Fundamentals of Contract Management

Fundamentals of Contract Management

Written By
Joy Cunanan
Updated on
August 25, 2023
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Effective contract management is vital to transforming your contracts from potential risks to drivers of business growth, as how you manage your contracts directly impacts your bottom line. According to World Commerce & Contracting, inadequate contract management can cost businesses more than 9% of their yearly revenue. Prioritizing contracting efficiency is crucial for legal management, and implementing best practices for contract management can help achieve this goal. To enhance your organization's contracting efficiency, read on to learn about key contract management best practices that can be implemented immediately and their significant benefits.

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Contract Management Defined

Contract management is the process of managing contracts throughout the entire lifecycle, from creation to execution. As an organization's most important business documents, contracts form the basis of relationships with key stakeholders, including partners, vendors, customers, employees, and contractors. Effective contract management requires the implementation of a robust system that prevents contracts from impeding business operations, ensures compliance with contractual obligations and relevant regulations, and prevents the potential oversight of critical deadlines, such as contract renewal dates.

Advantages of Contract Management

Enhance Operational Efficiency

By incorporating automation into your contract management processes, you can establish workflows with pre-approved standard clauses for recurring contracts, resulting in accelerated contract creation, secure storage in a searchable repository, and automation of repetitive tasks. As a result, your organization can greatly enhance its efficiency in managing contracts.

Reduce Potential Risk

Once your business puts in place reliable contract management, you can now efficiently monitor contract execution, ensuring compliance with agreed-upon terms and obligations, including but not limited to deadlines, product or service delivery, and payment. Additionally, contracts often contain sensitive information protected by various privacy regulations, making contract management essential to prevent unauthorized access. As new regulations are introduced, contract management enables swift updates to existing contracts, ensuring continued compliance.

Cut Back On Costs 

Implementing effective contract management strategies can result in significant time and cost savings for your organization, reducing the need for extensive contracting efforts and minimizing reliance on external legal counsel. Additionally, taking full advantage of every contract renewal opportunity, whether through renewal or opt-out, enables your organization to optimize cost savings and drive enhanced value from contractual relationships.

Facilitate Revenue-Generating Relationships

Failing to fulfill contractual obligations not only results in financial losses through potential litigation but also tarnishes the reputation of your organization, making it challenging to attract and retain partners. Implementing effective contract management practices ensures that you meet all obligations and maintain satisfied contracting parties, establishing a foundation for long-term, mutually beneficial business relationships.

Contract Reporting

Contracts are not merely legal documents outlining rights and obligations; they also serve as dynamic sources of valuable data. By leveraging contract reporting tools, you can efficiently extract data from contracts and gain actionable insights into your contract creation, negotiation, execution, and management processes. Relying on spreadsheets to track and report on critical contract data, such as active contracts, contract amounts, milestones, and key timelines, can lead to errors and inconsistencies that may impact organizational decision-making.

Repercussions of Bad Contract Management

Financial Losses 

Inefficient contract management practices such as slow negotiations, approval delays, and missed milestones can have significant financial consequences for businesses. As previously mentioned, according to research by World Commerce & Contracting, poor contract management can cost companies more than 9% of their annual revenue. Additionally, a survey of business leaders found that 50% of respondents believed that inefficiencies in their contracting process resulted in missed business opportunities.

Failure to track and manage deadlines can result in potential legal liabilities, such as the unauthorized use of licensed intellectual property. Relying solely on spreadsheets and manual tracking methods can lead to missed deadlines and contracts falling through the cracks. Automated contract management systems can help mitigate these risks by providing automatic notifications and tracking, improving overall efficiency, and reducing potential losses.

Collaboration Inefficiencies

Efficient collaboration and communication are crucial for effective contract management, which involves various internal and external stakeholders. Relying solely on emails for communication can lead to confusing threads and missed changes during redlining, which can result in different versions of the contract. This underscores the importance of having a centralized platform for contract collaboration and communication to ensure that all parties involved have access to the most up-to-date contract version and can easily track changes and updates.

Best Practices for Contract Management

Contract Standardisation and Centralisation

In order to streamline the process of contract creation, legal departments can save significant time by standardizing and pre-approving contract language and terms, rather than drafting contracts from scratch. This allows for faster contract creation and empowers other departments to create certain contracts without involving legal personnel. Utilizing standardized templates for contracts also facilitates easier editing and reviewing, as the attention can be focused solely on terms specific to each transaction.

Furthermore, it is essential to store contracts in a central, searchable repository to ensure both security and accessibility. This becomes especially crucial in the event of litigation. Advanced legal record management should include information such as who accepted the agreement, the specific version of the agreement that was accepted, and the date and time of acceptance.

Establishing Meaningful Key Performance Indicators (KPIs)

Legal departments face increasing pressure to maximize their output while demonstrating their value to the organization. To achieve this, legal professionals must adopt a proactive approach and shift their focus from reacting to legal threats to strategically influencing revenue and mitigating risk. This shift requires the implementation of key performance indicators (KPIs) to measure progress.

However, it is important to note that KPIs should not be set arbitrarily. The metrics to track and KPIs to set should align with your objectives. Therefore, the initial question to ask is, "What do we want to improve?" For instance, you may aim to expedite the contract review process. Specific KPIs such as accelerating the contract creation process and minimizing approval time can be established to achieve this goal.

Utilizing a contract management solution can assist in tracking performance metrics that offer valuable insight into the contracting process. By utilizing this data, legal departments can identify areas for improvement and implement strategies to enhance their efficiency.

Obligation Monitoring

It is not uncommon for individuals to sign contracts and subsequently overlook them until an issue arises. However, the significance of contracts amplifies post-signature. Organizations are bound to fulfill their obligations outlined in contracts, which can be quite numerous in a sizable organization.

To comply with contractual obligations, contracts must be readily available for reference. Without accessible contracts, it becomes impossible to monitor or track their execution.

Relying solely on individual employees to track obligations carries inherent risks as human errors are inevitable. In contrast, employing a robust contract management software solution can facilitate proactive monitoring and ensure that all obligations are fulfilled in a timely manner. The software can generate timely email reminders to notify the relevant parties of impending obligations, streamlining the entire contract management process.

Increased Visibility and Collaboration

In most organizations, contract management is primarily the responsibility of the legal department. However, in order for legal to ensure compliance and minimize risks across the entire organization, it must collaborate efficiently with other departments. When legal becomes a bottleneck in the contract process, it impedes progress for everyone involved.

To address this, legal must break down silos and make legal information easily accessible to those who need it. By empowering other departments with standard templates and workflows, legal can reduce the need to be involved in every step of the contract process. Utilizing contract management software, such as Ironclad, can streamline the approval process, ensuring that contracts receive legal approval before they are sent out.

In addition to collaboration, legal must also prioritize visibility while maintaining data security. The right contract management software can help define who has access to each workflow and record, enabling legal to balance visibility and control.

By adopting these practices, legal can effectively manage contracts while supporting the needs of the wider organization.

Automation of Communication

In the realm of contract communication, utilizing email correspondence can prove problematic due to a lack of centralization. It's not uncommon to inadvertently overlook including pertinent parties' addresses when disseminating information, and key details may become buried within lengthy email threads.

To optimize contract communication practices, it is advisable to integrate a contract lifecycle management software (CLM) into your workflow. This technology enables comprehensive tracking of all activities and facilitates real-time notifications to relevant stakeholders. By automating your communication processes, you can rest assured that no stakeholders will be excluded from any stage of the contract lifecycle.

Convenience of Digital Signatures

For numerous legal departments, prompt contract signature acquisition remains a persistent challenge. Beyond the traditional wet ink signature method, there exist alternative means of executing contracts. Electronic signatures and clickwrap agreements have gained widespread acceptance as valid methods of signing contracts online.

As a result, contracting parties anticipate a seamless signing experience that integrates these digital options. A contract management software that integrates digital signing allows greater flexibility and convenience for all parties involved. 

Fuel Your Growth With Lexagle

Lexagle’s innovative platform boasts modern features designed to fortify your existing contracts while streamlining your operations. By leveraging our platform, you'll be empowered to create and execute contracts with greater ease and efficiency.

Our comprehensive solution provides a centralized document repository, complete with a clause and template library, making the contract creation process smoother than ever. With protected access, authorized users can quickly search and track all agreements within our database, available for your business 24/7. Our analytics and contract tracker with deadline warnings also ensures that you stay on top of your obligations.

Schedule a free demo today and take your business to the next level.

Fundamentals of Contract Management
Joy Cunanan
Joy is the Digital Transformation Manager at Lexagle. As a marketing professional in the Tech and B2B industry for over seven years, she is always on the lookout for the next best solution in the ever-changing online world. With a passion for helping businesses thrive and optimize operations, she shares her expertise in the power of contract lifecycle management and its capacity of easing the contracting process for busy organizations worldwide.

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