Contracts are an integral part of running a business; you need a contract to start a business; you need a contract to buy goods/services for running a business; you also need a contract to hire employees for your business. Contracts are fundamental elements for not just running a business, but for human cooperation and society.
Contract management is essential for the smooth running of the business. To manage contracts the right way a contract management system is required to manage the end-to-end process lifecycle. Learn about what contracts management is all about, the need for managing contracts, and best practices in contracts management in this blog.
What is a Contract?
Before getting into details on contract management, it is important to understand what contracts are, and the role they play in business operations. A contract is a legally binding agreement between parties identified in the agreement to fulfill or abide by the terms and conditions outlined in the condition.
A prerequisite for enforcement of the contract is that both parties must agree to the terms and conditions mentioned in the contract. The agreement is usually achieved via the signatures of the parties getting into the contract. With the advance of electronic commerce, electronic or digital signatures are also being used for signing contracts.
Contracts are several types, but the main types of contracts are sales contracts, purchasing contracts, partnership contracts, property contracts, and trade agreements.
The main elements of a contract are:
Offer – the promise made by one party to another saying that they will perform a specific action in the future.
Acceptance – the terms of the contract need to be accepted by both parties. Acceptance is an expression through words or deeds that both parties agree to the contract terms.
Awareness – proof that both parties understand and agree to the basic substance of the contract
Consideration – entails something of value that is promised in exchange for the actions mentioned in the contract.
Capacity – every signatory to the contract has demonstrated the legal capacity to understand what they are signing
Legality – all contracts are subject to the jurisdiction laws in the location they operate.
Bill of Sale, Promissory Note, Employment Agreement, Non-Disclosure Agreement, and Licensing Agreement, are some examples of contracts. The services of a lawyer are usually required for drafting contracts. The consequences of a poorly drafted contract, or worse, not having a contract can spell doom for your business or individuals. There can be severe legal consequences when a business deal or an individual deal is carried out without proper contract management. Investing time and money into contract management is worthwhile for businesses and individuals alike.
What is Contract Management?
Managing contracts is an overlooked form of business management. Frequent interactions between managers and employees are part of daily business operations. Some of these interactions involve contract management. There are several occasions when businesses need to manage contract agreements with other businesses.
Contract management is not something that businesses discuss often or give due importance to during strategic business discussions. Knowing what contract management is and the best practices in contract lifecycle management can simplify business operations significantly and ensure legal compliance of the business.
What is contract management? In simple terms, contract management is the process of managing the entire contract lifecycle – from creation to analysis. Effectively managed contract management workflow maximizing the operational and financial performance of the organization. Businesses are under constant pressure to reduce operational costs while improving business performance. Contract management is a time-consuming element of a business that can be better managed by automating the contract lifecycle.
A contract needs to be signed whenever 2 businesses wish to do business with each other. All the activities for fulfilling business dealings between the two parties and the terms through which they will fulfill their parts of the contract agreement are clearly described in the contract. The profitability of a business is significantly affected by the way contracts are managed, as they have a great impact on revenue and expenses.
A poorly phrased or drafted contract causes significant financial loss to the business. Effective contract management creates a powerful and trusted business relationship and paves way for greater profitability in the long run. Engaging the services of a legal department or a lawyer during contract management discussions and for preparing contracts is a good way to ensure the legal correctness and compliance of the contracts. Taking legal help in drafting contracts ensures that precise wording is followed throughout the contract.
Contract management involves a few key stages – early stages and the pre-award phase. The first phase in the early stages includes all the work that takes place prior to the contract being handed over to someone. The middle stage is when the process is awarded and involves all the paperwork to make the agreement final.
The last stage or the post-award stage is where contract management and maintenance come in. These 3 stages are a basic way of looking at contract management. In reality, the process is more complicated and can be divided into stages depending on how detailed a view you are taking.
Importance of Contract Management
Contract management is important for several reasons, the most critical one being contract management influences the outcomes of the agreement. The contract lifecycle management process is designed to help businesses extract maximum value out of contracts while being compliant with regulations and managing third-party relationships effectively.
All contracts then need to be managed for their entire lifecycle, leveraging any negotiated clauses, monitored for compliance and then reviewed again for renewal or amendments.
A single contract pulls in people from finance, procurement, and legal departments to handle contracts. Without proper contract management, you expose your business to countless risks, financial penalties, and procurement contract compliance issues.
A well-drafted contract clarifies the role of parties involved in the agreement so that each party is accountable for their role. Moreover, contracts are the foundation of business relationships. They spell out every aspect of the business deal or supplier relationship, from beginning to end. Both parties are held legally responsible once they sign the contract. Having a contract management process is essential to ensure that all the terms and conditions are followed diligently by both parties.
Contract management is usually used by departments that directly deal with creating, tracking, and signing contracts. Financial contract management is a must to handle financial operations with third parties. The HR department that manages employment accounting also uses contract management processes.
In some cases, a contract manager is assigned the duty of managing contracts that the organization enters into. This role entails the management of the contract completely – from creation to fulfillment to analysis.
Understanding the Contract Management Workflow
So what are the stages in the contract management workflow? While there are several components that make up the contract management lifecycle. Breaking the lifecycle into the basic 7 stages helps one understand the contract management workflow clearly. The stages of the contract management lifecycle can be grouped into two main types – pre-signature and post-signature.
1. Inception stage
When the need for a new product, service, or partner becomes apparent for the business, the first step is to capture the requirements and details of potential partners. Stakeholder identification, requirement gathering, and identification and initial screening of potential suppliers are the steps carried out at this stage.
2. Contract negotiation stage
The suppliers that are shortlisted in the previous stage are reviewed with cost control and reduction in mind. It is important that both parties feel that their interests are valued in the contract. At this stage, preferred suppliers are selected, a draft contract is issued, and legal review and redlining are performed.
3. Execution stage
Once an agreement has been reached, the documents are signed by the relevant parties. Several drafts of the contract are created to include all the terms and conditions relevant to the stakeholders. The finalized document includes all the agreed changes and is produced and shared with all stakeholders. In this stage, finalized documents are created and shared; a decision on electronic or wet signatures is taken; and contracts are signed by relevant parties.
4. Start-up stage
This is a foundational stage where metadata is extracted and added to a central contract register. This stage is often overlooked when there is a rush to get the contract up and running. If this stage is ignored, significant issues may crop up further down the line. At this stage, the key features of the contract are documented and added to a central register; awareness and understanding of the contract with the stakeholders are built; and roles and responsibilities for an ongoing contract are obtained and assigned.
5. Monitoring stage
It involves regular check-ins and ongoing contract performance monitoring that ensure that targets and milestones are met. Contract monitoring helps businesses adhere to compliance requirements at all times. At this stage, obligation tracking is automated; balanced scorecards and checklists are used to measure performance; commercial and business reviews are carried out; and contract disputes are managed.
6. Renewal stage
Contract renewals offer a massive opportunity for cost reduction and control for businesses. When contracts are renewed, the negotiation terms are revisited and supplier relationships are deepened. Timely renewal of contracts can get a maximum financial advantage for the business.
Automating contract renewals is a great way to ensure that contracts are renewed on time. Having clear insights into all contract renewals is important for generating the necessary value from contracts, and mitigating the risk. At this stage, renewal processes and approvals triggered by key dates are automated; competing suppliers are assessed for capability and price; and internal users are asked for feedback on supplier performance.
7. Close-out or completion stage
The close-out stage is often overlooked by businesses, especially, when there is no interaction with the contracted party. However, you never know what information and records might need to be available in the future. So, it is important to close out contracts appropriately. At this stage, contract performance is recorded against the KPIs; records are checked for gaps and missing information is furnished; and contract records are archived for future reference.
Including all of the above stages in the contract management process in your organization is important to ensure that stakeholders have deep visibility into the portfolio of the contract.
What is Contracts Management Software?
Traditionally, contracts are managed manually through the physical exchange of documents between stakeholders for review and signatures and stored in the form of folders in file cabinets. This practice is riddled with inefficiencies that detract from the overall efficiency of the organization.
Contract management software is an electronic approach to solving issues with manual contract management. Contract management software is capable of organizing all the work related to contract paperwork. The software can automate the signing and review process for easy management and tracking of contracts.
The software can also automate the allocation of resources related to the contracts management process. The main purpose of contracts management software is to streamline admin tasks by creating a centralized and uniform record for each contract’s lifecycle.
Monitoring complex contracts is made easy with contracts management software without relying solely on paperwork. Contract management software allows employees in multiple locations to access contracts in one place.
Who uses contracts management software?
This software is used in departments that directly deal with creating, tracking, and signing contracts. This type of work is offloaded to the HR department, which manages important tasks such as employment accounting. Contract managers use contract management software to track the entire lifecycle of contracts and integrate it with calendars and communication software. The software takes care of the heavy lifting in the contract management process so that managers can take care of specific aspects like signing or negotiation.
Features of Effective Contract Management
When contract management is carried out effectively, it provides complete visibility into the business portfolio. The contracts management workflow provides visibility into which obligations have been fulfilled and which ones need to be completed still. Leadership can understand the current levels of risk, spending, and performance associated with each of its contracts. When any of these areas are not performing as expected, stakeholders can trigger mitigation strategies to ensure that compliance is safeguarded and outcomes are always delivered.
Effective contract management is characterized by –
- A centralized repository for storing all agreements and metadata
- Timely and accurate delivery of negotiated contract benefits
- Seamless collaboration and communication between all stakeholders and automated resolution of any bottlenecks in the contract workflow
- Better control within negotiations and fewer missed contract renewals
- Standardized and automated processes minimize non-specialist work
- Improved revenue and control costs due to the removal of duplicate spend
- Maintaining compliance via self-delegation by holding vendors accountable
When choosing a contract management solution, businesses need to focus on aligning their people, processes, and technology around managing contracts so that the full value of the contract is derived. The subsequent section elaborates on the contract management best practices, which should be borne in mind when choosing a contract management solution.
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Best Practices in Contract Lifecycle Management
Effective contract management comes in different forms, but they are all built around the pillars of visibility, compliance, and control. Contract management best practices or procedures that are implemented must reflect these 3 pillars. These are the stepping stones for the success of the contract management process that every business must focus on.
1. Central contract repository for restoring visibility
The Pareto principle is usually applied to contract management. Working on a proportion of your contract base helps the business realize the significant benefits of contract management. Gaps in the contract management process expose your business to risks and increased costs.
Creating a single source of truth via a contract repository and maximizing the visibility of the business’s entire portfolio allows stakeholders to apply a coherent strategy to its agreements. The contract needs to be reviewed ahead of renewal, vendor information may need updating, or internal discussion may be required to improve overall performance – all this can be done with a single source of truth.
2. Bring the entire organization on the same page
In most businesses, the legal team is responsible for handling contract agreements. In the entire contract management process, the legal team gets priority over other teams. However, contract management becomes more effective only when all the areas of the organization are brought in and responsibility isn’t stagnated within a single department.
Collaboration across all teams includes sharing information, clarifying who is responsible for what in the process, and finding out what is left to do. Shared workloads and shared responsibility keep key stakeholders away from bottlenecks due to poor communication. Automation of manual tasks ensures that the workload is more manageable for all teams.
3. Build an auditable history of contract actions
even the best contract management systems require auditing and checking to make sure that everything is running as intended. Spot-checking individual contract records periodically from different areas of the business to gain insights into the robustness of the contract management process.
The context of these audit spots is likely to change as regulations continue to evolve over the years. Investing in contract management software transforms this manual, time-consuming activity into an automated and standardized process that helps prove compliance and controls to auditors.
4. Drive accountability by assigning ownership of renewals
Contract renewals often fall through the cracks when the contracts management process is not streamlined. The use of siloed processes to manage contracts often results in missed renewal deadlines and any cost savings that might come with on-time renewals. Accountability of renewals can be really driven by using automated notifications that remind the assigned owner that it is time to renew the contract.
5. Integrate the contract management process with the existing tech stack
Technology-driven improvements to the contracts management process must be well aligned with user requirements and their current working practices. When teams are already using a tech stack, the new solution or working methodology must integrate with what is already in place. The Contracts management software automates key tasks and reduces the admin burden on the teams. Adopting automation software that works alongside the current tech stack is much better than the rip-and-replace approach.
6. Prioritize data security and compliance
Manual contract management brings with it a wider scope for data errors and duplication. Not just high error margins, but manually managed contracts are subject to damage or misplacement. As important as it is to digitize contract management, ensuring high levels of data integrity and security is important too.
Data security must be given the highest priority, especially in regulated industries. The contracts management solution must be ISO 9001 Quality Certified, provide role-based access controls, and provide data hosting options in locations that are convenient for your business.
7. Choose the right contract management software
The choice of contracts management software is crucial for your business. A robust contract management software that is capable of handling the volume of contracts across your business must be chosen. Other features that the software must have are – flexibility to accommodate stakeholders across geographical locations; choice of different automation levels that you can choose from; seamless integration with existing tech stack; highest levels of data security and encryption; easy to use and understand user interface; transparent approval hierarchies; clear, real-time view of contract status for all users; automated alerts and notifications for contract review, approval, and renewals.
Once the decision to automate contract management is made, the next important step is choosing the right software. Cflow is a no-code workflow automation solution that can automate key components of contract management so you can sit back and focus on strategic business initiatives. Cflow does all the heavy lifting for you so that you can spend more time on high-value tasks. The visual workflow form builder simplifies your work considerably by introducing the drag-and-drop method for creating workflows.
Why stick to manual methods to manage contracts when you can use contract management software to simplify the process and make it more effective at the same time? The contracts management process can be streamlined by using workflow automation software like Cflow. With workflow automation, you can bid goodbye to missed contract renewals or compliance issues. To derive maximum value out of your contracts – sign up for Cflow today.
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