Learn how organizations effectively manage routine contracts so crucial personnel can spend time on higher-value work.
What is contract management?
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Contract management defined
Contract management is the ability to understand, plan, and control the deal-making process between businesses, as well as with customers, vendors, partners, investors, and employees.
Contract management begins before an agreement is drafted or proposed with an outline of preferred terms and conditions. It continues through the negotiation, execution, and fulfillment phases of a contract’s lifecycle.
Some prefer to draw a distinction between contract management and contract administration. The latter focuses on the negotiating phase, while the former deals with responding to any conditional changes that might arise once a contract is in effect.
The benefits of contract management
In the modern economic landscape, having an effective contract management process is critical. Due to complex relationships and an increasingly litigious society, it’s beneficial to businesses, no matter who they’re working with, to use contracts to clearly state responsibilities, expectations, and limitations.
Among the areas where contract management benefits business are:
Improved business function
Contract management can simplify and speed up a legal teams’ operations by level setting and benchmarking expectations and performance. By building more predictability into both timing and results, companies are able to better organize and execute broader initiatives.
Better performance through data
Traditionally, all contracts are negotiated independently and siloed. A modern contract management system not only improves the overall process but also turns the information locked in a company’s cache of active contracts into actionable data that gives professionals insight into their obligations and where there’s opportunity for improvement.
Simplify the negotiation process
An effective contract management system helps formalize the end-to-end process by which agreements are reached. Rather than treat each new contract as its own endeavor, they instead become standardized thanks to a guiding playbook of preferred terms that helps ensure advantageous results and fast execution.
The importance of contract management
Contract lifecycle management turns the lengthy, costly, and sometimes unpredictable process of striking agreements into a standardized workflow that supports organizational goals. It can also help to reduce the level of compliance needed by standardizing desired terms and encouraging negotiators to systematically pursue them.
For those enterprises with multiple contracts in effect, it can help ensure all elements of the business are aligned and working within their legal agreements. For those in regulated industries, contract management can help ensure operations consistently fall within the bounds of government requirements.
Contract management fundamentals
While there are many best practices for contract management, the fundamentals underlying the process should be guided by a handful of principles that ensure expectations are always met. First, the system must be protected from digital threats. Contracts are among businesses’ most important and sensitive undertakings, and the ability for a contract management system provider to ensure their security is paramount.
The system must also be scalable. Whether there are five, 50, or 500 contracts each month, it should be able to nimbly handle the entire process without compromising cost or consistency. Finally, the system should be global to ensure a complete contract management system that can accommodate a businesses’ geographic requirements as part of its scope.
Elements of a contract
The formats and types of information included in contracts can vary widely depending on the industry. Asset managers, for example, rely heavily on nondisclosure agreements to conduct thorough due diligence ahead of any potential acquisition. Despite the details of the exchange and the barriers surrounding it, there are a handful of standard concepts that must be included in every contract for each to be valid. They are:
A valid offer and acceptance
Mutual assent is when both or multiple parties agree to a contract. This can be verbal or written.
This is reached once promises are made.
The ability of all parties to fulfill each aspect of the agreement.
Ensures that the object of, or reason for, the contract is legal.
The stages of contract management
Modern contract management is a systematic approach to executing and overseeing agreements. The proper establishment of that framework is among the most important elements of ensuring an effective process. That structure, combined with best-in-class talent and technology, is what helps turn contracting from a resources-draining function into one that adds value. The stages include:
Here, enterprises and legal teams assess their contracting needs and where current processes can be optimized. Financial and functional analyses can also be conducted to compare the speed and cost advantages of a modern contract management system to a traditional law firm.
This stage starts by establishing the types of contracts that will flow through the system as well as the preferred and fallback terms for the provisions in each contract type. Outsourced legal experts are selected and technology is implemented in order to streamline all future negotiations.
Negotiation and execution
At this point, contract negotiations are near automatic. Incoming agreements are entered into the system and finalized according to the established standards. Here, the system helps reduce markup rounds, improving time to execution.
Managing contract obligations
As contracts continue to flow in, each company’s slate of obligations to its various stakeholders grows larger and potentially unmanageable. A smart contract management system extracts the terms from existing contracts to help benchmark future negotiations while also turning those obligations into actionable data to ensure requirements are consistently fulfilled.
As companies and business conditions evolve, periodic reviews of the system are required to ensure that preferred terms match users’ strategic goals as well as the current economic climate. Small adjustments may need to be implemented from time to time, but should not impact operations in any meaningful way thanks to the system’s structure.
How contract management can help
While contracts are the foundation of most companies’ operations, most businesses don’t exist solely to negotiate and sign them. Some offer financial services, healthcare, or real estate services. Professionals, and especially legal teams, in industries that use a higher number of contracts than other businesses, run the risk of being endlessly bogged down by what is essentially paperwork. When this happens, companies start to fall further and further into a trap. They risk losing sight of their long-term, strategic goals due to the overwhelming grind of daily tasks that are important, yet also repetitive and of lower value.
A modern contract lifecycle management system is the answer to this problem. By moving routine work to a cloud-based provider companies can refocus on critical, high-value projects with the confidence that contracts are managed in a way that improves overall operations by reducing cost, increasing speed, and providing data in an effort to continually improve outcomes.
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