Contract management is the practice of managing contract formulation, implementation, and assessment in order to maximize an organization’s performance and profitability while minimizing investment risk.
As a result, organizations are under increased pressure to save expenses and enhance corporate performance. Whenever someone takes on the task of controlling contracts for workers, contractors, or other parties, this is referred to as contract management.
Contract managers must have legal understanding in order to lead the contract management effectively. Contract managers are not used by all corporations, although they are commonly used by big military businesses or organizations that often engage with the government.
Effective Contractual Management
According to World Commerce and Contracting, inadequate contract management procedures cost organizations an estimated 9% of their income each year. It is not enough for a company to have contract management specialists on staff. To meet rising compliance and analytical demands, staff must be reinforced by the presence of procedures and software tools.
Companies can expect the following benefits when a contractual strategic approach is implemented properly:
- The anticipated commercial and financial gains are being achieved.
- The provider is collaborative and sensitive to the demands of the company.
- There are no contract issues or surprises for the organization.
- Both parties are satisfied with the service given.
What Steps of the Contract Plan Implementation are there?
While contract management has numerous components, we may describe the process by dividing it down into five distinct stages: development, cooperation, signature, monitoring, and renewals. The procedure is divided into nine steps, each of which contributes to one of the five overall phases. This helps to manage the final push that occurs when a fresh batch of agreements is due. Each state’s steps are described:
- The first inquiries: The contract management begins with identifying contracts and relevant papers to support the objective of the agreement.
- Contract creation: Writing a contract out manually takes time, but with the help of automated contract software solutions, the process may be greatly expedited.
- Contract negotiations: Employees must be able to examine copies of the contract and report any errors after writing the agreement to decrease negotiating time.
- Approval of the deal: Obtaining management permission is where the majority of bottlenecks occur. Users may avoid this by designing approval procedures that include parallel and serial clearances to keep decisions on track.
- Executing signatures: By using digital signature and fax, users may regulate and shorten the signing phase while completing the contract.
- Management of obligations: This necessitates extensive project management to guarantee that relevant parties fulfil requirements and that the contract terms value does not deteriorate throughout its early stages of expansion.
- Revisions and additions: It isn’t easy to collect all papers relevant to the contract’s initial preparation. When elements that were neglected are discovered, mechanisms must be in place to alter the original contract.
- Filing and monitoring: Contract management doesn’t include writing a contract and then tossing it into a file folder with no more consideration.
- Renewing: Manual contract administration procedures frequently result in lost renewal chances and money. By automating, a company may find reinstatement opportunities and develop contract extensions.
12 Best Practices of Contract Management
1. Standardized Creation of Contract
- Creating a contract differs from person to person as per their requirements. The tenure addition, their agreement, the regions they work in, and the services offered vary, and as a result, it takes a considerable amount of time to create it every time.
- A well-drafted contract is vital to a company’s reputation, as an improperly drafted contract can certainly undermine its market value and even cause the company to lose money.
- Contract creation should be hassle-free. Building a repository of templates and fetching them under contract requirements will simplify the task and reduce errors in contracts.
2. Track and Manage Contract Approval
- Even though drafting the contract alone is not difficult, sending it out for further approvals from stakeholders and various teams can be hectic and delay the process.
- Ninety-two percent of businesses have difficulties in translating material into multiple languages. In addition, only 29% of companies connect their CMS to a language processing system or a translation provider.
- Automating a process helps ease the process and ensure that the work gets done quickly and efficiently.
- By establishing the proper list of approvers and automatically sending them, the process can be simplified.
3. Contract Management Terms Should be Set
- The performance metrics to be used post-approval to measure the success and progress of a contract are imperative. They are providing metrics on how contracts are performing and show whether they are delivering the expected results.
- Taking the time to create, approve, and finalize contracts, for example, can be a measure of efficiency. This high renewal rate is a sign of a successful vendor association. Various coin addition, different execution KPIs, such as meeting deadlines, providing quality, etc., can be used to evaluate whether the contract should be renewed or replaced with a new provider.
4. Managing and Accessing Contract Risk
- Before and after awarding a contract, identifying potential risks involved is crucial.
- Risks include financial (cost escalation), scheduling difficulties, failure to deliver expected features, etc. In addition, a contractor compromising confidential information of customers can be punished heavily for compromising compliance and regulatory risks.
5. Communicate Effectively During the Contracting Process
- When there is poor communication between an organization’s central procurement office and its contractors’ agencies, they can miss opportunities, incorrect drafts, and damage relationships. And business cannot foster relationships through the traditional approach of relying on individual efforts.
- Communication guidelines must be established and channels for team collaboration (email, Slack, etc.), plus a list of those individuals who must be informed at all times.
- To ensure that stakeholders are informed when contract documents are revised, or potential risks are identified, these details must be integrated into the contract lifecycle (before, during, and after a contract is awarded).
6. Resolving Disputes Efficiently
- KPIs help you identify issues that need to be addressed when you monitor risks and assess KPIs. Communication problems within teams can result in complex conflicts as well. Disputes and claims such as these are best handled by not letting them continue for too long or leaving them unattended, but by solving them quickly and informally before they escalate.
- The challenge in doing so is the ambiguity in roles, as it is sometimes unclear who is responsible for resolving a particular issue. Create a task force for dispute resolution that includes both organizational and vendor representatives. For example, accounting could be depending on the department (legal, HR, finance, etc.), they are assigned to specific people.
- Companies can avoid paying hefty penalties by conducting regular compliance checks. The reviews are designed to verify compliance with external regulations such as HIPAA, FINRA, and GDPR (as applicable) and contractual obligations that are legally binding. Fines can be as high as 20 million dollars or 4% of the company’s annual turnover for GDPR violations.
- Identifying an exhaustive list of criteria and configuring them in contract management systems is essential so that alerts can be sent out for possible violations. Furthermore, by detecting bottlenecks and taking corresponding steps (e.g., assigning more resources or replacing insecure technology), proactive detection can be performed.
7. Anticipate and Manage Change
- There are many triggering factors for contract terms to change, including business needs, industry standards, and federal regulations. To assess these changes and formulate action plans, change management strategies are needed. For example, a contact management system is preferred by 86 percent of individuals.
- Inquire, for example, whether the new annual budget can accommodate the inflationary cost rise? The company could then renew the contracts with new rates or renegotiate the contract or find a new cost-effective vendor.
- Impact analysis of this type is needed not only at renewal time but also at regular intervals. It’s a tremendous chance to examine vendor relationships and learn what works and what doesn’t.
8. Automation
- So far, we have discussed some best practices that can be automated. However, it may not be possible to execute them manually in some cases. Consider, for example, the management of approvals, changes, and risks in a manual spreadsheet or the security of contracts in a vault. As a result, this method is inefficient, error-prone, and unsalable.
According to a worldwide legal survey, 65% of legal practitioners consider the time spent on administrative functions to be their greatest source of frustration.
- Using automatic triggers, alerts, and reports, you can catch issues and resolve them before they escalate. Automation also makes contract management an integrated process rather than isolated tasks. With end-to-end management, it’s possible to scale quickly and make more cohesive decisions.
9. Mobile
- Automating contracts is the first step towards efficiency and flawless execution. Mobile technology increases the reach of automation to almost everyone involved in the contracts process, from management to every member who executes contracts.
- Mobile technology enables transmitting information quickly and easily between multiple companies and their field teams, acting as a bridge between them. Keeping people connected and motivated with its speed and ease of use keeps them motivated and enables them to accomplish more.
10. Measurement of Progress and Performance
- Monitoring of quantitative indicators such as contractual parameters and performance metrics provides ample information for analysis. Further, there is subjective data available through informal communication channels, such as discussions about risk management and change.
- In comparison with historical data and industry averages, all this data can be used constructively.
- Spending patterns can be seen in historical data based on contractual engagements over time. The contract status can then be gauged to determine if it is moving in the correct direction. In addition, statistics reveal how well a company manages contracts in comparison to its competitors.
- Comparing notes collected from the contractor with notes collected from you is a third way to benchmark, so you can acknowledge variances and work towards alignment.
11. Data Integration
- The data collected from users on contract performance can be used to draft future contracts for similar products or services. There are much more benefits to data than that, however.
- Integrating data from each of these silos into an integrated project management platform is the best way to bring these practices together. With this, you can build a connected system where contracts are not just a set of agreements and clauses but rather part of a larger context – a project that rolls up into a portfolio of projects.
- In this way, contractual processes are aligned with the rest of the controls’ environment, and project overruns are alerted.
12. Expenses and Budget can be Strategized
- Budgeting cannot be set and forgotten. Maintenance of budgetary and spend performance on a contact-by-contact basis is a well-resourced activity within the top-performing organizations.
However, according to Aberdeen Research, employing automation reduces administrative expenses related to agreements by 25% – 30%. In addition, these top-performing organizations can manage their fiscal account at the contract and portfolio level by integrating their CMS with their budgeting and accounting system, along with dedicated stakeholders and business processes.
- In an environment where you have consistent access to this vital performance data via automated reporting, you can take proactive actions to maintain optimal performance and mitigate the risks of underperformance from contracted third-party relationships.
Contract management is critical in a company since it is the practice of managing contracts via a comprehensive documented system. This method allows you to supervise contracts, their terms, deal components, as well as reestablishment. The relevance of contract management within any business is to ensure that obligations to clients and suppliers are clear to the key employees in the business and that they are followed through on.
