Contracts are a key part of doing business. They are an agreement between your business and its external stakeholders such as suppliers or employees to render services to your company.
It’s important to understand contract management, the benefits of contract management software and how they can help you, and what contract managers do.
What is a contract?
A contract is a legal document that constitutes a binding agreement between parties when it is signed. For businesses, the parties can either be a company and its suppliers, merchants, business partners, employees, or customers. In short, there must be a vendor and a buyer.
The agreement contains all the specifications and terms to be fulfilled by both parties. If any party violates the terms, the other party will be able to take legal action. These contracts need to be managed appropriately to create a strong business relationship and to protect the interests of a business. This is where contract management comes in.
What is contract management?
Contract management is the process of managing the contract specifications for the satisfaction of both parties. The contract’s specifications entail the duties to be done by each party, terms, and conditions to be followed, and the deadline for completing the required obligations.
Some also include the scope of contract management to include contract administration. This includes the entire cycle of creating contracts, negotiation of contract terms, and amendment of contract terms.
You will often need to involve a lawyer or any other individual in the legal team to help review the contracts to ensure the terms are worded properly and avoid any vague points.
Some businesses employ contract managers to help them manage and administer contracts if the company has agreements with a large number of stakeholders.
Who are contract managers?
A contract manager is a person managing contracts for vendors and customers. Contract managers must have some legal knowledge and have a full understanding of the contract management process. Many contract managers are also equipped to use technology tools that automate some of the processes of contract management.
A good contract manager needs to communicate well, be highly organized, and meet tight deadlines that can come with administering business-critical contracts. They often have to collaborate with the legal department to create and amend contracts.
Stages of contract management
The contract management life-cycle can be categorized into three stages. These include:
This is the activity taking place before the contracts are given to a business party. During this stage, contract creation takes place and the business will determine if the other party can fulfill the contract terms and conditions. The business needs to consider the clauses they want to include so that things work in the manner they intend.
The contract is awarded to the parties, sometimes after a tender or proposal process.
In the post-award stage, the company and the other party sit down to negotiate the contract’s agreement to ensure mutual benefits. They compare versions of their agreements and note any incongruities. If there are any disagreements, they can discuss and agree to make amendments to the proposed contract. Often, the legal teams and sales teams will be involved to review the contracts.
Once both sides approve the contract, there may be a traditional contract-signing process. However, more companies are using contract management software for automated contract signing which can be legally binding. Both sides will receive a signed copy of the contract.
Completion of the execution process does not mean that the contract process is over. Contract management and maintenance follow where the business will ensure that the other party maintains compliance with all the terms of the contracts and delivers the services as promised. Sometimes, real-time events such as political conflicts, natural disasters, and global events such as a pandemic can affect the fulfillment of certain clauses in the contract. Contract management teams from both sides may then meet to discuss amendments to the contract.
Contracts can be regularly audited to ensure that that the business is in compliance with all the clauses they have agreed to.
At the end of the contract, the business may also determine whether to extend the contract, propose a new contract with modified terms, or terminate the contract.
The end-to-end contract management process can be difficult to manage alone. The use of manual contract management can be time-consuming and add to the workload. Many businesses are using ways to automate the contract management process and improve efficiency.
Contract management in the procurement process
Contracts are often used as part of procurement which handles the purchase of goods and services from an external source for an organization. Due to the high number of contracts involved in procurement, the contract management process is important.
Here are the reasons why the contract management process must be managed well in procurement.
Contract management processes are essential to ensure that suppliers deliver their products and services in the state and time required by the company. Sometimes this can have implications on revenue if the employees cannot get what they need at a certain time.
The contract defines the rules of engagement between the buyer and seller. By setting out expectations clearly, the communication between your business and the vendor will be better which makes it easier to manage the relationship.
Managing contracts involves ensuring that all the daily procurement processes follow the contract conditions stated in the agreement.
While managing a contract, it’s important to identify process improvements that can be made which can create new changes to the clauses in the contract. Companies can benchmark against best practices to evaluate ways to improve existing processes. This can also include ways to improve contract management.
Any procurement activity involved in a contract needs to be assessed continuously for compliance with the contract information while ensuring that these activities follow the purchasing processes and mitigate risk appropriately.
Businesses need to manage changes in procurement activities, requirements, or product availability in a long-term procurement relationship. This can affect the contracts already in place between the parties.
Managing renewal or termination
Once the contract period is over, the decision can be made to identify whether to make contract renewal or terminate them depending on the supplier’s previous performance.
The above contract processes apply mostly in the procurement cycle, but generally, these are the main stages that a contract management system must follow to be efficient.
Benefits of contract management
Helps build relationships
Business organizations use the contracts to build a long-lasting sales and procurement relationship with other parties. This leads to consistent business operations and revenue creation. These relationships can also lead to referrals to other vendors, thus increasing the sustainability of business operations and revenue for the company.
Increase the overall performance of the organization
Contract management tools often gather data that can be analyzed and reviewed. With this information, businesses can evaluate how well they are meeting contractual obligations and how well they are assessing the performance of obligations performed by other parties for successful contract management.
The use of automated contracts can also simplify contract management solutions.
Contract management software
Traditional contract management is done manually with printed contracts, ink signing, and contracts stored in filing cabinets. This process often has room for human error and lacks efficiency.
Contract management software integrates automation and artificial intelligence to analyze and store contracts electronically while ensuring that the signatures and contract are legally binding.
These speed up the contract management cycle for contract creation and storage. The contracts can be retrieved easily via the cloud in a short time, unlike filing cabinets where you might spend a fair amount of time looking for contracts. It allows employees in different locations to access the contract easily.
Benefits of using a contract management software
Easy accessibility of the contract
Contract management software offers a centralized location on a cloud-based system to store the company’s contracts where every employee can easily access it. In case the contract is revised or audited, the software provides the best way for every employee to see the changes easily.
The software becomes the single source of truth where everyone has access to the same information and can incorporate it into their work.
Since the software stores the sales contracts online, it saves the time spent by employees searching through the filing cabinet looking for contracts. The automated alerts also make it easy to get the important dates and perform other data entry work over hundreds or thousands of pages.
The best contract management software has rigorous cybersecurity measures to prevent hackers from gaining access to confidential company information. Since the contract is stored electronically, it is protected against the risk of theft, loss, or destruction.
Makes the contract management stages easier
The signing is done electronically, reducing the execution time. The signatures are also binding in court on a legal contract even if it is done electronically. The software also makes the review process easy and faster since it can scan through it and look for errors, hence reducing the approval workflows and speeding up the process at every stage of the contract lifecycle.
It also marks out where parties need to sign on a contract which reduces communication back and forth to correct contracts.
Improves the efficiency of the organization
Since the contract lifecycle management is automated, manual activities are reduced which minimizes the chances of human error. This leads to effective contract management.
Proper contract management and contract administration is critical especially when it comes to high-value or high-risk projects. Many companies hire a dedicated contract manager to help them manage their contracts. However, if you don’t have the budget or scale to warrant a contract manager hire, you can utilise contract management software to automate large parts of the contract management cycle such as creation, signing, storage, and access.