Irrespective of the type of business you have Ultimate Guide to Contract Management will be a great help to build business efficiency. One aspect that is unequivocally central to the organization’s functioning is contracts. Daily, contracts form the backbone of every relationship that an organization has with stakeholders like its suppliers, partners, and customers. Given its importance for business performance, effective contract management in place drives long-term value for your organization. It also helps establish powerful stakeholder relationships. A contract management process that will guide the entire lifecycle of the contracts will ultimately make or break the organization.

What is Contract Management?

Contract management refers to the business processes that manage the creation, implementation, and evaluation of contracts to maximize business performance and minimize risk.
Contract management is pivotal for your business – Contracts, being legally binding, determine a business’s stakeholder relationships, pricing structures, the scope of work, rights and obligations, timelines for projects, warranty provisions, etc. Given how critical contracts are, effective contract management can dramatically improve the performance of the organizations. Similarly, if your contract management is unstructured, it will lead your business to various operational and financial risks.

The role played by contract management is also evolving. It’s not just filing documents anymore; contract management entails understanding every aspect of a contract’s lifecycle to extract meaningful data insights. Businesses are engaging in contract lifecycle management to drive their performance and can better achieve their objectives with this ultimate Guide to Contract Management. A Gartner Report has mentioned that ‘CLM is evolving from an operational record-keeping system to an enterprise-level core system addressing business risk, costs, and the pursuit of revenue maximization.‘

Our One-size-fit Soluton: Contract Management Software – iContract

Benefits of Contract Management

Let’s look at some of the significant benefits of contract management:

1. Aids Business Functioning

Efficient contract management will help simplify how an organization functions – it structures business expectations, the mechanisms needed for their fulfillment and allows you to analyze how the organizational objectives meet. The insights from contract management can also help identify areas for revenue optimization and cost minimization.

2. Improves Functional Efficiency

Best-in-class contract management techniques involve the use of various software or tools that automate the process of managing contracts. By reducing manual efforts, it improves business efficiency and the scope of errors.  The personnel can focus on more strategic aspects of contract management like evaluating contract performance, identifying areas for improvement, etc.

3. Improves Spend Visibility and Minimizes Maverick Spending

By structuring the engagement of an organization with its stakeholders, especially its suppliers, contract management simplifies transactional, and performance tracking. It increases spend visibility and improves the transparency of where exactly your money is going. Maverick spend is one of the critical issues that plague businesses, and higher spend visibility will help you curb undocumented expenditures. By increase spend visibility, contract management can also help you identify higher cost savings opportunities for your organization.

4. Increases Visibility of Suppliers

Suppliers form a crucial part of most business today as the majority of the organizations involve suppliers for the provision of goods / services for facilitating their performance. Contract management helps in tracking the suppliers, assessing their performance based on the criteria mentioned in the contracts, and evaluating supplier risk. Furthermore, it also acts as a mechanism for building long-term, collaborative relationships with the suppliers resulting in valuable synergies.

5. Enforces and Improves Compliance

Having a contract management system that dictates terms and conditions and procedures followed implements and enhances the level of compliance amongst the relevant stakeholders. Increase in compliance invariable helps in mitigating a large number of risks within the organization.

It is crucial as Zycus’ annual report, Pulse of Procurement 2018, has identified contract risks and lack of compliance as one of the significant procurement pain points in 2018.

Read our blog on: 7 Steps of an Effective Procurement Process

To ensure effective contract management, it is essential to identify the steps of contract management, which can be used to put a contract management system in place. The phases and cycles of contract management might differ based on the type of organizations and how they function; however, a basic framework design is possible.

Real-World Success: Telekom Malaysia’s Contract Management Transformation

Stages of Contract Management

1. Identify Business Objectives and Goals and Define Risk Appetite

Before a contract gets drafted, it is essential to identify the business objectives and goals for which the contract is necessary. It will help set appropriate expectations for both parties and will also enable effective evaluation of how the contract was able to fulfill the organization’s requirements.
Additionally, it is crucial to understand and define the stakeholders’ risk appetite to set appropriate performance expectations and to minimize the probability of risk occurrence throughout the lifecycle of the contract.
Read here: Steps to Manage Contracts Efficiently

2. Draft the Contract

Once the business objectives and expectations get identified, defined, and communicated correctly, the drafting process of the contract starts.
Gather all supporting information and documents required, and if the organization maintains any, take help of standardized templates that are updated and adhere to all regulatory / legal and organizational requirements. Drafting a contract is an extremely critical process as any level of ambiguity might result in business losses.

3. Negotiate the contract with involved stakeholders

One the contract gets drafted, the negotiation between the interested parties commences. This process takes into consideration what each party expects from the contracts concerning the pricing structure, terms, and conditions, rights and obligations, warranty provisions, renewals, and termination, etc. Ensure that all proposed changes in the negotiation process are effectively tracked for incorporation.
The negotiation process should ideally be conducted in a way that all involved parties communicate with transparency and mutual trust. An added benefit of this is that the organization can build long-term, collaborative relationships and leverage the resultant synergies for improved performance.

4. Finalize and execute the contract

Once the negotiation phase concludes, and the contract is amended to incorporate any appropriate changes, the contract goes out for approval to all relevant teams. It is essential for the organization to have a proper workflow of the approval process for various types of contracts to ensure that approvals do not impede the contract cycle. Once the contract is approved and finalized, the execution by all relevant stakeholders starts based on all the specifications mentioned in the contract.

5. Manage contract obligations and audits

Contract management (CM) doesn’t end when the contract gets executed. Post-execution, it is essential to ensure all involved stakeholders meet their obligations regarding their performance, timelines, payments, etc. Managing responsibilities enables compliance to all the contract specifications and provides that contract performance meets the business requirements.
Additionally, it is vital to periodically audit all contracts to measure performance and to identify any exposure to risks. Regular contract audits will help you identify and establish risk mitigation mechanisms.

6. Manage contract termination and renewals

As the contract cycle arrives its closing date, it is essential to keep track of termination or renewals. Missing contract renewals can result in significant losses regarding the loss of long-term relationship building and synergies, missed revenue maximization opportunities, etc. Additionally, it implies the organization has to execute a new process for the same contract requirement.

Read our blog on: 5 Reasons Why You Need a Contract Management Software

Best Practices for Contract Management

To make the CM system more useful, you can implement certain best practices that will ensure that you reap the maximum benefits from your contracts:

1. Centralize a repository for all contracts

Ensure that your organization is storing all contracts in a centralized repository that can be accessed by all relevant stakeholders. It will help track contract information such as terms and conditions, renewals, etc. Learn how to create contract repositories effectively.

2. Ensure team collaboration throughout the lifecycle of contracts

In the majority of the business cases, the legal department oversees the contract management process. Make sure there are procedures or communication channels in place for contracts to represent the stakeholders. Through collaboration and communication between the legal and other business units, a contract produces desired results with minimal risks. It also prevents complete dependency of the other business units on the legal team.

3. Enable compliance throughout the lifecycle of contracts

Ensuring effective compliance management through the lifecycle of contracts is crucial. It helps in adhering to regulatory/legal and corporate requirements. Contract compliance stakeholders prevent financial and operational loss besides various risks.

4. Standardize contract management processes without mandating rigidity

Standardizing various stages of CM will reduce cycle times and related inefficiencies. The organization can have standardized templates as a majority of the contracts have common agreement types. Pre-approved templates updated periodically helps adhere to regulatory/legal requirements. Every organization should have a contract management procedure for business units to follow a standardized method of managing their contracts.

Read our blog: 5 Contract Management Best Practices that can do Wonders!

Differences between Contract Management and Contract Lifecycle Management (CLM)

Why is a Contract Management Software Important?

An important question for the organizations to ask is if investing in CM software has a relevance. Inducting a contract management software that suits your organization’s requirements might be a complicated and time-consuming task. But the right software can be very effective, efficient, and productive in the long-run.

1. Once contract management software automates the lifecycle of the organization’s contract, manual efforts that go into tactical tasks will significantly reduce; and so will the probability of human errors.
2. Contract management software will also enable higher efficiency at every stage of contract management and thus, reduce contract cycles. For example, while drafting a contract, if the legal team were to prepare every contract, the organization requires manually, it will take too long. Automated CM software reduces manual intervention.
3. Contract management software will help centralize a repository for the contracts in a cloud system while simultaneously enabling more comfortable access to critical contract information by all relevant stakeholders. Thus, finding, tracking, and evaluating contracts will be a few clicks away.
4. Contract management software will also contribute to contracting risk mitigation and performance maximization. It will ensure all relevant stakeholders get necessary notifications on time, especially when it concerns contract renewals, payments, deadlines, etc. Contract management software also links your contracts to compliance management.

Download report: The Why, What & How of Contract Management

Additionally, contract management automation powered artificial intelligence boosts data analytics. Through predictive capabilities, you can derive crucial insights from your contract management system, forecast costs, and revenues. You also identify how to drive your performance.

The Role of AI in Contract Management

Artificial Intelligence (AI) is revolutionizing contract management by enhancing efficiency, accuracy, and strategic value. Traditional contract management processes are often labor-intensive, time-consuming, and prone to human error. AI addresses these challenges through automation, intelligent data analysis, and advanced decision-making capabilities.

• Automation and Efficiency: AI streamlines contract management by automating routine tasks such as data entry, contract creation, and compliance checks. AI-powered systems can draft contracts using pre-defined templates, reducing the time and effort required. Automated workflows ensure that contracts move through approval processes quickly, minimizing bottlenecks and ensuring timely execution.
• Enhanced Accuracy: AI significantly reduces the risk of human error in contract management. Machine learning algorithms can accurately extract and categorize key contract terms, obligations, and deadlines. This ensures that critical information is not overlooked, and all contractual obligations are tracked and met. Natural language processing (NLP) capabilities enable AI to understand and interpret complex legal language, enhancing the accuracy of contract analysis and review.
• Risk Management: AI improves risk management by identifying potential issues before they become problems. AI algorithms can analyze large volumes of contract data to detect patterns and anomalies that may indicate compliance risks or unfavorable terms. Predictive analytics help organizations anticipate and mitigate risks, ensuring that contracts align with regulatory requirements and organizational policies.
• Data-Driven Insights: AI transforms contract management from a reactive to a proactive process. By analyzing historical contract data, AI provides valuable insights into contract performance, trends, and areas for improvement. This data-driven approach enables organizations to optimize contract terms, negotiate better deals, and make informed strategic decisions. AI can also identify opportunities for cost savings and revenue generation, enhancing the overall value derived from contracts.
• Scalability: AI enables organizations to manage large volumes of contracts efficiently. As businesses grow and enter new markets, the complexity and number of contracts increase. AI-powered contract management systems can scale to handle this growth, ensuring that all contracts are managed effectively without requiring proportional increases in human resources.
• Collaboration and Integration: AI enhances collaboration by providing a centralized platform for contract management. Stakeholders can access and update contract information in real-time, improving communication and reducing delays. AI systems can integrate with other enterprise software, such as CRM and ERP systems, ensuring seamless data flow and comprehensive contract visibility.

In a Nutshell

5 Reasons Why You Need a Contract Management Software has found that 70-75% of failing projects occur due to contracting and commercial issues, resulting in an average 9.2% of annual revenue leakage.

In this blog, we’ve covered the crucial aspects of contract management. We discussed the benefits, stages, and best practices that can drive contract management processes to be more effective and productive. Organizations realize the strategic importance of contract management in achieving enterprise objectives. With AI, software, and digitization, contract management professionals  harness maximum benefits. What about you?

FAQ’s

What is the contract management process?

The contract management process is the system by which organizations manage their contracts. It includes the identification, selection, and negotiation of contracts; the drafting and execution of contracts; and the ongoing administration, monitoring, and renewal of contracts. The contract management process is essential to the success of any organization that enters into contractual agreements. A well-managed process can save the organization time and money, while protecting its interests and ensuring compliance with applicable laws.

What are Contract Management Skills?

Contract management skills are critical for any business. The ability to effectively manage contracts can mean the difference between a successful business venture and a failed one. There are a number of different contract management skills that businesses need to be aware of.
These include:

• Negotiation Skills: The ability to negotiate effectively is crucial in contract management. Those who are skilled at negotiation will be able to get the best terms and conditions for their business.
• Organizational Skills: Effective contract managers need to be highly organized. They need to be able to keep track of all the different contracts that their business has in place and ensure that they are all being adhered to.
• Communication Skills: Good communication skills are essential for contract managers. They need to be able to explain the terms of a contract to both parties involved and make sure that everyone understands what is expected of them.
• Analytical Skills: Contract managers need to be able to analyse complex data in order to identify trends and patterns. This information can then be used to negotiate better deals and improve the overall effectiveness of contract management.

What is a Contract Lifecycle Management (CLM) process?

Contract Lifecycle Management (CLM) is a systematic approach to managing contracts from creation to completion. It encompasses the entire process, including drafting, negotiation, approval, execution, compliance management, and renewal or termination. CLM leverages technology to automate workflows, track deadlines, and ensure compliance. By providing centralized storage and real-time visibility, CLM enhances efficiency, reduces risks, and improves decision-making. Its comprehensive nature helps organizations streamline contract management, ensuring that all contractual obligations are met and maximizing the value derived from each contract.

What are the six 6 stages of contract management?

The six stages of contract management are:

Initiation: Identifying the need for a contract and defining the objectives, scope, and key requirements. This stage involves gathering necessary information and setting the groundwork for contract creation.
• Drafting: Creating the initial contract document, including terms and conditions, obligations, and responsibilities of all parties involved. This stage often involves collaboration between legal, procurement, and other relevant departments.
• Negotiation: Discussing and finalizing the contract terms with the other party. This stage aims to reach a mutually beneficial agreement and may involve several rounds of revisions and discussions.
• Approval and Execution: Obtaining the necessary approvals from stakeholders and signing the contract. This stage ensures that all parties formally agree to the contract terms and commit to their obligations.
• Performance and Compliance: Monitoring and managing the execution of the contract terms. This stage involves tracking deliverables, deadlines, and compliance with the agreed-upon terms to ensure both parties fulfill their obligations.
• Renewal or Termination: Deciding whether to renew, renegotiate, or terminate the contract at its expiration. This stage involves evaluating the contract’s performance, addressing any issues, and making decisions about the contract’s future.

What is a contract cycle?

A contract cycle, also known as the contract lifecycle, refers to the comprehensive process that a contract undergoes from its inception to its conclusion. This cycle encompasses all the stages involved in the creation, execution, management, and eventual termination or renewal of a contract.

What are the 5 steps of contract management?

• Creation: This step involves drafting the initial contract. It includes defining the terms, conditions, obligations, and responsibilities of all parties involved. Legal, procurement, and other relevant departments collaborate to create a comprehensive and clear contract document.
• Negotiation: Once the draft is prepared, the contract terms are discussed and negotiated with the other party. This process aims to reach a mutually beneficial agreement and may involve several revisions to ensure that both parties’ interests are adequately addressed.
• Approval and Execution: After finalizing the terms, the contract must be reviewed and approved by the necessary stakeholders within each organization. Once approved, the contract is signed by all parties, making it legally binding.
• Performance and Compliance: This step involves managing and monitoring the execution of the contract terms. It includes tracking deliverables, deadlines, and ensuring compliance with the agreed-upon conditions. Regular reviews and audits may be conducted to ensure that all parties fulfill their obligations.
• Renewal or Termination: As the contract approaches its end date, a decision must be made whether to renew, renegotiate, or terminate it. This step involves evaluating the contract’s performance, addressing any issues that arose during its term, and making informed decisions about the contract’s future.

Related Reads:

1. 5 Reasons Why You Need a Contract Management Software 
2. Driving Collaboration with Contract Management 
3. 5 Steps to Realizing Value from Contract Lifecycle Management
4. The Why, What & How of Contract Management
5. The Paradigm Shift in Contract Lifecycle Management: Why 2024 Demands a Rethink of Your CLM Strategy
6. Explore Zycus’ AI Contract Management Software
7. Top 7 Reasons to Invest in a Contract Management Software
8. Watch Video: Maximize ROI with Effective Contract Management Strategies