Contract management is the process of managing agreements, from their creation through to their execution by the chosen party, and to the eventual termination of the contract.
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What is contract management, and why is it important?
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. Contract management proves to be a very time-consuming element of business, which facilitates the need for an effective and automated contract management system.
The fundamentals of contract management
When two companies wish to do business with each other, a contract specifies the activities entered into by both organizations and the terms through which they will each fulfill their parts of the agreement. Contracts affect business profitability in a very large way due to the emphasis on revenue and expenses.
When a contract is phrased poorly, one organization might lose countless thousands of dollars over a simple technicality they lacked the resources to identify. Effective contract management can ultimately create a powerful business relationship and pave the road to greater profitability over the long term, but only when managed correctly. It’s a good idea to include a legal department or a lawyer in contract management discussions. The precise wording of contracts is crucial to contract management.
Generally, contract management involves a few key stages. There’s the early stages or pre-award phase. This is all the work that takes place prior to a contract being given to someone, whether it be a business or an employee. The middle stage is when the process is awarded. This includes all the paperwork to make the agreement final. Third, there’s the post-award stage. This is where a lot of contract management and maintenance comes in.
What are the stages of the contract management process?
In all, we can break the process down into nine steps, each of which contributes to one of the five overarching stages.
Here are the steps of each stage:
Creation
1. Initial requests. The contract management process begins by identifying contracts and pertinent documents to support the contract’s purpose.
2. Authoring contracts. Writing a contract by hand is a time-consuming activity, but through the use of automated contract management systems, the process can become quite streamlined.
Collaboration
3. Negotiating the contract. After drafting the contract, employees should be able to compare versions of the contract and note any discrepancies to reduce negotiation time.
Signing
4. Approving the contract. Getting management approval is the step where most bottlenecks occur. Users can preemptively combat this by creating tailored approval workflows, including parallel and serial approvals to keep decisions moving at a rapid pace.
5. Execution of the contract. Executing the contract allows users to control and shorten the signature process through the use of electronic signature and fax support.
Tracking
6. Obligation management. This requires a great deal of project management to ensure deliverables are being met by key stakeholders and the value of the contract isn’t deteriorating throughout its early phases of growth.
7. Revisions and amendments. Gathering all documents pertinent to the contract’s initial drafting is a difficult task. When overlooked items are found, systems must be in place to amend the original contract.
8. Auditing and reporting. Contract management does not mean drafting a contract and then pushing it into the filing cabinet without another thought. Contract audits are important in determining both organizations’ compliance with the terms of the agreement and any possible problems that might arise.
Renewal
9. Renewing. Manual contract management methods can often result in missed renewal opportunities and lost business revenue. Automating the process allows an organization to identify renewal opportunities and create new contracts.
National Contract Management Association
The National Contract Management Association (NCMA) is a professional association, based in the United States, dedicated to the profession of contract management.
Founded in 1959, NCMA now has over 20,000 members and more than 100 local chapters. NCMA promotes contract management through various means, including education, networking, publications, legislative and regulatory alerts, professional certifications, a code of ethics, awards, job postings, salary surveys, and a leadership development program.
Contract Management Software
Most companies place a lot of emphasis on contracts in the formulation of an agreement, but have a tendency to forget them once they’ve been signed. However, the lifecycle of a contract goes far beyond its signing. The contract should serve as a compass throughout the agreement. It should be continuously consulted to ensure each party is living up to the expectations of the agreement.
But as a contract changes hands from one department to the next throughout the contract lifecycle, a lot of critical aspects of the process can get lost in translation. Mismanaged contracts can cost your business up to 9% in annual revenue. A contract management system helps keep the contract accessible and relevant at all times, keeping the agreement on track every step of the way.
Contracts themselves can be quite complicated, but the contract management process is rather simple. Contract management begins with the composition of a formal contract (the Pre-Award phase), continues through the signing of the contract (the Award phase), and lasts through the end date of the agreement (the Post-Award phase). It begins all over again with the Renewal phase.
Legal teams face perhaps the most demand of any department that touches a contract. Contract management software helps mitigate risk and ensure compliance by making it easy to bring a contract into the platform and quickly find potential problem clauses. The software can analyze all contracts across the business to produce risk analysis reports, compliance tracking, and more.
Legal teams also gain access to a library of pre-approved clauses and other tools that streamline the document assembly and submission process.
Additional Information
Best Contract Management Software
