Contracts are great oral or written agreements that businesses have with their third-party partners such as employees, customers, suppliers, or partners. Given its relevance and importance in business performance and success, proper contract management is essential for promoting long-term value for any organization.
While contract management can be viewed as a mere formality between two parties, it is a key process for gauging the sustainability of a business entity.
So, how do you ensure proper contract management in the company? Read this article to discover the effective contract management strategies that promote business success.
What is contract management?
Contract management is a business process used to manage contracts' creation, execution, and evaluation to minimize risks and enhance business performance.
Contract management is key for any business. And being a legally binding, it determines company stakeholders' relationships, the scope of work, rights and obligations, pricing structures, warranty systems, timelines for projects, and many other important business facets.
The role of contract management is also evolving, and it is no longer about document filling only; it involves understanding every detail of the contract lifecycle to generate relevant data-backed insights.
Businesses should engage in contract management lifecycle to minimize risks and drive success by creating ways they can better achieve their goals.
Benefits of contract management.
Before we jump into contract management strategies, it is imperative to know the benefits of employing contract management in your business.
a. Accelerate contract creation and execution.
Contract management automates extremely complex contract channels so that the entire process takes less time. This can include conditional and parallel approvals leading to improved collaboration between different departments in an organization.
To improve the process further and reduce time, you can employ electronic signature capabilities via SMS messaging and email to ensure every party has everything they need. Most businesses take things a notch higher by integrating their contract management system with enterprise software like Salesforce to produce proposals and agreements.
For some companies, delays start right from the time of contract execution before the review and approval stages. For these organizations, contract management solutions can avail templates, basic terms and conditions, and clause articles chosen by law and approved for use in specific cases.
b. Reduce business risks and enhance compliance.
Contract management systems reduce three major categories of business risks. The first risk category is business compliance management having a full audit trail. Instead of looking for missing attachments or approvals, contract management solutions handle this for you.
When you automate your contract processes, there is an electronic record of action taken, including signatures. The software provides audit reports with just simple clicks.
The second risk category is business compliance. The system has functionalities that run analytics on the status of your business relationships. These data include every business operations regulatory compliance and how they are aligned to their business legal compliance.
c. Expands contract visibility through a single-sourced truth.
Contract management can be done through a spreadsheet or a desk draw, but a contract management system offers enterprise-level solutions that are availed to everyone within the company with access.
This means that everyone within the business can initiate requests for contracts and watch the process till the end without any compromise and allow everyone using the software to oversee suppliers, business pricing, and their obligations. This boosts their negotiating potential.
Some businesses also choose to increase their clients' and suppliers' visibility. And this gives every partner access to the contract, which is the backbone of their relationship.
And with the software's in-built features and prompts for customers to get their commitments fulfilled and forms completed, they speed their pre-qualification and onboarding processes.
Some businesses take it a step higher by viewing their contracts as one source of transactional truth. By generating and arranging data from the contracts, they address other major commercial activities and track their KPIs in a better way.
d. Negotiate better renewals quickly.
Contract management automatically identifies renewal data listed in a contract. It triggers a notification to legal teams and owners when the contract will end. Knowing when the contract will last is just the start of initiating another one.
The management software keeps track of all the terms and conditions with involved parties. If all these are available to related parties, it will help negotiate subsequent contract rates and possibly reduce expenses.
This can also facilitate discussions related to contract performance and developing future key performance indicators in the future statement of work. You can allow the system to inform contract performance, end dates, and possible renewals.
Furthermore, it can aid accurate invoicing, pricing, and recommended relevant actions to improve revenues.
e. Improved document management.
An automated document management system allows you to find whatever you need whenever you need it without hesitation. Contract management software will enable you to get the exact figure or word regardless of where it is across the enterprise.
It doesn’t matter whether the document is a JPG or a PDF, the contract management software will convert it into a complete searchable text that can be accessed through the mobile or desktop conveniently.
f. Promotes best practices in contract privacy and protection.
For most companies, a protected contract is that which is kept in the drawer that can be accessed by one person with the key. And in this case, you cannot know how many people have found the key and viewed or compromised the contract.
The only best way to protect a contract is by having strict and vigilant access controls in place. Contract management solutions provide privacy standards with permission of whoever can view the agreement and can show who attempted to access it without permission.
Contract management strategies every business should adopt.
Having known the benefits of contract management, here are the essential contract management strategies you should know.
1. Prioritize contract management in your company.
Don’t make contract management a last-minute activity in your transaction. Include it in the first stages of your procurement program. Ensure that appropriate, enough funded resources are involved and secure straight from the start of the process.
While doing these, consider the reality that a robust customer-side contract management cost can range between 5 to 8% of the whole contract resources.
Ensure the planning is detailed for the continuity and sustainability of involvement. This will also create an effective handover in case key individuals decides to opt-out of the organization or process.
Also, the planning needs to be supported by the creation of an informed knowledge base around the adaptation and development of the contract until the end, during, or past the signing stage. And remember, this commitment should be kept throughout the entire life of the contract.
2. Develop a strong document storage system and sharing platforms.
Straight from the beginning of your procurement process, ensure you set a document sharing and storage platform and be keen on document versioning and identification. When it reaches the contract signature stage, you need to make a standard library of primary documents having everything that is essential to the contract.
Basic candidates for the above case include the requirement documents, the winning bidder's tender with all the supporting clarifications, the contract including all the supporting details, final evaluation details, logs, plans, and all other materials related to the contract process for quick future reference.
Be careful and attentive to ensure sensitive internal documents are private while also being prepared to share important details with the provider. This trail will be crucially useful in the future if things go out of the way or the dispute arises over what was said, who said it, and when it was said.
3. Design major post-contract information flows between the business and the provider.
During the transaction process, it is important to create channels that give you the relevant, accurate, granularity, and clear level of information needed for effective contract management.
For instance, open-book accounting is usually a bigger mandate for larger contracts, but also often when customers find the data is bleak, and providers’ real margins and costs are hard to identify.
Always try as much as possible to avoid this opacity by setting out clear and relevant heads of costs that should be produced plus any intra-provider gross charges or hidden fees. Design obligations to allow you to see, examine, and audit open-book data at reasonable intervals.
1. Give attention to invoice designs.
Supporting the importance of information visibility mentioned above, it is imperative also to consider its accuracy. Vaguely designed invoices that don’t deter and encourage complicated entries can lead to wastage of client-side admin hours over a big, long-lived contract.
A small consideration of how invoices are arranged or designed to accommodate known or expected factors can make a huge difference in the procurement process.
2. Ensure the contract include relevant management provisions.
It is important that management provisions, tools, and processes are integrated for the whole duration of the contract both electronically and physically. Ensure the level of contract management strategies is proportionate to the complexity and scope of the services and deliverables.
For instance, an outsourced contract is likely to guarantee much deeper and wider attention than others, such as a product supplies contract. The provisions in the agreement may range between service management meetings or routine deliveries to testing for perfect value and special arrangements aimed at dealing with disputes, underperformance, etc.
While model contracts can be seen as helpful since they cover management provisions, it is important to have the legal and procurement advisors confirm if there are adequate tools to assure and monitor "normality" and provide measures when there are errors.
3. Create a systemic approach to contracting.
Although various systems are ideal for contract management strategies, it is imperative to standardize management across processes by setting stages for management. For staff mandated to manage contracts, it is important to provide them with clear instructions.
The guideline should include several language guidelines, terms, and conditions applicable to a broad range of contract creation. These may not only help contract initiation but also prevent managers from going out of the company standards.
4. Schedule contract reviews.
During a contract review regularly is sore important after initiating a contract with any party. Contract reviews help the business by offering deeper visibility levels that ensure your business always gets the benefits outlined in the agreement.
1. Set manageable deadlines.
Deadline is one of the most important aspects for consideration in the business. Every party involved in the contract has instances where deadlines cannot be met. In this scenario, it may be relevant to push deadlines by agreement.
It may be wise to move the deadline to ensure you get quality output instead of pushing involved parties and receiving an unnecessary outcome.
Remember to be realistic when setting deadlines. You need to formally and politely object to unrealistic or ambitious deadlines if asked by the other party. While compromising can assure long-term cooperation between parties, it is also wise not to lower your standards so much for the sake of unrealistic and unreasonable reasons.
Contracts are essential written or oral agreements between two or more parties in a company. And they should not just be seen as something that is there to initiate a transaction or refer to when the agreement does not go as planned.
Having known this, effective contract management strategies are therefore a key factor in ensuring a streamlined contract process.
To have strong contract management systems, implement the strategies discussed above; prioritize contract management, develop strong document storage and sharing facility, design post-contract information flows, be careful with invoice designs, include relevant management provisions, create a systemic approach to contracting, schedule reviews, and set realistic deadlines.