What is contract management?
A legally binding agreement between two parties isn’t a set-it-and-forget-it matter. In today’s business world, it’s one that requires continuous maintenance, from initial negotiations to eventual renewal. Contract management helps ensure each step of the process is executed with as much efficiency (and as little risk) as possible.
What is contract management? It’s a term that describes a business’s approach to successfully managing agreements with clients, partners, vendors, and employees. It emphasizes careful adherence to terms and conditions and thorough documentation surrounding any deviations or departures. In short, contract management practices exist to ensure all parties involved in an agreement abide by its terms, and that said agreement is carried out effectively.
Contract management has become increasingly complex as business operations become more complex, too. The need for clear, concise, easy-to-use paperless contract management tools has given rise to a wealth of digital solutions that resemble (and often work in tandem with) project management software – with a few key differences, of course.
Why is contract management important?
Contract management is important because contracts typically have lengthy, detailed lifecycles. During the early stages, each party involved outlines their responsibilities, expectations, and obligations. Documenting them for ongoing reference ensures everyone walks away with a clear understanding of the agreement, which they can reference as the contract is carried out. It also provides a point of reference for ensuring compliance and reducing risk.
To support these efforts, many businesses use contract lifecycle management software to lighten and simplify the administrative workload. In the past, contract management was a paper-heavy, manual process. Any updates or adjustments made during the life of the contract meant creating new copies of important documentation, and referring back to these documents was burdensome for all parties involved.
Today, contract management remains as essential as ever, but technology has helped facilitate a smoother, safer, and more efficient approach to contract lifecycle management (CLM).
What is contract lifecycle management (CLM)?
Contract lifecycle management emphasizes a proactive, stage-by-stage approach to contract management. From the initial request to renewal talks, it offers a more orderly experience for each party while improving efficiency, lowering costs, reducing liabilities, and ensuring compliance throughout each contract stage.
CLM solutions are software tools that enable organizations to standardize contracts according to this approach. With them, project managers can easily map workflows and automate administrative processes. CLM systems vary in features and functionality, but most serve as centralized repositories for contract storage and management, uniting important information in one place for ease of access, security, and functionality.
Stages of contract lifecycle management (CLM)
Initiation/Request
During the first stage of the contract lifecycle management process, each party states what they want from the agreement to set expectations. Then, they gather and present information relevant to the prospective contract. That information might include units to be made or purchased, sales goals, financial benchmarks, work orders, and other specific details. Once all parties agree on the conditions set, the request is sent to a contract manager before proceeding to the next phase of the contract process.
Creation
In the creation stage of the contract lifecycle management process, terms and conditions set during the request phase are physically drafted. At this point, all parties involved have decided what they want from the agreement (though their wants may be challenged during negotiation later on). At this point, however, the initial request is put into writing. Then, copies of the request are sent to all parties for internal review.
Review
After creating the first draft of the contract, all parties involved carefully review it to ensure their requests and responsibilities are accurately represented. Some organizations may send this draft to their legal team for additional oversight. Any facts and figures are double-checked, phrasing is considered for clarity, and any possible liabilities are buttoned up ahead of the next stage of the contract process: negotiation.
Negotiation
Once everyone has had a chance to review the contract, they can begin negotiations. During this contract stage, each party can attempt to adjust certain details to their advantage. The other party may decline those adjustments or return with their own requests. Any changes made during this phase are captured and added to the contract, creating a new draft that will go on to become the legally binding agreement for the duration of the agreement.
Approval
When contract negotiations are complete and every party is satisfied with the final draft, they move on to the next stage of the contract management process: approval. During the approvals process, all parties receive an up-to-date version of the contract and seek buy-in from the appropriate parties before adding their signatures (either physically or digitally with electronic signatures). Multiple departments and decision-makers may get involved before moving on to the next phase.
Execution
Once the final draft of the contract has been approved by each party, they move on to signatures. The person who signs the contract varies from business to business and may hold unique responsibilities. Seeking signatures from all necessary parties may take quite a bit of time, depending on the size and nature of the organization; electronic signatures are easier to gather, and this stage is often expedited through CLM software.
Ongoing management
As all parties begin to execute the terms and conditions set forth in the contract, they continuously revisit the document to review and ensure everyone is meeting their obligations. Remaining compliant with contract terms is an ongoing process that requires mutual effort from each party involved, especially because the terms may be especially detailed, lengthy, or particular.
Contract renewal
Toward the end of the contract’s initial lifespan, one or all parties may surface the idea of renewing the agreement. It may not be the exact same agreement (in fact, negotiations and adjustments are almost always necessary after reviewing the results of the first contract) but the renewal stage of the contract is an opportunity for parties to express formal interest in continuing their partnership.
Termination
For many different reasons, one or all parties may decide not to renew the contract at the end of its lifespan. During this stage, the contract is reviewed again, as well as the results of the partnership, to assess performance and store insights away for future reference.
What are contract management best practices?
Contract management is a well-studied approach to business agreements that, when carefully and skillfully executed, greatly benefits the parties involved. Years of research and experimentation have yielded a widely agreed-upon set of best practices that have been embraced by businesses across industries – practices that are also reflected in modern contract lifecycle management software features. Some of the most common include…
- Standardize the contract creation process. Working from a well-made template is much easier than starting over from scratch each time a new contract is needed. It helps to have a central contract repository – one place to store and access past contracts. This, in turn, can expedite the contract creation process (and save time during the approval stage).
- Conduct regular compliance reviews. Once your organization’s signature is on a contract, it’s important to revisit the terms and conditions often to ensure you’re holding up your end of the bargain. Even if things are proceeding as planned, it’s good to refamiliarize yourself and the departments accountable at regular intervals.
- Integrate CLM software with your existing tech stack. When comparing CLM softwares, choose one that integrates with the tech your organization already uses, if possible. This will speed up each stage of the contract lifecycle significantly, as well as provide easy access to essential documents and other information as needed.
What is contract management software?
The most important best practice in contract management is one you can start implementing today: using the right contract management software.
Earlier, we touched on how vital digital tools are in organizing and expediting contract creation in today’s fast-moving world. The stages we outlined above are now largely paperless, often automated, and analyzed frequently for useful insights. This is all thanks to the power of software specifically developed to bring cohesion and clarity to the contract lifecycle management process.
You read that right – automated. Contract automation has eliminated many manual, error-prone processes in contract creation, improving efficiency, security, and analytics. Learn more about contract management software that incorporates automation features by contacting us today.
