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What is contract management? Everything asset managers need to know
The definition of contract management is the ability to understand, plan, create, and enforce an organization’s contracts with customers, vendors, business partners, investors, employees, and other parties.
Contract management begins before an agreement is drafted or proposed with a term sheet. It continues through the negotiation, execution, and performance phases of the contract lifecycle. Contract management impacts how businesses handle individual contracts, as well as how they manage the dozens or hundreds of agreements they enter into each year.
What is the contract lifecycle?
The contract lifecycle includes the phases every agreement goes through from beginning to end, including:
- Initial draft
- Expiration, termination, or renewal
There are slight variations within the contract lifecycle, such as amendments that take place during the performance phase. For example, businesses may execute a joinder to include a third party in an ongoing agreement. Through the joinder agreement, this third party becomes bound to the terms of the underlying contract.
Basic contract requirements
To create legally enforceable obligations, all contracts must have these distinct elements:
One party must make an initial offer to another party. This offer usually includes the service or product offered, the price, and other terms and conditions.
The other party must accept the offer, though they don’t have to take the initial offer. Commercial contracts often go through negotiations in which the parties decide various terms and conditions. When the party receiving an offer suggests new terms, it’s called a counteroffer.
Consideration is the most complicated element of a contract and means each party must provide something of value, such as agreeing to perform a task, promising to do or not to do something, paying money, or providing some other object of legal value. For example, an employee agrees to work for a business, and the business agrees to pay the employee a salary in exchange. Both parties must have an actual stake in the transaction. Essentially, both parties must get something from the deal.
Both parties must intend to enter into a legally binding agreement.
The parties entering into the contract must be of sound mind and an adequate age.
The purpose of and obligations within the contract must be legal.
Common business contracts
Common contracts for asset management firms include:
- Employment contracts
- Consulting agreements
- Confidentiality agreements
- Non-disclosure agreements
- Vendor contracts
- Software licenses
- Insurance policies
- Non-reliance letters
- Transaction agreements
- Loan or credit agreements
- Shareholders’ agreements
- Stock purchase agreements
- Merger agreements
- Equity commitment letters
- Equity guarantees
- Organizational documents
- Limited partnership agreements
- Limited liability company agreements
- Operating agreements
What is contract lifecycle management?
Many businesses, including Ontra, use the terms contract management and contract lifecycle management interchangeably. Some people make the distinction that contract management denotes old-fashioned, manual processes, while CLM encompasses a combination of technology, automation, and streamlined workflows. CLM is an evolution from the days of businesses managing the contract lifecycle through spreadsheets and lengthy email chains.
Why do businesses need contract management?
Organizations often encounter the same contracting pain points over and over. By adopting a robust contract management program, businesses address those challenges directly, creating more efficient and effective processes.
Pain point 1: Slow contract negotiations
Businesses favor speed of execution. While they may expect to take weeks or months to negotiate complex commercial contracts, they often prefer to wrap up routine contracts within a few days. Unfortunately, organizations that lack defined processes and contract playbooks often spend too much time on routine agreements, going back and forth through redundant markups and comments.
Pain point 2: Inconsistent contract terms
Organizations that fail to predefine appropriate terms for routine contracts inadvertently leave their employees and outside parties to decide what to include in an agreement and how to phrase each provision. The effect is that the company may have numerous wordings of the same provision across a contract type, giving rise to different (or conflicting) obligations.
Pain point 3: Manual obligation management
While spreadsheets are useful tools, they are an inefficient and ineffective way for businesses to track their obligations to other parties. Employees have difficulty quickly surfacing specific obligations, reading the underlying contract provision, and comparing similar obligations across a contract type.
Pain point 4: Irregular performance audits
Businesses often have to trust that other parties are complying with their commercial contracts. It can be extremely difficult to track another party’s performance, such as whether a vendor is billing the company properly for the delivered products and services. Given that difficulty, companies put off or fail to perform contract compliance audits.
Pain point 5: Lack of visibility into expirations and renewals
Organizations might have trouble keeping track of when contracts are up for renewal or expire. Many businesses continue relationships without an effective contract after one expires or miss their opportunity to renegotiate terms before an agreement auto-renews.
Pain point 6: Business risks
Inconsistent terms, manual obligation tracking, and lack of visibility into contract performance can all contribute to business risks. Organizations may not fully understand their own obligations or be able to enforce their agreements effectively, which can lead to reputation damage, disputes, lawsuits, and regulatory compliance concerns.
Pain point 7: High contracting costs
Inefficient contract lifecycle management can lead to unnecessary expenses. When businesses’ employees spend too much time on routine agreements, businesses effectively spend too much money on the contracting process. Inefficient processes can also slow down revenue recognition and result in lost opportunities.
Pain point 8: Unusable contract data
More and more businesses are beginning to realize the value locked within their current and historical contracts. Yet many organizations still can’t digitize their contracts, benchmark and extract key terms, and use analytics.
What are the benefits of contract management?
Businesses that build a comprehensive contract lifecycle management system can experience numerous benefits, from shorter contract turnaround times to improved business operations.
Simpler & faster negotiations
An effective contract management system formalizes the end-to-end contract creation process. Rather than treat each new contract as its own endeavor, businesses standardize routine contract types through playbooks of preferred and fallback terms. This simplifies negotiations for routine contracts and reduces turnaround times.
Fewer manual processes
Organizations get the most from their contract management systems by using legal technology. A CLM software solution gives businesses a way to streamline workflows and approvals and take advantage of automation, such as automatic notifications and alerts. Also, a user-intuitive platform makes it easier for employees to move contracts from one phase of the lifecycle to the next.
Data analytics & increased visibility
A technology-based contract management system digitizes businesses’ agreements. Where before companies couldn’t take full advantage of information locked in their contracts, now they can run reports and pull actionable insights from their business contracts. They gain increased visibility into their current and historical agreements.
Improved business function
Contract management improves in-house legal teams’ operations by enabling level setting and benchmarking expectations and performance. By building more predictability into both timing and contract-related results, companies can better organize their workloads, adequately assign tasks to internal resources, and execute broader initiatives.
Comprehensive contract management systems can mitigate business risks in two ways. First, businesses can standardize many contract terms and ensure their preferred and fallback terms are commercially appropriate. Second, organizations can better track their and other parties’ obligations within their CMS software solutions, avoiding noncompliance or catching it early.
What is contract management software?
Contract management software includes legal technology solutions that help businesses create, negotiate, execute, store, and manage their commercial contracts. These software solutions replace manual contract creation and obligation management processes with more efficient and, in some cases, automated workflows.
Through contract management software, also known as CLM software, businesses can digitize their contracts, improve the contracting process, mitigate risk, and take advantage of data analytics and reporting.
Who uses contract management software?
Any business can take advantage of contract management software, no matter its size or industry. However, a business’s size, contracting needs, industry, regulatory requirements, and other characteristics impact which CLM software is right for the company. Contract management software features differ, and, to gain the most benefits, organizations must choose the one that fits their needs.
Within a business, various departments benefit from contract management software, including:
- In-house legal: In-house counsel often own the contracting process and might use CLM software daily, either for contract creation or obligation management.
- Compliance: For asset management firms with compliance functions separate from general counsel, the chief compliance officer and their team would access the CLM.
- Human resources: People teams are often responsible for overseeing employment contracts.
- Sales: Sales teams might oversee contracts with new customers or clients. Depending on the business, sales professionals might participate in negotiations with the help of the in-house legal department and would use a contract management solution for contract creation and execution.
- Investor relations: The investor relations team might facilitate contracts signed with investors, such as limited partnership agreements, side letters, and subscription agreements.
- Investment teams: These teams often interact with documents associated with a potential investment opportunity, such as NDAs. They might also need to reference contracts associated with the purchase of an asset, such as purchase agreements.
- Procurement: Large enterprises often have a team dedicated to finding and managing goods and service vendors. This team would use contract management software for contract creation and auditing vendor performance.
Finance: Finance departments often need visibility into contracts for billing and audit purposes.
What is a contract manager?
A contract manager is an employee responsible for managing their employer’s contracts. Depending on the company, a contract manager or contract administrator might oversee the contract creation, negotiation, and execution processes.
Alternatively, various people within the organization might negotiate and execute agreements, while the contract manager ensures every agreement is appropriately labeled, stored in the contract management system, and accessible to stakeholders.
The purpose of a contract manager is to ensure the company has an efficient contract lifecycle management system. To that end, the manager might oversee:
- The creation and storage of contract templates
- The creation and revisions of contract playbooks
- The contract creation workflow
- Employees’ permissions within the contract management system
- Data analytics related to the company’s contracts and contract lifecycle workflow
- Vendor relationships
- Software integrations with the contract management system
Do contract managers need to be lawyers?
Contract managers don’t need to be lawyers or have a law degree, though many have a legal background. Businesses are more likely to hire a contract manager with a law degree if they want the manager to work closely with the in-house legal department or with business professionals responsible for negotiating agreements.
Do businesses need a contract manager?
Whether an organization needs a contract manager depends on the volume of its agreements, its ability to manage contracting in-house or partner with an outsourcing provider, and its employees’ workloads. Companies that feel they have a good handle on their contract volumes might forgo a dedicated contract administrator, whereas companies with large and growing contract volumes might bring someone on to manage and improve the contract lifecycle process.
What are the benefits of contract management software?
Many small and midsize businesses handle contracts without any specialized software solution. However, as contract volume increases, manual processes become less efficient and create business and reputational risks. By adopting a contract management solution, businesses can build a more efficient and effective contract lifecycle process.
The benefits of contract management software include:
- Fewer ad hoc software solutions during the contract lifecycle
- Contract storage in a central repository
- Streamlined contract creation workflows and faster collaboration
- Integrations, including eSignatures
- Audit trail of revisions and approvals
- More streamlined contract workflows within the solution
- Ability to efficiently manage a higher volume of contracts
- Robust search features to surface contracts and other legal documents
- Contract data analytics and reporting
What is the contract management process?
Modern contract management is a systematic approach to executing and overseeing agreements. Properly establishing that framework is among the most important elements of ensuring an effective process. The structure, combined with best-in-class talent and technology, helps businesses turn contracting from a resource-draining function to one that adds value.
The contract management process includes:
Enterprises and their legal teams must assess their contracting needs and determine where they can optimize current processes. During this process, businesses should pinpoint their routine contracts and establish playbooks of preferred and fallback terms for those contract types.
Businesses must review their contracting technology. Are they using ad hoc solutions or do they have a sufficient CLM software solution? If they lack the necessary contract management technology, a group of key stakeholders should research the business’s options and recommend a solution.
Businesses can also conduct financial and functional analyses to compare the speed and cost of insourcing their full contract lifecycle management, using outside counsel, or partnering with a legal outsourcing provider. New developments in legal technology and contract automation mean businesses can benefit from high-quality, dependable outsourcing.
Businesses often find it challenging to adopt a new, comprehensive CLM system. They must consider how to best manage the change within their organization, such as by purchasing contract management software, training employees on new processes and software, and enforcing the new procedures.
The employees involved in the contracting process must fully adopt the new workflows for the businesses to gain the full benefits of a contract management system.
After implementing a new CLM system, companies should see faster and more efficient routine contract negotiations. Employees enter incoming agreements into the system and negotiate based on preestablished standards. Here, the contract management system helps reduce markup rounds, reducing time to execution.
Modern CLM systems typically include an electronic signature component. The most efficient contract management software includes eSignatures, enabling parties to execute contracts quickly within the platform.
Obligation management & enforcement
As contracts continue to flow in, each company’s obligations to its various stakeholders grow more numerous and potentially unmanageable. A technology-based contract management system gives businesses the ability to quickly surface obligations or the underlying contract language, and even set notifications and alerts regarding obligation-related tasks.
Contract compliance audits
Many organizations fall into the trap of signing contracts, saving the contract on an employee’s device, and rarely reviewing the terms again. This increases the risk of the business’s noncompliance and also makes it difficult to determine if the other party is fully complying with the terms of the agreement. With a technology-enabled contract management system, companies can perform audits on all or some of their contracts, reviewing terms for future negotiations or amendments and ensuring compliance.
CLM process improvements
Businesses should perform periodic reviews of their contract management systems to ensure their playbook terms are commercially appropriate and match their strategic goals, and that their workflows are as efficient and practical as possible. Businesses might need to make small adjustments over time.
Contract renewals and expiration
A formal contract management process ensures businesses address contracts as they come up on their expiration or renewal dates. Companies might need to renegotiate the next contract, prepare internally for a contract to expire, or seek out a new vendor or another party for that relationship.
Insourcing vs. outsourcing
Another aspect of contract lifecycle management is determining which tasks the business should keep in-house or outsource to a service provider. Insourcing every aspect of contracting can be costly and bog down in-house legal teams and business professionals, particularly for companies handling a high volume of routine contracts.
A better choice for some organizations is to partner with a contract automation and outsourcing provider. Legal technology has advanced and pushed traditional legal outsourcing into a new generation of legal process automation. Businesses can now take advantage of contract automation to reduce manual tasks, improve efficiencies, and reduce turnaround times and costs.
This blog was originally published on June 9, 2021.
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