Ultimate Guide to Contract Management: Benefits & Best Practices (2022)

Ultimate Guide to Contract Management: Benefits & Best Practices (1)

Irrespective of the type of business you have, one aspect that is unequivocally central to the organization’s functioning are 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.

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What is Contract Management?

Definition

Contract management refers to the business processes that manage the creation, implementation, and evaluation of contracts to maximize business performance and minimize risk.

(Video) Intro to Contract Management

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 know how they can better achieve their objectives. 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.’

Learn More: Contract Management Software – iContract

Benefits of Contract Management

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

  • 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.

  • 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.

  • 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.

  • 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.

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  • 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.

Learn more: 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.Stages of Contract Management

  • 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.

  • 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.

  • 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.

(Video) Contract Management Plan Template Walkthrough

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.

  • 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.

  • 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.

  • 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.

Learn More: 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:

  • 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.

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  • 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.

  • 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.

  • 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.

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.

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.

In a Nutshell

IACCM research 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.

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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.

FAQs

What are some best practices for contract management? ›

6 contract management best practices
  • Centralize and standardize agreements.
  • Set sensible key performance indicators (KPIs)
  • Tracking obligations.
  • Team collaboration and visibility.
  • Automate communications.
  • Clickwrap and a variety of signing options.

What are the principles of contract management? ›

Contract management principles
  • 1.1 Make sure the contracts are understood by all those who will be involved in their management. ...
  • 1.2 Be clear about accountability, roles and responsibilities. ...
  • 1.3 Set up and use strong governance arrangements to manage risk and allow strategic oversight.
8 Feb 2021

What are the phases of contract management? ›

Contract management is the process of administering the request, creation, negotiation, review, execution, and post-execution management of contracts and supporting documents.

What are the four components of contract management? ›

Four components of contract planning and management
  • Contract management plan.
  • Supplier relationship management.
  • Transaction management.
  • Variation.
21 Dec 2021

What is the purpose of contract management? ›

Contract management is the process of managing contract creation, execution, and analysis to maximize operational and financial performance at an organization, all while reducing financial risk. Organizations encounter an ever-increasing amount of pressure to reduce costs and improve company performance.

What are contract management skills? ›

To ensure expectations are set realistically and milestones achieved, the following are essential tools in every contract manager's toolkit: negotiation and influencing smarts. effective communication and project management skills. the ability to inspire and manage change.

What is a contract management plan? ›

The Contract Management Plan (CMP) is a tool to implement and manage the contract as agreed. It gives an overview of the governance of the Contract from an operational, financial and performance reporting perspective.

How do you improve contract performance? ›

9 Best Practices to Improve Your Contract Management Process
  1. Standardize Contract Creation. ...
  2. Set Contract Management KPIs. ...
  3. Balance Storage Security and Visibility Requirements. ...
  4. Track Contract Approval Time. ...
  5. Automate Contract Communications. ...
  6. Review Finances. ...
  7. Conduct Regular Compliance Reviews. ...
  8. Resolve Disputes Promptly.
26 May 2021

What are the 3 types of contracts? ›

The three most common contract types include: Fixed-price contracts. Cost-plus contracts. Time and materials contracts.

What is the contract management standard? ›

The CMS™ is an ANSI-Approved Standard that describes contract management in terms of the processes created through the integration and interaction of job tasks and skills and the purposes they serve. The common and repeated application of this standard will improve productivity, increase efficiency, and reduce costs.

What are the essential elements of contract? ›

And even though contracts are infinitely varied in length, terms, and complexity, all contracts must contain these six essential elements.
  • Offer.
  • Acceptance.
  • Awareness.
  • Consideration.
  • Capacity.
  • Legality.

What are the three stages of contract management? ›

Contract management can be complex but it's easily broken down into three essential phases: Pre-execution. Execution. Post-execution.

What are the 5 steps of contractor supplier management process? ›

These employers utilize five key steps in order to manage supplier and contractor safety:
  • Prequalification.
  • Prejob task and risk assessment.
  • Training and orientation.
  • Job monitoring.
  • Postjob evaluation.
10 Dec 2020

What are the five basic principles of contract describe each? ›

They are: (1) obligatory force of obligations arising from contracts; (2) relativity of contracts; (3) consensuality of contracts; (4) autonomy of contracts; and (5) mutuality of contracts. These are the five general principles governing contracts.

Is contract management part of procurement? ›

Contract management is an integral part of any procurement cycle. Purchasing and Procurement firms may reduce vendor prices, execute contracts with new parties faster, boost compliance, mitigate risk, and effectively manage internal and external relationships by implementing contract lifecycle management software.

What is contract management and its examples? ›

Contract management is the process of handling and carrying out a contract's obligations for vendors, clients, employees or others. Some everyday examples of contracts include apartment leases, employment and terms of use for software.

What is contract management and its types? ›

Contract management can be divided into three phases: pre-contract phase. contract execution phase. post-award phase (often referred to as contract compliance/governance), including contract termination.

What qualities as per you a contract manager must have to be successful? ›

Key Qualities of Successful Contract Managers
  • Effectively communicates from initiation onwards.
  • Negotiates from a position of strength.
  • Understands regulations, legalese and different contract types.
  • Manages risk across the entire portfolio.
  • Takes early corrective action to improve contract performance.
19 Mar 2021

Which of the following is the most involved with contract management? ›

Program management

Which of the following is the most involved with contract management: Project management.

What are the 7 elements of a contract? ›

For a contract to be valid and recognized by the common law, it must include certain elements— offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.

What are the main elements that should be included in the contract management plan and why? ›

There should be clearly outlined definitions including:
  • Roles & responsibilities.
  • Contact information.
  • An agreed level of management according to value/risk profile.
  • Contract objectives.
  • Performance Management Framework, e.g., KPIs.
  • Obligations, e.g., Dates and Deadlines.
  • Contract Compliance.
  • Review meeting schedule.
19 Mar 2021

What is contract implementation plan? ›

Contract implementation consists of two distinct phases: Migration. The movement of organisations to a new contract post "go-live". Mobilisation. The process of moving from contract award to "go-live" i.e. the point when a user can actually buy from the contract.

How can contract management be improved? ›

Listed below are actions that could improve the contract management process. Standardize the contract by using templates: During the contract creation stage, templates and standardized legal terms may be used to enforce consistency.

How does contract management contribute to business success? ›

Contract management enables you to streamline and automate your approach to managing existing contracts and creating new ones. It helps to control costs, oversee payments, and revenue, improve productivity, and reduce error.

What is performance management procurement? ›

In a nutshell Procurement Performance Management refers to the holistic approach of being able to manage and increase the overall value of your Procurement organisation. The process of doing so, is met with being able to identify savings potential via various strategic sourcing techniques.

What is contract management and its examples? ›

Contract management is the process of handling and carrying out a contract's obligations for vendors, clients, employees or others. Some everyday examples of contracts include apartment leases, employment and terms of use for software.

What are contract management skills? ›

To ensure expectations are set realistically and milestones achieved, the following are essential tools in every contract manager's toolkit: negotiation and influencing smarts. effective communication and project management skills. the ability to inspire and manage change.

What is contract management in Procurement? ›

Procurement contract management is about the managing of contracts associated with procurement or purchasing as part of legal documentation shared with partners, suppliers or even customers.

What are contract administration policies and procedures? ›

Contract management, sometimes referred to as contract administration, refers to the processes and procedures that companies may implement in order to manage the negotiation, execution, performance, modification and termination of contracts with various parties including customers, vendors, distributors, contractors ...

How can contract management process be improved? ›

9 Best Practices to Improve Your Contract Management Process
  1. Standardize Contract Creation. ...
  2. Set Contract Management KPIs. ...
  3. Balance Storage Security and Visibility Requirements. ...
  4. Track Contract Approval Time. ...
  5. Automate Contract Communications. ...
  6. Review Finances. ...
  7. Conduct Regular Compliance Reviews. ...
  8. Resolve Disputes Promptly.
26 May 2021

What is the lifecycle of a contract? ›

Contract lifecycle management overview

These stages include: initiation, authoring, process and workflow, negotiation and approval, execution, ongoing management and compliance (within the repository), and contract renewal.

What qualities as per you a contract manager must have to be successful? ›

Key Qualities of Successful Contract Managers
  • Effectively communicates from initiation onwards.
  • Negotiates from a position of strength.
  • Understands regulations, legalese and different contract types.
  • Manages risk across the entire portfolio.
  • Takes early corrective action to improve contract performance.
19 Mar 2021

Why contract management is important in procurement? ›

Importance of Contract Management in Procurement

Enhances Business Functioning by identifying the needs, implementing the strategies, and analyzing the objectives. Controls Spending by providing better spend visibility and helping organizations to monitor financial transactions.

What are the 3 types of contracts? ›

The three most common contract types include: Fixed-price contracts. Cost-plus contracts. Time and materials contracts.

What is the difference between procurement and contract management? ›

Contracts and procurement are sourcing concentrate on direct products and solutions, while procurement focuses on indirect items and also services. In larger companies, these agreements are usually developed by a lawful team or contract monitoring team, bypassing the need for procurement.

What are the most important clauses in a contract? ›

The “force majeure,” or “greater force,” clause details what to do when circumstances arise that are beyond anyone's control. Sometimes parties cannot perform their obligations due to unprecedented and unexpected events.

What is the difference between contract administration and contract management? ›

Contract administration is concerned with the state of the agreement between the two parties in the period before the contract has been finalized. Contract management is focused on the implementation of the contract after it has been finalized. Each process has its own workflow and role in the contract process.

How can I be a good contract administrator? ›

A Contract Administrator needs to be able to work well under pressure and to balance competing demands. For this reason, you need to have the ability to think quickly, problem solve, and make decisions that are well-informed and follow a logical trajectory.

How do you manage contractor communication mechanism? ›

Here are three strategies for contract managers to improve communication and better align a company's contract portfolio with the business's goals and objectives:
  1. Insist on an Ongoing Dialogue. ...
  2. Be a Partner Not a Liaison. ...
  3. Align Activities and Strategies.
3 Dec 2015

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