments
- Implement strong internal controls
- Stay informed about regulatory changes
- Maintain clear and accessible audit trails
- Provide ongoing compliance training for employees
- Establish clear processes for handling and reporting any violations
How to Streamline Processes for Business Growth
As businesses grow, their needs become more complex. To scale successfully:
- Choose technology solutions that can grow with your organization
- Standardize processes across all departments to ensure consistency
- Integrate systems with existing business platforms such as CRM, ERP, and financial systems
- Develop a “Playbook” to guide employees and promote consistency
- Build a specialized team dedicated to handling contracts to manage increased volume and complexity
By following these best practices and leveraging the right tools, organizations can transform operations into a strategic advantage that supports long-term business growth and success in contract management.