Contract management encompasses all activities that revolve around contracts in a company: From the contractual negotiation between the parties, to the creation and approval of the contract, to the management of deadlines, to the archiving of the contract.
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What is contract management?
Contract management encompasses all activities that revolve around contracts in a company: from the contractual negotiation between the contracting parties, through the creation and release of the contract, deadline management, to the archiving of the contract. Contract management is an essential function of business management and affects most departments in a company.
Lack of contract management poses risks such as non-compliance with legal requirements, financial losses due to missed deadlines or non-termination. In the context of contract management, the broader term “Contract Lifecycle Management” is also often used, which is even more focused on the different phases and cycles of a contract.
Unlike software for document management, contract management covers only contracts and not other documents such as quotes, brochures, etc.
Importance of contract management
Contracts form the basis for all business relationships. However, with a growing number of contracts, increasing complexity and constant need for changes, it becomes a challenge to manage the valuable information in the contracts.
Contract management is the process of enabling both parties to a contract to fulfill their obligations in order to achieve the goals intended by the contract. It is relationship management. It also involves building a good working relationship between the customer and the provider. It continues throughout the life of a contract and involves proactive management to anticipate future needs and responding to situations as they arise.
Contract management includes negotiating the terms of the contract, ensuring compliance with the terms, and documenting and agreeing on changes that may occur during implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis with the goal of maximizing financial and operational performance and minimizing risk. Contract management contributes significantly to the financial health of an organization and is considered a strategic weapon for optimizing contract performance and improving return on investment.
Benefits of contract management
A well set up contract management has a great many benefits, below is an overview of the key benefits:
- ensures that contractual obligations are met
- helps to avoid potential contract breaches
- improves compliance with contract objectives
- provides a well-documented audit trail
- ensures better contract outcomes
- improves quality of service and customer focus
- achieves good financial control
- reduces the level of risk
- enables early identification and resolution of performance deficiencies, other problems, or disputes
Phases of contract management
Contract management encompasses all aspects of the entire contract lifecycle. Organizations use contract management strategies, techniques, and principles to streamline each phase. A holistic approach to contract management is important. Slowing down in any of the phases can result in slow response times, lost time in completing administrative tasks, and/or friction with potential customers that can negatively impact the customer experience.
Although the individual phases of contract management combine to create an overall experience, each phase presents unique challenges and has unique requirements. This is why it is so important to identify each phase and develop separate strategies to streamline and optimize them on an individual basis.
The phases of the contract management process are:
- contract solicitation
- contract negotiation
- contract approval
- contract execution
- contract renewal and termination.
The phases of contract management do not necessarily occur in the correct order. For example, during negotiations, contract terms may be negotiated that are not approved. In this case, the contract would proceed between the negotiation and approval phases. Similarly, during the contract renewal phase, it may be necessary to go through the negotiation and approval phases again if changes to the specific terms are required.
Contract management challenges
Effective contract management uncovers inefficiencies and bottlenecks so companies know how to manage the contract lifecycle at each stage. Companies should design their strategies to meet the unique challenges of each phase. However, they must also consider the full experience that the entire contract management process offers potential customers.
Failure to take either into account will result in contract management inefficiencies that reduce the amount of revenue opportunities companies can actually generate.
The challenges of contract management are:
- Quickly creating correct contract terms and conditions: The legal department must ensure that contract terms are comprehensive and accurate through effective contract management. At the same time, contracts must be drafted quickly so that they do not hold up the progress of a deal. Managing the tension between these two goals is challenging.
- Ensure consistency with commercial and legal policies: Contract terms and conditions must reflect the latest commercial and legal policies as set by senior management and leadership teams, even if they are constantly changing. This is an important contract management issue.
- Organize interdepartmental communication and approvals: Obtaining approvals from multiple departments and reconciling differences is complex. It is difficult to maintain a single source of truth that accurately reflects the current status of the contract. Often, at the end of a negotiation, there are multiple “final” versions of a contract. Simplifying and centralizing this is the task of effective contract management.
- Streamline collaboration with the other side during negotiations: Counterparties also make changes to contracts during negotiations and may need to obtain their own internal approvals. It is a contract management challenge to ensure that communication is clear and fluid so that it does not impede contract completion.
If not handled properly, these contract management challenges can cause problems by significantly increasing corporate administrative overhead and expenses.
Need for contract management
We may not realize it, but contracts help manage and shape just about every business: Between 60% and 80% of all business transactions are governed by contracts or agreements in one form or another, particularly in finance, IT, legal, purchasing, sales, operations, and human resources. So whether we realize it or not, contractual agreements and therefore contract management are an important part of a company’s basic structure.
And contracts are not just about fixing an agreement with third parties and employees: Rather, they provide the framework for how we work with people and other organizations, setting the rules and guidelines for commitments so that everyone should be clear about what is expected of them. And if managed properly, contracts can help organizations reduce costs and improve profitability, and of course mitigate risks. So contract management is hugely important from a business perspective.
Whether it is a small, medium or large organization, developing processes for contract management and striving to improve performance should be a key objective of any company’s operational mission. In this age of rising costs and increasing competition, this can mean the difference between a sustainable company and one that takes the time to define and manage superior contract management processes. This is true for all types of organizations, regardless of their size or line of business.
A company that does not pay attention to contract management often does not generate the revenue it could and also overpays for the legal services it buys. Poor contract management carries high risks that can result in high costs. Contract management is an issue of strategic importance for both the organization and individual projects. Thorough contract management can improve control, increase effectiveness, reduce costs, and also provide strategic and competitive advantages.
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