Contract management is the process of managing agreements, from their creation to their execution by the chosen party and the eventual termination of the contract.
Key activities involve performance analysis against the contract terms to maximize operational and financial performance and to identify and mitigate financial and reputational risk through non-compliance with contract terms.
Why is contract management important?
According to World Commerce & Contracting, 90% of business people need help understanding contracts1.
Contract management is an important task for a business team. A solution to streamline contract writing, processing, and storage allows businesses to meet legal and regulatory requirements with ease.
It minimizes risk, protects both companies' interests, and can be a good resource in decision-making and resolving disputes.
Having well-documented contracts that are executed quickly reduces costs and streamlines the contract process while promoting positive vendor relationships.
Software solutions can automate certain actions in the management process, saving a company time and money.
1 World Commerce & Contracting, 2021, Overcoming the 10 Pitfalls of Contracting: How AI Can Transform the Value of Contracts.
What is a Contract Lifecycle Management (CLM) process?
Initiation
This step involves identifying the need for a contract between two parties. In this discovery phase, the scope of the agreement is established.
Authoring
The contract is drafted based on the terms and conditions defined by each business involved in the agreement.
Process and Workflow
With an initial draft version in place, each party must examine the details of the contract. This stage of the contract lifecycle will often involve internal collaboration with various departments.
Business operations, accounts payable, and legal may need to confirm that the agreement is sound separately.
Negotiation
After a thorough review, one or both parties may need to make edits to the contract. All differences must be addressed before a final document can be approved.
Approval
This stage in the lifecycle process of a contract can be where things slow down. Large companies with multiple stakeholders with varying access and authority can make the approval process complex.
Execution
After both parties approve the final contract, it is signed to put it into effect. Increasingly, these signatures are electronic through a service like DocuSign.
Ongoing Management
Contracts are monitored for performance and to ensure both parties are meeting obligations. This information is valuable when it is time to consider contract renewal or amendment.
What are the benefits of contract management software?
Improved document management and storage
CLOC reports that 68% of contract professionals search for completed contracts at least once weekly2. These searches can be labor-intensive to find contractual information such as:
- Renewal dates
- Contract obligations
- Legal Requirements
Contract management software digitizes and stores all contracts into a central repository, providing a way for stakeholders, such as legal and compliance departments, to search for and review contracts.
This can eliminate the need to manually locate and sift through stacks of paper in endless rows of filing cabinets.
2 DocuSign. CLOC, 2022, Contract Analysis Trends: Smarter Search, DocuSign.com.
Security
Contract management software also manages access to contracts so that only authorized people in an organization can view any particular contract, improving security.
This is accomplished by password-protecting access to the online platform and limiting access through role-based permission levels.
Shorten contract cycle time
Contract management software helps to automate processes. Staff can create customized workflows to dynamically direct documents through the lifecycle process.
The system will provide an overview of all contracts and makes it easier to keep document processing moving.
Contract compliance
The software also alerts key contacts when contract expiration dates are nearing, allowing businesses to decide whether to re-negotiate or cancel their agreement.
This allows the business to avoid being locked into contracts automatically rolling over from year to year at increasingly unfavorable terms.
Track spending
Finally, contract management software can track current spending against a supplier by integrating it with other financial or procurement software systems.
How contract management works
Managing Service Delivery
This ensures that products are delivered as and when they are ordered.
Managing the Relationship
It involves strengthening the contact between vendor and purchaser to improve communication throughout the contract management process.
Managing the Contract
The ongoing administration that ensures the day-to-day procurement activities follow what is detailed in the agreement.
Seeking Improvements
Amendments and alterations are pursued within a procurement environment to improve efficiencies and increase profits.
Ongoing Assessment
Procurement activities are assessed continuously to ensure that contracts are honored and that all purchasing processes have been followed.
Managing Change
As part of a long-term procurement relationship, the changes in activities, requirements, or products must be noted and handled effectively.
Managing Renewal or Termination
When a contract is due for renewal, contract management allows for taking proactive steps to understand whether the contract should be renewed as is, re-negotiated, or terminated based on future business needs, commercial attractiveness, and previous performance by the supplier.
See Medius Contract Management in action!
Take control and reduce contract risk by managing all your agreements in a single, secure cloud based repository. With Medius Contract Management you can create and manage multiple contract types, delivering efficiency, visibility and risk control.
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Challenges of non-automated contract management
Lack of visibility
Not being able to see the details of every active contract leads to unintended auto-renewals at unfavorable terms.
It can also lead to poor performance where one or both parties must comply with regulations or contract terms.
Inefficient processes
Business processes that lack automation create an environment where manual intervention is required to push the process forward through each step.
The contract lifecycle process tends only to stall if diligence is maintained. An automated system is a second security level to back up busy contract professionals.
Human error
Human errors due to data entry mistakes or misplaced documents are minimized when a centralized, cloud-based system is used to maintain contracts.
Manual contract renewal and revisions
The manual renewal and renegotiation of contacts can be labor-heavy. A digitized system prevents timely reminders to review terms and allows renegotiation to remain unhurried and based on actionable data like contract performance.
Limited communication
Contract partners may tend to limit communication over the lifecycle of a contract. The regular reminders and task completion assignments that a contract management software solution provides will encourage open communication between parties.
This could limit contract disputes and misunderstandings. Better supplier relationships will result.
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Contract Management
Integrating contracts with AP Automation
Contact management can become one key facet of a greater push for automation. CLM solutions that integrate with accounts payable automation software provide a more streamlined business workflow.
- Validate supplier information on received bills and shipments.
- Easily tie invoices back to the associated contract document.
- Digitize and store every related document based on the vendor.
- Track key contract metrics for business decision-makers.
Contract management best practices
Standardize contract creation
Use a set of terms, conditions, and legal language that applies to many contracts.
Set contract management KPIs
Make your goals transparent to the entire business.
Track contract approval time
This allows an organization the advantage of:
- Receiving contracted goods and services sooner
- Ensuring a quicker move toward a positive relationship
- Creating an easier process for seizing later opportunities
Set automated reminders
Alert essential parties to review the document. This eliminates the risk of missing certain addresses in group emails.
Review financial metrics
Dedicate part of the business’ regular contract management reviews to analyzing financial metrics.
Conduct regular compliance reviews
This responsibility is necessary to protect the company against the risk of legal, industry, and external regulations.
See Contract Management software in action
What is ‘good’ contract management?
Explore how contract management has changed over the past decades and what you should expect from your system today.
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Frequently asked questions about contract management
Contract management automation is moving away from manual methods of creating, processing, and monitoring a company’s partner agreements.
Through automation techniques, contracts can be standardized and digitized for every step of the lifecycle – from initial creation to execution.
Each step in the process that is automated shortens the cycle time for contract execution and increases your return on investment.
The contract management automation software implementation process follows a logical progression.
User access is audited and implemented so that only the staff that need access to sensitive and confidential documents are allowed access.
After initial configuration, contracts can be created and imported using intuitive capture technology. Pre-set templates for contract creation can be set up so that a contract can be created with the click of a button.
Contract professionals develop rules for automated alerts to notify them of impending contract work that needs to be performed.
Reports and key performance measures are also identified so that the health of every contract can be monitored closely.
Yes, it can. The contract management solution from Medius features rich integration with common ERPs.
With intelligent, pre-packaged connections and REST APIs, all your data repositories can speak to each other.
Contract Management from Medius can also operate as an independent system to get you up and running in weeks. The standalone solution features interactive summaries, reports, and full visibility into your contacts' lifecycle.
Yes, contract management software is security-rich. Access to the cloud-based portal is password-protected to prevent unauthorized access to sensitive business documents.
Control user access with role-based permissions, providing granularity to access and keeping you working safely.
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