Contract Management 101: Everything You'll Ever Need to Know
- Contract Management
What is Contract Management?
Contract management or contract lifecycle management (CLM) is the process of managing contracts, from the creation through to execution, and eventually termination or renewal of the contract.
Key activities involved in contract management include contract drafting and clause negotiation, performance analysis to maximize operational and financial performance and risk mitigation, both financial and reputational (e.g., business relationships get damaged by defaulting on contract terms).
Why is Contract Management Important?
Contracts are the foundation of business relationships. They spell out every aspect of a business deal or supplier relationship from start to finish.
A study shows that the average Fortune 1000 company has an average of 40,000 active contracts on a given day.
Think about that for a second.
40,000 times that a contract needs to be authored, reviewed, negotiated, approved, and that’s just the beginning.
All contracts then need to be managed for their entire lifecycle, leveraging any negotiated clauses, monitored for compliance, and then reviewed again for renewal or amendments.
A single contract pulls in people from finance, legal and procurement, all needing to handle things manually.
This is time-consuming and costly for one, but these manual and repetitive processes are very error-prone which leads to further costs, missed deadlines, and compliance issues.
That’s just for one contract.
Without proper contract management, you open yourself up to countless risks, financial penalties, and procurement contract compliance issues.
A small technical mistake or wording issue can cost thousands of dollars in the long run.
What are the Stages of Contract Lifecycle Management (CLM)?
An average contract’s lifecycle can be split into two distinct parts, pre-signature and post-signature, each coming with its own challenges and responsibilities.
Encompasses the initial authoring of a contract, negotiations, editing, and approvals. This is largely a cross-departmental undertaking, relying mostly on manual tasks and negotiations.
- Contract Initiation: This is where the need for a contract is identified, and the contract lifecycle begins. Maybe you are starting to work with a new supplier vendor, there needs to be a contract in place to set the guardrails for the business relationship.
- Authoring: The contract needs to be written. Consider this more of a rough draft than a final product. Doing this by hand can be a tedious and time-consuming process, but solutions like JAGGAER Contracts can automate the process.
- Negotiation: Both parties need to look at the proposed draft and rule out any changes that should be made. Certain clauses will need to be negotiated to ensure that each side is getting maximum value.
- Editing: After all negotiations are through, it’s time to finalize those edits. Contract management software really comes in handy here by tracking all changes and allowing for easy comparison between versions.
- Approval: This is typically where the most bottlenecks occur. You need a clear process and set of workflows in place to keep the approvals process running smoothly. This can be aided by contract and workflow automation software.
Deals with contract management and enforcement, along with the renewal and amendment process. This is ongoing throughout the entire length of the contract and details can easily be missed when dealing with a large volume of varyingly complex contracts.
- Execution: Now that the contract has been signed, it’s time to execute the agreement. However, done manually, this can lead to quite a bit of risk and missed opportunities. Contracts can be quite lengthy, and some clauses can be hidden. Using contract management software can easily allow you to identify risky clauses or opportunities for more value.
- Tracking: Tracking performance across the entire contract lifecycle is crucial, not only to ensure compliance and you are getting the most value possible but also to inform you whether this is a contract worth renewing or terminating.
- Auditing: Occasionally, you should run a full audit of all open or recently closed contracts. This will give you an in-depth look at your contract performance, open clauses and what your next steps look like.
- Reporting: Tracking the data is one thing, but without a central and intuitive dashboard or repository the data will be hard to read and analyze. Good CLM software will give a “single source of truth” for your contract data and help to bring actionable insights to guide your decision-making.
- Renewing: You’ve seen the contract through its lifecycle. Time to make a decision, will you renew, renegotiate or terminate? Unfortunately, when done manually, most companies miss out on renewal opportunities and lose thousands of dollars of potential value. Remember, many companies have upwards of 40,000 open contracts at a time, this makes it extremely difficult to track manually, but with automated workflows, you can always have one eye on upcoming expirations.
What is Contract Management Software?
Traditionally you think of contract management, and you think of a filing cabinet and dozens of folders.
If you’re still keeping your contracts in a filing cabinet, on a shared drive, or sending scanned copies of the final version via email, you’re not the only one. It’s amazing how many billion-dollar companies still rely on paper.
However, as I’m sure you’ve gathered so far, that manual practice is full of inefficiencies and risks that take away from the incredible value that contract management can bring.
Contract management software is an electronic approach to solving all of these manual problems.
From organizing paperwork, authoring contracts, negotiating and redlining, managing dates, reporting on performance and automating workflows, contract management software can take the friction out of the entire contract lifecycle.
Modern AI-Powered contract management can even use the power of AI to take clause authoring, risk management, and prescriptive analytics to the next level.
Integrated contract management software can free up countless man-hours and automate all of the processes associated with managing the contract lifecycle, creating more bottom-line value for your company.
10 Benefits of Contract Management Software
There are tons of ways that contract management software can bring value to you.
Here are 10 of the top ways to simplify your life with contract management software:
1. Standardize Your Contracts
Stop recreating the proverbial wheel. With a contract management software tool, you can choose from a library of templates and clauses to ensure consistent contract text and clauses company-wide. Now you can put an end to NDAs spread across the company in six different versions.
2. Make Monitoring and Tracking Contract Changes Easy
No more worrying about version control. All text changes, whether they are internal or external, are redlined automatically and can be easily accepted or rejected.
3. Streamline Your Contract Approval Process
Stop wasting time trying to figure out who needs to review a contract and then chasing that person down. The approval workflow makes sure the right items are approved and recorded on time by the right people.
4. Store All Your Contracts in One Place
Say goodbye to tracking down contracts. A contract lifecycle management (CLM) tool with a contract repository is a convenient way to store contracts and related documents so stakeholders can access them securely and easily – from any part of the globe.
5. Set Automated Contract Alerts
Never worry about missing something important. Set custom alerts that appear in your email and never miss expiration dates or deliverable due dates again.
6. Find Your Contracts Faster
Don’t lose time searching for the right contracts. Find a contract by searching for a keyword or a phrase. You can even search attachments to a contract – for example, insurance certificates.
7. Take Advantage of E-signature Technology
Stop worrying about tracking down the VP for their John Hancock. It only takes a few minutes and works just like a physical signature.
8. Simplify Your Contract Negotiation Process
Graduate from printing and scanning PDFs. Contract revisions can go back and forth between you and your client via email.
9. Integrate with your ERP
No more manually moving data. Our contract management software can operate as a standalone tool or plug into your ERP to sync with main customer lists, vendor lists and users.
10. Save Time and Money!
Don’t waste time manually completing tasks you can automate. One customer realized a 50 percent improvement in contract cycle time from automation.
Of course, not all contract management software is created equal. Some have integrated AI embedded throughout the solutions to provide even more automation and value.
5 Ways to Get More Value From Contract Management Software
Contract management technology like JAGGAER Contracts provides a wealth of value depending on where you are on your contract management transformation.
Regardless of what electronic solution you use, there are a few steps you should be taking to establish better contract lifecycle management.
Simply having a contract management system isn’t enough. Unfortunately, many organizations with contract management software are leaving untapped savings on the table by not using contract management software to its fullest potential.
1. Manage Contract Storage
It can’t be overstated how important it is just to know where your contracts are stored. Ideally, all contracts throughout your organization are located in one central repository that’s shared across departments. Contract repositories provide centralized storage of documents with the ability to tag, categorize, and structure metadata about your contracts.
Beyond just organization and access, a central repository also allows transparency and a single source of truth. When everyone has access to one definitive version of the contract, there are no longer disagreements about what was agreed to and when. This kind of clarity can not only improve internal coordination, but it can also help to improve your supplier relationships” by keeping a consistent message between your organization and theirs.
2. Reporting and Analysis
The second major step toward maximizing the benefits of your contracts solution is developing a reporting system and analyzing data. Reporting and analysis extend the functionality of your contract repository by answering key questions around your contract portfolio.
Having signed agreements accessible and organized is just the bare minimum. By analyzing them in bulk you can start to identify best practices and inconsistencies across suppliers. Then, when it comes time for renewals, you can start to implement more standardized language across all of your contracts.
Plus, pull data directly from contracts and weigh them against actual supplier performance. That way you can quickly see who’s meeting the agreed-upon terms and who’s missing targets, whether that’s on-time invoices, delivery times, bulk discounting or any other key business metrics.
3. Smart Authoring and Templates
How much time do your contract managers spend authoring document after document? Authoring is no longer a chore as a CMS can automate the building of contracts through Smart Templates. Simply select the type of contract you need and the system will pull from predefined templates, then pull in supplier information from their profile.
This process not only streamlines contract creation but also reduces risk. Smart authoring and intuitive templates mean that you can standardize language while decreasing the likelihood of inadvertently leaving out important clauses or terms.
Artificial intelligence systems are making contract management even more powerful with intelligent automated authoring, using AI to predict which clauses a contract might need based on the supplier’s location, size, industry and more. Gone are the days of manual authoring line by line. Instead, your team can focus on building strategic relationships and optimizing new contracts.
4. Connect Contracts to Source to Pay Processes
Tools like smart authoring can certainly simplify the contracts process. Connecting to the overall digital source to pay process, though, can completely revolutionize the way your procurement team operates. Connecting your contract to ensure compliance with your upstream and downstream processes allows you to leverage important data at every stage of the procurement lifecycle.
Not only can contracts draw in supplier data to make the authoring process easier, but your procurement tools can automatically incorporate negotiated pricing and prioritize contracted suppliers, driving bottom-line savings across the organization. Supplier Management can measure vendors against agreements and flag discrepancies automatically, triggering communications or a supplier improvement program.
The possibilities are endless, and you can optimize them further based on the needs of your organization. This is where you can truly start to add value from your contracts tools.
5. Continually Push for Improvements
It’s important not to revise your contracts process once and assume that you’ve done the job. Rather, you have to continue to refine, optimize and improve! Not only will you gradually improve efficiency, but you’ll also start to see patterns emerge over time. For example, understanding your process bottlenecks or even where your most negotiated clauses are can improve your throughput. It will take time to identify these patterns, but once you do you can start new initiatives to make further progress.
Don’t let contract management be a set it and forget it mentality. Collaborate with stakeholders to understand what they care about from a contract management perspective. Ask yourself, can you go further to improve your current process? Have you realized the full benefit of your CMS system?
How to Choose the Right Contract Management Solution For You
AI will have a profound impact on organizations globally. But that doesn’t need to be a distant dream.
The technology is here, now all that’s left is for all of you is embrace this change head-on and pick the right technology partner to fit your needs.
This is an investment in your future, and you should take into account several important questions before making a decision.
- Does it integrate with your systems easily?
- Is it flexible enough to fit your needs?
- Is it intuitive and easy to learn?
- Do you want access to a support team?
- How powerful are the analytical capabilities, and is it a secure platform?
AI contract management can make your life easier, save you money, and give you insight to make improvements in areas you’ve never even considered before.
But it all starts with picking a knowledgeable vendor that will act as a true technology partner to support your needs and goals.