What is contract management?
Contract Management is a key business process, comprising a range of activities across all the stages of the contract lifecycle.
Often overlooked, particularly in fast-growing businesses, effective contract management can be a source of competitive advantage. If the principles are applied consistently it can help ensure:
- All negotiated contract benefits are delivered
- Costs are controlled and reduced as renewals are prepared for and duplicate spend can be removed
- Business risk is mitigated by making suppliers responsible for maintaining compliance and providing clear reporting for audit purposes
- Processes are carefully designed and automated and consequently reduce the amount of time specialist resource (such as your Legal Team) spend doing non-specialist work (such as basic contract admin)
With this in mind, businesses need to focus on aligning their people, processes and technology around managing contracts, in order to release the full value contained in them.
So what are the steps for doing this?
In this article, we’ll take you through some fundamental areas of contract management:
- The process of Contract Lifecycle Management
- Tips for successful contract management
- Common pitfalls
First things first, let’s look at the contract lifecycle and how to think about managing contracts through it.
The Process of Contract Lifecycle Management (CLM)
As outlined above, applying the relevant contract management principles and practices throughout the contract lifecycle will create opportunities to generate more revenue, lower costs and benefit from better relationships with your contracted partners.
The contract lifecycle can broken down into seven high-level stages, which are:
- Inception
- Negotiation
- Execution
- Start-Up
- Operation
- Renewal
- Closeout
You can see how they fit together in the following diagram:
You might also see the stages of the lifecycle grouped into two main areas:
- Pre-signature. A summary term covering the period and actions prior to a contract being signed. Involves steps like contract authoring, templating, redlining and negotiation.
- Post-signature. A summary term covering the period and actions which follow a contract being signed. Includes items such as obligation tracking, performance & compliance management, dispute resolution and renewals.
However, focusing on the 7 stages, they each represent an opportunity for a business to maximise the value realised from its contracts and to protect its interests.
Initiation/Inception
When a need for a new product, service or partner becomes apparent, having a clear process to follow for everyone is vital. Now’s the time to capture requirements, details of potential partners and agree sign-off parties.
It’s surprising how often these completely controllable details are either not recorded accurately or not covered in enough detail. Getting them right makes the rest of the process much more straightforward.
Selected CLM actions at this stage:
- Stakeholder identification
- Requirements gathering across the business
- Potential supplier identification and initial screening
Negotiation
A lot of focus for contract managers is rightly on cost reduction and control. However, it’s vital that both parties are happy with the outcome and one party doesn’t feel that they’re at a disadvantage.
At this stage, good CLM ensures a mutually beneficial agreement is reached that is rewarding but attainable on all sides.
For more specific advice, read our related article on contract negotiation.
Selected CLM actions at this stage:
- Preferred supplier selection
- Draft contract issued
- Legal review and redlining
Execution
Once agreement has been reached, the documents must be signed by the relevant parties.
Finalised documents, with all agreed changes, have to be produced and shared with key stakeholders.
Selected CLM actions at this stage:
- Finalised documents to be created and shared, along with summary document
- Signature format to be agreed — electronic or wet
- Contract to be signed by relevant parties and returned
Start-up
In this foundational stage, key contract metadata needs to be extracted and added to the central contract register.
This stage can easily be overlooked if there’s a rush to get the contract up and running. This can lead to significant problems further down the line.
Selected CLM actions at this stage:
- Document the key features of the contract and add to central register
- Promote awareness and understanding of the contract with stakeholders
- Obtain/assign roles and responsibilities for ongoing contract management
Monitoring
This is vital, and it needs to be written into the agreement. Regular check-ins and ongoing oversight of the contract performance are needed to ensure targets and milestones are met, particularly in terms of spend and revenue.
Both parties must ensure they comply with their contractual obligations, with the supplier delivering what’s been ordered or agreed.
Selected CLM actions at this stage:
- Automate obligation tracking
- Measure performance through the use of balanced scorecards
- Carry out regular business reviews
- Manage disputes as necessary
Renewals
A massive opportunity for cost control & reduction, negotiating better terms and deepening relationships with suppliers.
However, it’s opportunity that’s all too often squandered due to poor management of the process.
How often have we, or someone we know signed a contract and then filed it away in order to focus on getting it up and running?
How often do we make a clear note of when the renewal date is, in order to trigger a discussion about value received and whether the contract should continue?
It’s all too easy to forget to do this and, before you know it, the renewal dates have come and gone and you’re committed for a further year (or longer) whether you like it or not.
On the flip-side, and with potentially equally damaging consequences, are auto-terminate agreements. If you have a business-critical contract that has an auto-terminate clause, you may find yourself at risk of failure if a particular service or system is no longer accessible.
Having a clear line of sight into all contract renewals is vital for generating the necessary value from these agreements and for minimising risk. Recording the data somewhere it can be accessed easily, setting reminders and establishing who is responsible for reviewing the contract must be the key priorities.
Selected CLM actions at this stage:
- Automating renewal processes, triggered by key dates
- Assessing competing suppliers for capability and price
- Canvassing internal users for feedback on supplier performance
Close-out/Completion
Again, it can be easy to skip this stage because of competing priorities. If you’re no longer working with a contracted party, it can be tempting just to ignore any remaining processes and to just move on.
However, you can never know what information and records might need to be available in the future.
Compliance requirements can change, audits of previous activities can occur and information that you previously thought irrelevant can become vitally important.
This is why it’s imperative to close out contracts appropriately.
Selected CLM actions at this stage:
- Record contract performance vs KPIs
- Check record for gaps and add information as required
- Move contract record to archive for future reference
Tips for successful Contract Management
Beyond the specific examples of contract management practices above, there are some more general principles that can be applied to ensure you gain the most value from your business agreements.
Delegation & Collaboration
Contract management becomes most effective when all areas of a business are bought in and responsibility isn’t concentrated in just a few people.
The overworked legal team is a regular symptom of businesses where contract management is more of an afterthought than a core practice.
In-house counsel are initially expected to review prospective contracts and then by extension are expected to be responsible for storage of documentation, obligation and renewal tracking and compliance monitoring.
This can quickly become unworkable as contract volumes grow and the team doesn’t scale at the same pace. It can also lead to the legal team spending lots of their time doing work that doesn’t require legal expertise.
It’s both inefficient and expensive.
Being able to delegate out responsibility for these tasks is crucial to successful contract management.
Automation
Once you’ve designed your contract management process, it’s then imperative to make sure it’s applied consistently to every contract in the business.
Where possible, automating the process helps minimise manual administration and errors, and ensures that people are only required to carry out specific actions at the appropriate times.
Generally, automation will require the implementation of a specialist contract management software, but even a system like Excel can be set up to remove some manual steps from processes.
Regular reviews and spot-checking
The best systems still require auditing and checking to make sure that everything is running as intended.
Spot-checking individual contract records periodically from different areas of the business will give you an insight into the robustness of your process.
Check to see if records have complete metadata, whether contract performance and obligations are being monitored and if relevant compliance certifications are up to date.
Don’t wait
We regularly hear from prospective customers that they’ve been looking to formalise their contract management and put a solution in place for a long period of time.
Again, we’ve written about this separately, but if the number of legacy contracts your business has is proving to be a barrier to progress, then you need to address it sooner rather than later.
Your business will keep moving forward, more contracts will be signed and the size of the initial task to get those legacy agreements into your chosen solution will increase.
More importantly, the accumulated benefits from those contracts are unlikely to be fully realised while they’re not being actively managed. The IACCM estimates that the cost of poor contract management can be as high as 9% of revenue.
If you think that a 9% bump in revenue would be beneficial for your business then now’s the time to make progress with contract management.
Choose the right technology
As we’ve already alluded to, the technology you choose to manage your contracts with will be crucial to the success or otherwise of your process.
With regards to prospective solutions, make sure you consider things like:
- The volume and value of contracts across your business
- The number of people you’d like to adopt the system and their geographical spread
- Their levels of technical proficiency
- The amount of support you’ll receive through the implementation period
- Prospective partners’ experience in your industry and with your specific use-case
What are some common pitfalls?
There are many things that can undermine the management of contracts, rendering it partially or completely ineffective.
If your people, process and technology aren’t aligned properly, your business can quickly lapse into bad practices and undo any good preparatory work.
In fact, any technology solution is only as good as the people and processes feeding into it. As you’ll see here, the reasons for these pitfalls are essentially people failing to follow an expected process
Some examples include:
Failing to maintain a central repository for contracts
While the Pareto Principle can apply to contract management, and significant benefits can be realised by working on a proportion of your contract base, having gaps can leave your business open to increased costs and business risk.
If the only copy of a particular business contract sits in a filing cabinet in a remote office, then there’s no opportunity for that to be monitored effectively. Expected benefits can’t be measured against those delivered, key dates can’t be extracted and business risk can’t be assessed.
The repository can be as simple as an Excel spreadsheet or as tailored as a specialist contract management solution. Provided contracts, and their associated metadata, are added consistently to your repository, you will have the means to manage and optimise your contract agreements.
If a large proportion of contracts remain outside of central records or new contracts aren’t added consistently to an existing database, then you lose the ability to apply a coherent strategy to your contract set.
Lack of handover when contract owners leave the business
Another easily avoidable issue. As part of someone’s exit from the business, there should be time set aside to identify all the contracts where they are the key contact or signatory.
With a centralised register, this is more straightforward but even when that’s in place, a lot of accumulated knowledge of the contract can leave the business without it being captured.
Conducting a handover with particular focus on contracts and vendor relationships is definitely good practice.
No clear accountability for managing renewals
If you fail to establish whose responsibility it is to approach suppliers at the time of renewal for an appraisal, you can be left with a “Oh, I thought you were doing it” moment that leaves everyone looking unprepared.
Using technology to automate the contract renewal process can help to ensure that consistency is achieved.
A typical workflow could include identifying the contract end date and notice period and then automatically calculating the date when notice would need to be provided. Using that date, an internal process could be triggered for a set time before so that an internal review by the relevant parties could be conducted and a reasoned decision reached about whether to renew.
Too often, renewals come and go without anyone realising and businesses find themselves locked in to year-long agreements that are no longer required.
Addendums aren’t linked to the original contract
As contracts mature and businesses change, there can be the need to expand the scope of agreements. Often, this will require the signing of addendums or even entirely new contracts.
It’s best practice to link these new documents to the original so there’s a clear record of what’s been agreed and when.
Think about how your record keeping can cope with multiple contract versions, addendums and different sign-off parties and then factor that into your processes.
Acquiring a new business without a full audit of existing contracts
Clearly, a review of contracts forms part of the due diligence process when acquiring a new company. A clear understanding of the company’s obligations and contract risks is needed to calculate the right price to pay.
From the point of view of the company being acquired, a full, auditable list of all contract agreements goes a long way to demonstrating suitability for acquisition.
It also makes it easier to plan the post-acquisition period and to see where there’s crossover of contracts and room for consolidation.
An incomplete view of a company’s contracts can leave the acquirer with an unknown amount of business risk to take on, as well as a potentially onerous process of centralising the contract data.
Summary
Why is contract management important?
The simple answer is that the future success of a business is written into the contracts that are signed on its behalf.
Whether they’re contracts for employees, software or strategic partners, when you put them together you should be able to visualise a business in six months, a year or three years’ time.
The process of CLM is designed to make sure that the business gets there and hits those milestones. It’s about making sure the commitments are acceptable for all parties and then holding them to account to achieve them.
Good management of contracts can also be characterised by the phrase “No Surprises”. When done right, everyone knows what’s expected of them and by when and they deliver on all sides of the agreement.
You should now have a better understanding of what CLM entails and why it’s vitally important for businesses to have discipline and clear processes for following through on the agreements they make.
As a reminder, some of the key pillars to successful contract management are:
- Repeatable, documented processes for all new contracts to follow before they are signed off or renewal
- A central, auditable, comprehensive record of all contracts and their key dates
- For each contract, having a named (current) employee who is responsible for ensuring the value in the contract is delivered over its lifetime.
If you have your own insights to add, or any questions, then get in touch.
Also, to help you understand the process of Contract Lifecycle Management better, we’ve prepared a Free 38 page Ebook covering all the stages. You can download it via the following link:
Originally published at www.gatekeeperhq.com.
