What is Contract Management?
A contract is a binding agreement between two or more parties. In a business this includes, but is not limited to, those made with customers, vendors, partners, or talent. Contract management is then the process of managing all the stages of that contract or agreement.
Contract management itself is not a new concept. However, the more recent focus on contract management as a critical business process is, as more organizations realize the potential, if managed well, for the process to maximize financial performance and minimize risk. For that reason contract management (also referred to as the agreements process) encompasses the contract entire lifecycle—going far beyond the action of signing documents and filing them—expanding across all document stages: from creation, to negotiation, signing, and post-signature management, including execution of and reporting on those agreements.
Contract management has historically been a manual process. Yet, in recent years the contract management space has seen an influx of technology focused on standardizing and automating these manual tasks, resulting in a more widely accepted and adopted technology-enabled version of contract management, where organizations who have adopted contract management software have been able to increase their operational efficiency and unlock business success.
Why is Contract Management Important?
Contracts form the commercial foundation of an enterprise, managing every dollar in and out of a company.
While contracts are often viewed as something that only pertains to Legal, in truth they touch everything and everyone within an organization—contracts govern approximately 75% of transactions every business generates. Meaning nearly every transaction across all business departments involves a contract, making a contract much more than a document or a piece of paper. A contract defines the rules of engagement and a business relationship—it is a binding agreement—outlining what each party is responsible for and the terms agreed to; a contract is the blueprint for the future and a historical catalogue of the past.
In a digital world, where other business functions have become technologically empowered and most processes are performed digitally, the inability to not only track, but simply have visibility into what a company has agreed to, or is to expect to receive from an agreement, is in stark contrast. To draw an analogy, imagine storing money under the mattress. It seems absurd, yet for many businesses who are manually managing their agreements either by storing them in a filing cabinet or managing them on a locally stored drive (essentially an electronic filing cabinet) the action is the same. The contracting process has remained one of the most poorly managed functions within most businesses resulting in significant costs, time, money, and opportunity, as well as inviting unnecessary risk that can have dire impacts on an organization.
“Ineffective contract management costs businesses up to 9.2% of revenue.” – Tim Cummins, CEO, International Association for Contract and Commercial Management
Yet, knowing all this, 94% of the world’s organizations, still manage their agreements through manual, legacy contracting processes.
The purpose of contract management is to:
- Reduce financial and operational risk
- Increase compliance
- Save administrative time
- Increase visibility of contracts across the organizations
- Manage workloads and performance
- Strengthen third-party relationships
The Contract Life Cycle: Stages Of Contract Management
A contract goes through five stages during its life cycle. (Contract Lifecycle Management (CLM) is then the methodical management of contracts across all five stages.) At a high level, a contract’s life cycle begins when one party requests goods, service, or partnership from other party. It ends when that goods, service or partnership has been fulfilled.
Having a clear understanding of what happens at each stage of contract management is crucial to ensuring processes will deliver optimal results, including identification of any potential bottlenecks. Furthermore, understanding the entire contract lifecycle in your organization will enable standardization (of legal language, clauses, approval workflows, etc.), streamlining the agreements process across departments, offices, and markets.
The 5 stages of contract management are as follows:
- Creation: The creation of a document or contract, typically done in Word, a CLM such as Concord, or other writing software.
- Negotiation: The process of sharing, editing, and redlining and agreement with another party to come to acceptable and agreed upon terms.
- Review & Signature: Final review of a negotiated contract and the act of signing said agreement, signifying acceptance of terms. Signature forms are either typically a “wet signature” (physically putting pen to paper) or by e-signature, a faster way to secure signatures using online solutions.
- Execution: Carrying out the terms of the agreement.
- Management: Tracking delivery against agreed upon terms, managing contract deadlines and renewals.
As the pace of the digital landscape increases, without an effective contract management solution to manage these stages keeping up becomes increasingly difficult, as every stage of contract management must be accelerated. A contract lifecycle management solution will streamline the Contract Management process, across all stages, through automation. Request a demo to learn more.
Benefits Of Contract Lifecycle Management Automation
The benefits of contract management automation (like those discussed here and here) include more accurate revenue forecasting, trend analysis to improve selling and negotiation, better risk management, and better coordination of sales and legal teams. When contracts are managed appropriately, it’s easy to find places to streamline and optimize both in your sales cycles and your revenue management.
“Effective contract management provides lightning fast time-to-value and profound ROI. Aberdeen reports a 150%-200% payback within one year.”
The Benefits of Contract Management Software
With the right contract management platform, it’s possible to have total visibility into your entire contract lifecycle and move faster than ever before, while maintaining flawless compliance. This means smoother, clearer, and more powerful business agreements—now and in the future.
Contract Management Solutions
Contract management platforms can accelerate success by standardizing and automating the contract management process, guaranteeing consistent, and confident, compliance and risk mitigation. This delivers more business opportunities and captures more revenue, all while delivering an intuitive experience that makes the lives of those who manage contracts (Legal, Contracts Managers, Procurement, etc.) easier.
There are two types of contract management solutions: a contract management system (CMS) and a contract lifecycle management platform (CLM).
CMS vs. CLM
Contract Management Systems (CMS) and Contract Lifecycle Management Platforms (CLM) each contain a unique set of features and functionality.
CMS, usually an on premise solution (and often called legacy), are typically designed for only one department to use at a time, and provide the benefit of consolidating documents into a single source of truth. They are not built to support multiple departments within a company, and don’t allow for any editing/redlining/signature capabilities, e-signature, and post-signature management typically—all components of the agreements process.
A CLM is essentially the modern answer to the CMS. A waterfall of changes within the business landscape has lead to the need for a robust, digital (or cloud-based), comprehensive CLM, including:
- An increase in global business velocity requiring faster process execution
- Increased demands on governance, risk, and compliance (GRC) management
- A push for self-service model to reduce operational costs/handle increased volumes
- Digitization of paper contracts, embracing e-signature, and so forth
- The move by many companies toward more diverse sales and licensing models
- Expansion into new markets, including M&A activity
- Increased personalization of customer requirements
Simply put, people need to do contracts faster than ever before. Without the right contract management platform it will be nearly impossible to keep up.
A quick comparison of CMS vs. CLM capabilities.
Recognizing the need for a better way to manage contracts is an important first step, but understanding what to do next can be a challenge. To support your decision-making process, it is important to arm yourself with a comprehensive contract management buyer’s guide, platform evaluation checklist, contract management buyer’s guide, platform evaluation checklist. This will help you assess your current status quo, evaluate readiness for a software solution, as well as identify necessary requirements specific to a business’ needs. Because often it’s so much more than just features and functionality.
Implementing Contract Management Software
Implementation of a contract management solution can vary widely, from a day to weeks, months, or more than a year, depending on the solution chosen and level of customization included.
Why does customization matter? The more customized a product is the longer the time it takes to put together all the system components. Think of it like buying a bicycle. Going to the store, picking one off the shelf, and riding it home versus picking one off the shelf and then choosing 10 custom accessories that all need to be attached before you can take it home. Those additions extend the time to bicycle enjoyment by 3 weeks. Also of note, the more customization the harder the push for adoption and possibly the lower the adoption rate or success for the change initiative. That highly customized bike now likely only fits one person, instead of allowing anyone to get on and ride.
Customization also speaks to the ease of use and simplicity of a solution. The easier to use (or more intuitive a product)—one, implementation is shorter, and two, the adoption rate is higher, delivering a much quicker time-to-value.
A typical implementation processes might include the following key activities:
- Alignment on use case and key objectives
- Administrator training
- Configuring account (templates, folders, workflows)
- Configuring user base (seats, teams, access rights)
- Populating legacy documents
*An industry benchmark for implementation of a contract management solution is 200 users in two weeks, fully up-and-running.
When considering a contract management solution it is imperative to think beyond the immediate product purchase. Like any other purchase, including software, successfully implementing is as important, if not more so than the purchase itself. Consider all steps relating to the implementation project—beginning, middle, and end. Successful implementation leads to higher adoption, driving more impact to the future of the business as a whole. For more information, request a demo.
Contract Management Best Practices
Adopting best practices is about creating a standardized approach that can scale with your business, in a way that works for your business.
Best Practice #1: Assess Current Processes & Identify Opportunities
When beginning evaluation to purchase a contract management solution or if re-evaluating a current solution or process it’s critical to map out all processes, software integration points, users, etc. to thoroughly understand the current state. Data backed decisions are sound decisions.
Best Practice #2: Create a Single Source of Truth to Simplify Management
It’s impossible to successfully manage contracts if they can’t be found, making the first best practice consolidating all agreements into one central repository, creating a single source of truth.
Best Practice #3: Leverage Templates to Automate Repetitive Tasks & Increase Efficiency
Creation is a critical part of the contract process, but often a time-consuming one. According to Forrester’s research, the average time it takes to create a contract is 3.4 weeks. Spending time on this process is necessary for an organization to function, but with that time being estimated at nearly a month, it can be at the cost of other valuable work being completed. Leveraging technology, often in the form of templates, Goldman Sachs reports can reduce time spent on a contract by 20%.
Best Practice #4: Use Approval Workflows to Ensure Compliance & Save Time
Review and approvals are two critical steps in the contract process that are notably reduced when organizations put an automated process into action. Using approval workflows via a contract management solution ensures compliance and, as Aberdeen and Forrester report, time for these tasks drops drastically—by over 80%—when a contract lifecycle management platform is put into place to drive quicker, more streamlined processes.
Best Practice #5: Automation is Key to Efficiency, Compliance, Revenue
Aberdeen’s research proved that automation is key to seeing results. Organizations as a whole saw contract cycle time drop to nearly ⅛ of what it was before when they had automated routing, processes, and notifications set up. Regardless of whether through a platform or a streamlined process, automation is the key for decreasing these numbers.
The Pitfalls Of Contract Management
Managing contracts manually, can often be very painful. From trying to find missing or lost contract, to running around in hopes of identifying the latest version.
With so many contracts and drafts moving through an organization, it’s easy to lose track of them. In fact, on average 12%-15% of contracts are actually lost. This alone can cause detrimental damage to an organization. Imagine the repercussion of not knowing the terms of an agreement or losing an important vendor due to an expired contract. But the frustration doesn’t end there. Within corporations, it’s not uncommon for every team or department to have its own culture and way of doing things. Different strokes for different folks need not apply when trying to create impactful, scalable business processes.
For Contract Managers, variances in how teams approach their agreements—from standard language and contract terms to milestones—can be a major headache, forcing reinvention of the wheel for each contract, adding valuable time to contract cycle time. And there’s another critical factor here: how those pitfalls make people feel.
Dealing with overbearing inefficiencies of manually managing contracts can drastically impact overall experience and satisfaction at the workplace. Contract Managers are often working in a “survival” mode when they could be thriving, and rising as strategic assets to the organization.
Contract Management Myths
As human beings, we naturally get excited about innovation, but often we let our preconceived notions put barriers down on the way towards adopting them. When we don’t have all the facts at hand, we often rely on perceptions to guide our decision making. However, it is important to know the difference between fact or myth, especially when it can make or break (or bankrupt) the business.
The same is true when it comes to contract management. While contract management is a necessity, adoption of contract management software can be a challenge. At a time when data breaches and increasingly complex regulations are becoming the norm, organizations can’t afford to keep running on legacy processes. Not only is manual contract management inefficient, it is also highly risky, time consuming and pricey. Yet myths around contract management software has been halting opportunity for many. Even those who have adopted technology, may have chosen tools that are limiting for their business. Others who have switched to a single contract management platform, may think that all are equal, as assumptions about “the norm” for new software are easy to make. It’s time to set the record straight, and dispel those contract management myths that are standing in your way.
Find out how Concord can streamline your agreements process to reduce costs, maintain compliance, and increase revenue.