What You Need to Know About Contract Management
Contract management is much more than simply drafting an agreement between two parties, gathering signatures, and moving ahead with a relationship — and sticking the document in a filing cabinet somewhere, only to be seen again when an issue arises.
Contract management is an important aspect of successfully running any company, in any industry. But what does it really mean? Here are some of the most frequently asked questions about the contract management process, and how it can protect your business.
What Is Contract Management?
In the simplest terms, contract management is the process of managing contract creation, execution, and analysis in such a way that your company is able to not only reduce the financial risk of an agreement, but also leverage opportunities and relationships with customers. A poorly phrased or managed contract can actually cost a company thousands — or even millions — of dollars.
What Is CLM?
CLM stands for Contract Lifecycle Management. Every contract has a lifecycle: It is drafted, it is utilized, and it expires. Sounds simple, but as your business grows, it becomes increasingly complex to manage contracts at various stages of their lives. That’s where CLM comes in. It begins with the process of drafting a contract, which can take hours (or even just minutes) rather than days or weeks to draft. CLM also allows companies to analyze their contracts quickly and easily in order to determine their obligations and their rights, and to determine the amount of risk that a contract creates for their company, and determine methods of controlling and reducing that risk.
On a less theoretical level, contract lifecycle management means using tools to allow teams to easily collaborate on contracts while still ensuring control over aspects of the process to maintain compliance. It allows for the contract development to be a consistent and organized process, in which everyone is working from the same set of contract terms and “truths,” with the same definitions, descriptions, documents, and data. And finally, it’s integrating the responsibilities of the contract into team members’ daily responsibilities, ensuring that all aspects of the agreement are adhered to, and that opportunities aren’t lost.
What Is a Contract Management System?
A contract management system (or contract management software) is a software program that stores and manages business contracts and any related or supporting documents. The system not only streamlines the development of contracts from negotiation to final electronic signature, but also provides insight into the contract development process and the progress of existing contracts to ensure the business is run as efficiently as possible while also managing risk.
Who Can Use a Contract Management System?
A great contract management system is intuitive, and anyone can use it. While typically, salespeople and other team members must request a contract via the legal department, the actual drafting and execution of those contracts can take time, creating bottlenecks in the sales process. With a self-service contracting solution, your team is empowered to create their own contracts using templates, wizards, and an interview process that customizes contract clauses based on the answers to specific questions. The legal department can pre-approve the language in common clauses to speed up the process, creating a library of fallback clauses that can be used when necessary. Contract management gives better insight into your business and helps the following departments:
- C-Suite and Board of Directors. By using a contract management platform to help generate reports for C-Suite and BoD's, allows them to understand and better analyze risk around their contract portfolio and how they can increase ROI. Contract management will help them better prepare for major events such as mergers or acquisitions, cutting expensive legal fees, and monitoring regulatory changes.
- Risk and Compliance Officers. Your companies CRO's and CCO's care about new regulations and standards, such as recognizing revenue, data privacy or leakage. By leveraging a contract management system allows them fingertip access and full visibility to analyze and report on data, track major milestones and set custom alerts, integrate with vendor risk and/or collateral systems, and risk score all agreements so there are no surprises.
- General Counsel and Chief Legal Officers. The legal department can now eliminate the hassle of starting agreements from scratch, worrying where the final contract lives or using the wrong clauses and terms. With a contract management tool generating agreements can be simple and straightforward, with clause libraries for storing templates, automating workflows for approvals and final sign-off, and setting alerts for renewals.
- Human Resources. The HR department generally goes through a lot of different contracts – from employment agreements to insurance documents. In order to help them streamline the process, legal can pre-approve templates so they can begin the process themselves through an intuitive Wizard interview in a contract management platform. This will help onboard employees even faster than before.
- Procurement. With a contract management system, you can ensure the right clauses and schedules to manage your organizations risk for creating RFI's, RFP's, RFQ's, RFT's or other agreements. Create compliant tender documents with self-service contracting in a fraction of the time and track progress all the way to the eSignature.
What Is the Contract Management Process?
Typically, when contract management is handled manually, the process is time consuming and the potential for oversights and errors is considerable. Most companies follow a process similar to the following:
- Contract Requests. Team members identify the need for a contract, any documents required to support the contract, and request the contract from the legal department. Using a contract management system allows for other business users to easily request what is needed through a portal, and depending on the agreement being generated, they can begin to start the process themselves.
- Contract Authoring. A member of the legal team writes the contract. In many cases, contracts are developed using templates in a word processing program, although many attorneys have begun using contract management systems that offer automated document development.
- Contract Negotiations. Once the contract is drafted, both parties review it, with a focus on identifying discrepancies with the initial agreement. At this point, all parties also identify any problematic clauses, reach mutually agreeable solutions, and additional drafts of the contract are developed. With a contract management system, redlining and keeping track of versions with audit trails assists in finalizing the contract.
- Contract Approval. This stage also creates bottlenecks, but with developed approval workflows through a contract management platform, companies can ensure that decisions are made in a timely manner.
- Contract Execution. In this stage, both parties actually sign the contract, which can be expedited via the use of e-signature integrated right within a contract management platform.
- Obligation Management. This is where the legal team steps back, and your other teams step forward and begin the real work of the contract. However, this doesn’t mean that the contract is filed and never viewed again. The obligation portion of the contract management process is focused on ensuring that the deliverables are being provided as agreed, and that the contract is holding its value.
- Contract Revisions and Amendments. Inevitably, there will be problems or issues that occur after the contract goes into effect. Contract management includes processes for quickly revising and amending contracts.
- Contract Auditing and Reporting. It’s important to regularly audit contracts to ensure that the terms are being met, and that the contract is continuing to hold its value to your company. Contract management offers built in or customized reports based on your preferences, so you can evaluate a contract’s risk to the company, its performance in terms of overall trends, and its performance in terms of the industry can be invaluable to future negotiations, not to mention in evaluating the overall value and position of your company.
- Contract Renewal. Finally, failing to properly automate your contract renewal process can result in lost revenues. Contract management automatically informs your team of important tasks, expiration dates, and other important details so that opportunities and revenues aren’t lost — and you can build stronger relationships with customers.
What Are the Benefits of Contract Management?
Imagine that you didn’t have any systems in place to do your job, and you basically had to reinvent the wheel every time you needed to complete an assignment. Maddening, no? Unfortunately, in many companies, the legal department must reinvent the wheel every time a new contract is requested, because there is no true contract management system in place.
Maintaining an efficient contract management process not only gets tasks done more quickly, but it provides a host of other benefits as well, including:
- Supporting your goals, including expansion, new product development and launches, corporate restructuring, and revenue growth.
- The ability to respond to negative events. Should you be faced with a lawsuit, supplier failure, financial crisis, or other problem, easy and accurate insight into your contracts can help you develop the right response because you will have a better view of your risk and understanding of how much you are exposed instantly.
- The ability to view internal processes and trends that could potentially put you at risk — and correct them before it’s too late.
- Improved preparation for an IPO or other financing plan, merger, acquisition, or business partnership. Investors and regulators will pore over contracts looking for errors, loopholes, and other issues, but a contract management system will reduce or eliminate potential problems.
- The ability to comply with new and changing regulations quickly and efficiently.
- Reduced loss of revenue due to missed deadlines, contract expiration dates, or auto-renewals.
A contract management system not only reduces bottlenecks and improved productivity, but also provides unparalleled insights that will improve your business.
Does Contract Management Replace a Legal Department?
The short answer is no. While a contract management system does allow for more self-service options, the process still involves your legal team. Individual clauses and templates are drafted and approved by your counsel, who ensures that the language and terms are compliant with current laws and regulations, and in the event that the interview process reveals potential issues or noncompliance, contracts are automatically flagged to notify counsel for review.
Contract management simply streamlines the process, allowing your team to make sales more quickly and efficiently, speeding up the document process by as much as 75 percent, and freeing up your legal team to address other pressing issues that require their expertise.
When it comes to contracts, you can’t manage what you can’t see. A contract management system allows you full visibility into your entire contract portfolio, and make the most of them, while improving the efficiency and productivity of your teams.