What Is Contract Management?
Contract management is exactly as it sounds — it's the process of managing the contracts for your organization. You may have someone in-house who can assist with this, or you may choose to outsource the work to a trusted company that will partner with your organization to maintain, execute, and renew contracts.
We all know the importance of having contracts. They provide guidance in and governance over your organization's relationships with any group or individual it does business with, including customers, employees, vendors, and partners. Effective contract management ensures that your business operations remain mutually beneficial for your company and all other parties. Contract management also involves minimizing your company's liabilities and potential for litigation through having solid contracts that are executed correctly and are satisfactory to all parties.
An individual or company that provides contract management may also serve as an advisor to your company's executive team and help your organization implement its goals.
Steps of Contract Management
There are seven basic steps of contract management:
1. Preparation (Initiation)
In this stage, those responsible for contract management will identify your needs for a contract and set expectations for the contract process. Since contracts are legally binding documents, it's important to be adequately prepared and organized from the very beginning. In this step, you'll want to outline the reasons for the contract and the goals of having the contract in place. You should even account for any risks you may come upon during the process, so you can feel equipped to handle these incidents later on by addressing them in the contract from the beginning.
For example, you may want to address what happens if your vendor decides to go out of business or if a client doesn't have the money to pay for an invoice. These may not be items you want to think about, but it's crucial to account for any contingencies you may be up against later.
2. Generation
A contract management team may partner with an attorney to make sure that everything is written out as complete as possible from the first draft. There may even be a template available that your legal team has created in the past with important boilerplate language that's essential for any contract. When drafting the contract, you must pay specific attention to all wording. You don't want to leave anything up for interpretation, as that can complicate matters later.
3. Negotiation
Even with such careful planning and preparation, you'll still need to negotiate the contract with all of the involved parties. It's a great idea to think forward and try to anticipate what the other party may need or want from the contract, and what items they may bring up when reviewing the contract draft. It'll prepare you for the conversation and show your partner, vendor, or customer that you are aware of their needs.
You can work on reviewing the contract together or go back and forth on each item that should be adjusted, whichever works best for your organization. The ultimate goal of this stage is for all parties to reach an agreement and have a contract that’s mutually acceptable to all parties.
4. Approval
After negotiations are finalized, approval is the next step. Those who may need to approve the contract can include upper management or an in-house legal team. Consider identifying who will need to ultimately approve the contract during the preparation stage of contract management.
5. Execution
This is an exciting stage because you are completing the contract and getting something formal in place. During the execution, all parties will need to sign the approved contract because it's only with a proper execution that the contract becomes valid. You can sign the document in person if everyone is local, or there are many e-signature tools and software that can facilitate electronic contract executions. Once everyone signs the contract, copies should be provided to all parties.
6. Revision
You may not have this stage in every contract process, but it is common because not all contracts one and done. It's possible that there will be reasons for revising the contract or attaching amendments, especially as situations arise that could not have been predicted. When you have an effective contract management process in place, it's much easier to make these updates without causing too much confusion.
7. Management
The contract process isn't complete just because all parties have signed the paperwork. Part of the contract management life cycle is performing regular audits on the contracts to make sure that all parties are complying with what has been agreed on. Audits are important for monitoring and tracking obligations, deliverables, and deadlines. Management also includes being keenly aware of any deadlines that were outlined in the contract and making sure that they are met. You'll also want to keep track of any renewals. If you miss a renewal period completely, that can equate to missed revenue and relationship opportunities with your partners.
Responsibilities of a Contract Management Professional
A contract management professional may be responsible for:
- Writing proposals.
- Responding to partners, customers, and vendors.
- Negotiating terms and conditions of a contract.
- Ensuring the contract and its associated process is compliant.
- Resolving conflicts.
- Managing the team and facilitating the entire contract process.
- Identifying risks.
- Maintaining complete records.
- Analyzing data.
- Improving the contract process and associated policies and procedures.
The Importance of Contract Management
In many ways, contracts are what drive your organization and keep it successful and free from legal disputes. Contracts help establish clear rights, obligations, and expectations between parties, mitigating risks and ensuring smooth business operations. How your contract management operations go can affect your company's operations, budget, revenue, and even your relationships with other parties, including customers. Any business arrangement has the potential to go haywire without a contract associated with it. Here is how else your company will benefit from a contract management process:
- Process: With a good management system in place, your process for producing, negotiating, executing, and renewing your contracts will be smoother, faster, and with less risk.
- Revenue: With a streamlined process, you can expect more revenue and fewer expenses, so your business continues to be a success.
- Relationships: Contract management means you can foster the strong relationships you've established with your partners, vendors, and customers because you're better able to identify any problems before they become too big of a deal to fix.
- Opportunity: The management process helps you to come upon new opportunities because your process is seamless and attractive to those you're entering into a contract with. It also helps you continue gaining opportunities with those you currently do business with because the contract renewal process is simple.
- Evaluation: Through contracts, you'll be able to identify where your business can grow more easily, the companies that can help you do just that, and how able you are to take on more work.
- Legal: With contracts, you're more likely to mitigate risks that can come with uncertain business relationships. A contract manager helps you assess any risks, monitor them, and get them under control.
- SOP: Having a contract management process is all part of SOP, or standard operating procedure. Establishing a routine for contracts allows you to spend more time in gaining new business, fostering the relationships you already have, and growing your company in other ways like in the case of expanding operations.
As you can see, contract management is an essential part of any successful business. Learn more about contracts and get comfortable with implementing them as part of your business strategy.
