Contracts make the world go round. Whether you’re a business or an individual, you’ve likely interacted with and signed contracts. As a result, you’ve come across contract management at some point even if you weren’t aware of what it was called.
The reality is that passive contract management and active contract management are different. Performing active contract management has many benefits and applications in modern business.
In this guide, you’ll learn what contract management is, why it’s important, the full contract management lifecycle, and so much more.
What is contract management?
Contract management refers to the process of creating, executing, and managing contracts between two or more parties. It involves overseeing the entire lifecycle of a contract, from negotiation and drafting to implementation and ongoing monitoring.
Contract management is crucial for ensuring that all parties involved in a contract understand their roles and responsibilities, and that the terms of the contract are being met. Effective contract management can help to mitigate risks, reduce costs, and improve overall efficiency.
Why is contract management important?
Contract management is an essential process for any organization or business that enters into contracts with other parties.
One of the primary reasons why contract management is important is that it helps you mitigate risks. Contracts establish expectations, obligations, and consequences for all parties involved, and effective contract management ensures that these are met. It reduces the likelihood of disputes or breaches of contract, which can result in costly litigation or damaged relationships.
In addition, contract management is important for ensuring compliance with legal and regulatory requirements – which can be expensive if you’re found noncompliant.. Many contracts involve sensitive data or intellectual property, and you have a legal and ethical obligation to protect this information. Contract management processes can help ensure that all parties are complying with relevant laws and regulations, such as data privacy laws.
Finally, contract management is important for optimizing business operations and processes. Effective contract management processes can improve efficiency, reduce costs, and increase revenue by identifying opportunities for process improvement and optimizing the use of resources.
How does the contract lifecycle management process work? Stages of contract management
Contract management follows the contract lifecycle which consists of multiple stages. Each one is important and cannot be skipped if you want to maximize the effects of your contract management initiatives.
The contract creation stage is the first step in contract lifecycle management. It involves identifying the need for a contract, determining the objectives of the contract, and developing a plan for its execution.
The need for a contract may arise from a variety of circumstances. These can include establishing a new business relationship, securing resources or services from a third party, or complying with legal or regulatory requirements.
Once the need for a contract has been identified, you must determine the objectives of the contract. This involves defining the scope of work, the expected outcomes, and the performance measures that will be used to evaluate the success of the contract.
Next, you develop a plan for executing the contract. This may involve identifying the parties involved, establishing timelines and budgets, and defining the roles and responsibilities of each party. The plan should also include a process for monitoring and evaluating the performance of the contract.
The final step in the contract creation stage is to draft the contract. This involves creating a document with the major terms and conditions, including the scope of work, the responsibilities of each party, the timeline and budget, and other relevant details. The contract should be reviewed and revised as needed to ensure that it is clear, concise, and legally binding.
Collaboration and negotiation
The negotiation and collaboration stage of the contract management lifecycle involves refining the terms of the contract. This stage involves open communication, collaboration, and compromise between the parties to ensure that the terms of the contract are mutually agreeable. This stage is also known as contract redlining.
This stage often takes the most time and there can be multiple changes made to the initial contract. Negotiation and collaboration are critical to achieving a contract that is clear, concise, and legally binding. You’ll discuss the scope of work, performance measures, timelines, budgets, and other critical details. Be prepared for multiple rounds of negotiation and review, as the you work to refine the terms of the contract to meet your needs and objectives.
This stage involves several steps, including:
- Editing: This involves reviewing the contract for clarity, consistency, and accuracy. This may include identifying and correcting typographical errors, inconsistencies in language, or unclear provisions.
- Proofreading: This involves reviewing the contract for errors in spelling, grammar, and punctuation. It may also involve checking citations and references to ensure that they are accurate and complete.
- Final Approval: Once the editing and proofreading is complete, both you and the counterparty must provide final approval for the contract. This involves acknowledging that they understand and agree to the terms and conditions outlined in the contract.
Signature and execution
The execution and signature stage in contract lifecycle management involves signing the contract and implementing the contract terms agreed upon. This stage involves the execution of the contract documents and the tracking of key milestones and obligations throughout the contract period.
It’s important to monitor performance against agreed-upon metrics and ensure that everyone is meeting their contractual obligations. Any issues or disputes that arise should be addressed promptly to prevent any delays or breaches of contract. Overall, the execution stage is crucial in ensuring that the contract is successfully implemented and that signatories achieve their intended outcomes.
Administration and Audit
The administration and audit stage in contract lifecycle management involves ongoing monitoring and management of the contract to ensure compliance with the terms and conditions. This stage includes the tracking of performance metrics, monitoring obligations, and managing changes or amendments to the contract. Additionally, this stage also involves the review of the contract to identify any potential risks or areas for improvement.
The administration stage is focused on ensuring that the contract is being executed according to the agreed-upon terms and conditions. This includes monitoring performance and ensuring that both parties are meeting their obligations under the contract. The audit stage, on the other hand, involves a detailed review of the contract to ensure that it is compliant with all relevant laws, regulations, and internal policies.
During the administration and audit stage, it is important to maintain accurate records of all contract-related activities and to conduct regular reviews to identify any potential issues or areas for improvement. By actively managing the contract throughout its lifecycle, you can minimize risk, ensure compliance, and optimize the value derived from the agreement.
The renewal stage in contract lifecycle management involves the evaluation and decision-making process for renewing or terminating a contract that is nearing its expiration date. This stage is critical to ensure that contracts continue to meet your needs and deliver value to all parties involved.
Conduct a comprehensive review of the contract to assess its performance against the agreed-upon metrics and identify any areas for improvement. This may involve conducting a risk analysis and evaluating the market to determine if there are more favorable terms or pricing available.
If the decision is made to renew the contract, the renewal process typically involves negotiating new terms and conditions, updating any necessary documentation, and executing the contract. If the decision is made to terminate the contract, it is important to follow the procedures outlined in the original agreement and ensure that all parties are notified in a timely and professional manner.
Benefits of proper contract management
Effective contract management offers numerous benefits that are both tangible and intangible. Below are five key benefits of contract management:
- Improved Financial Performance: By managing contracts effectively, you can negotiate better terms, identify cost-saving opportunities, and avoid costly penalties and legal disputes. Additionally, effective contract management can help organizations track key financial metrics, such as budgetary compliance and revenue generation, ensuring that contracts are contributing to the overall financial health of the organization.
- Risk Mitigation: You’re better able to mitigate risk by identifying potential risks and developing strategies to manage them. This includes identifying contract clauses that could lead to disputes, ensuring compliance with legal and regulatory requirements, and monitoring vendor performance to identify any potential issues before they escalate. By proactively managing risks associated with contracts, organizations can avoid costly legal disputes, reputational damage, and other negative impacts on the business.
- Enhanced Operational Efficiency: Improve operational efficiency by streamlining processes and reducing administrative burdens associated with managing contracts. This includes automating key contract management processes, such as contract creation, review, and approval, and providing access to centralized contract data and reporting. By simplifying and standardizing contract management processes, organizations can reduce the time and resources required to manage contracts, freeing up staff to focus on other strategic initiatives.
- Better Vendor Relationships: By establishing clear expectations and developing mutually beneficial agreements, organizations can foster stronger partnerships with vendors, leading to improved collaboration, communication, and trust. Additionally, effective contract management helps you identify high-performing vendors, enabling them to build long-term relationships with strategic partners.
- Increased Compliance: Proper contract management ensures contracts comply with relevant laws and regulations, as well as internal policies and procedures. It also helps you track key compliance metrics, such as contract expiration dates and renewal terms, ensuring that contracts are renewed or terminated in a timely manner.
Contract management software – what to look for
When selecting contract management software, there are several key factors to consider. Of course, you may have unique needs, but generally speaking, there are a few major things to look for which are listed below:
- Functionality: Look for software that offers comprehensive functionality to support the entire contract lifecycle, including contract creation, review, approval, tracking, and reporting. The software should also include features such as automated notifications and alerts, electronic signatures, and contract templates.
- Usability: Contract management software should be user-friendly and easy to navigate, with an intuitive interface and clear instructions for all tasks. The software should also offer customization options to tailor the platform to your specific needs.
- Security: Security is critical in contract management software, as contracts often contain sensitive and confidential information. Look for software that offers robust security features, including data encryption, access controls, and secure data storage.
- Scalability: As your organization grows, your contract management needs may also evolve. Look for software that can scale with your organization, accommodating an increasing number of contracts and users, without sacrificing performance.
- Integration: Contract management software should integrate with other systems and tools used by your organization, such as CRM software or project management tools. This enables seamless data sharing and improves efficiency across departments.
- Reporting: Look for software that offers robust reporting and analytics capabilities to track contract performance and compliance, identify trends and areas for improvement, and provide insights to support decision-making.
- Support: When selecting contract management software, it’s important to consider the level of support offered by the vendor. Look for a vendor that offers responsive customer support, training resources, and ongoing updates and maintenance to ensure the software remains up-to-date and functional.
Contract management is a discipline that can yield many benefits when it’s done properly. It also has countless benefits in large and small organizations.
This guide has gone through what contract management is, the aspects of contract lifecycle management, the benefits you stand to gain, and what to look for in contract management software.
If you’re looking for tools that can make contract management a breeze then consider DoxFlowy – an end-to-end contract management and document automation platform. You won’t be disappointed.