Hardly any business relationship with customers, employees, suppliers or partners is established without a contractual agreement. It is therefore all the more astonishing that only a few companies have mastered contract management par excellence. Harvard Business Review cites studies that show that companies lose between five to forty percent of value on a deal due to inefficient contract processes. According to HBR, however, the solution is Artificial Intelligence. But do companies have to go that far or are there more accessible ways to solve this problem?
Contract management (also known as “contract lifecycle management”) is fast developing into a challenge – depending on the number of contracts to be managed. This challenge is particularly difficult to resolve satisfactorily when analogue and paper filing systems are being used.
For a better overview, greater efficiency in contract management, certainty in meeting deadlines and quicker processing, it is recommended that you use a digital solution. Two good news about digital contract management for companies for you:
- Although contract management is a complex process, the challenges are similar for most companies. Since everyone is in the same boat, it’s worth rowing in the same direction. In other words, learn from and implement best practices!
- Artificial Intelligence is used as a wonder weapon to combat many business problems – and rightly so, in most cases. In contract management, however, it is often the smaller, more manageable digital solutions that already work miracles!
Definition
what is contract management?
The term “contract management” describes a process for companies to manage contracts. Ideally, a digital contract management solution will assist with every stage of contract management. The various phases range from draft contracts and contract creation to contract modification and archiving through to contract termination/cancellation and the destruction of the contract.
What are contracts?
Simply put, a contract is an agreement between two (or more) parties, which manifests itself as a mutual and voluntary declaration of intent. A contract will usually regulate what a party must do or have done within a specific period, and what they will receive from the other party for it. This brief definition describes a range of parameters – contract partner, duration, service to be performed, contractual penalties for non-fulfillment, etc. – which will ideally be recorded, managed and evaluated in a central location. Here is a list of typical contract types processed in contract management:
- Rental contracts
- Purchase and sale agreements
- Employment contracts
- Demise charters
- Contracts of service
- Leasing contracts
- Maintenance and servicing contracts
- Insurance contracts
- Supply contracts
- Trade agreements
- NDAs (non-disclosure agreements)
The contract management process
To gain a better understanding of the tasks involved in contract management, it is helpful to take a detailed look at the complete contract creation process. The beginning of every contract process is a draft, and the end is the signed final copy that ends up being archived. In contrast to the journey to Rome, however, the steps between the start and finish are clearly defined. Avoid experiments and instead rely on a clearly defined procedure for your contract management. It could look something like this:
1. Contract negotiation
If the contract partners are willing in principle to do business with each other after the initial talks, then the contract negotiations and contract drafting can begin. Usually, one of the parties will provide a rough framework of the contract, which can then be filled with details during the negotiations. Preparation of a draft contract should be based on standard templates for different types of contracts.
2. Reviewing the contract
If both parties agree on the details of the contract, it goes into the review phase. This review will, for one thing, make sure that the contract does not clash with the conditions of any contracts which have already been concluded. This may be the case if, for example, one of the contract parties is being granted exclusive rights, but they have already been given away. The legal departments of both contract partners will also check to make sure that all the clauses comply with any applicable laws. The business sense and benefits should also be reviewed for the final time.
3. Contract conclusion & Filing
If the draft is approved, the contract is put into force by the signatures of representatives from both parties. Each party will receive at least one copy of the signed and valid contract and archive it. This may be at a centralised location in the company or decentralised in the department concerned. Secure filing and archiving of concluded contracts and adherence to compliance guidelines and authorisations must be observed.
4. Continuous monitoring of the contract
After the contract comes into effect, there must be regular checks to see whether the two parties are keeping to the agreements and agreed deadlines, e.g. whether the agreed payments are made on time. When the contract is coming to its end, a check must be made in good time to see whether the contract needs to be extended (under the same or renegotiated conditions), whether it can be allowed to expire, or even be actively terminated.
From contract creation to archiving
In many small and medium-sized enterprises (SMEs), various people carry out the role of contract manager in addition to their original roles: fleet managers, heads of HR, purchasing agents and accountants, authorised officers and managing directors – they can all be involved in contract management for their departments. Large companies (corporations), where contract management plays an essential role, often have a contract manager who deals with contract management on their own:
- Drafting in-house contracts
- Reviewing external contracts
- Contract settlement and negotiation
- Maintaining relationships with contract partners
- Identifying and resolving potential conflicts in contracts
- Monitoring the contract term
- Deciding or assessing whether a contract should be extended or allowed to expire
- Passing on contract-related information to the employees or departments concerned at the right time and proactively
Which tasks are part of contract management?
These tasks can be roughly divided into three categories: namely contract management, contract life cycle monitoring and contract controlling. As multiple people are usually involved in contracts, joint, collaborative work in contract management is given a particularly high priority. All in all, the job of the contract manager is associated with great responsibility – as can be seen from the abundance and complexity of the tasks.
It starts with the contract drafting
The creation of a contract is a job that must be carried out with a great deal of care. There is, however, the option of accelerating the process and simplifying this task by using tried and tested boilerplate. The legal department prepares this boilerplate and makes it available to staff, who can now put the desired contract together from this library. Of course, the contract management system will also provide CI/CD-compliant company templates for the frameworks for the specific content of the respective contract, i.e. the boilerplate.
Digital contract management, by its very nature, needs the contract in the digital form. The metadata for the contract is first recorded after the contract is signed by both parties. Ideally, the contract management system is connected to an ERP/CRM system so that important information about the contract partner (exact company name, address, contact person, etc.) fits directly. Furthermore, the type of contract and relevant information on the content of the contract and the contract conditions are recorded. This automatically generates something like the digital equivalent of a contract cover letter or file cover. The actual contract is then added in digital form.
Contract administration is the basis of contract management to a certain extent. In principle, this is about keeping all the company’s signed contracts in one centralised place. And to do it in such a way that any contract can be found again quickly and easily: and ideally be accessible on the go. In practice, many companies carry out their contract management on Excel spreadsheets, in which the key contract data has been recorded, while electronically archived contract documents are stored by each department involved and made accessible to all parties via SharePoint.
A contract runs through various stages in its life cycle (the so-called “contract lifecycle”): e.g. in the case of contracts, where the company acts as the contract giver. The cycle begins here with the creation of the draft contract. This is reviewed, modified, corrected and then approved and signed. Many changes can only be made in dialogue with the contract partner, which is why the option of being able to work on a contract document jointly is so important. After that, it’s a matter of monitoring deadlines within the contract and deciding towards the end of the contract: do the contract partners agree to an extension of the contract – with or without adjustments to the content of the contract –, or will the contract be terminated or simply allowed to expire?
In contract controlling, the tasks include risk assessment, ensuring adherence to contractual provisions and monitoring the costs resulting from the contracts. That is why it is important to always maintain an overview of all the key figures from individual contracts and to provide quick access to the desired information. In practice, companies also often use Excel as a tool in contract controlling. It is also important that contract information is prepared and made available for the usual financial statements – annual and quarterly statements, balance sheets, etc.
Ideally, a contemporary contract management solution will oversee the management of the entire contract lifecycle. Unfortunately, and all too often, contract management is focused on keeping to contract deadlines and contract terms as an orientation point for contract termination. Contract management should inform users in good time about the upcoming end of a contract. So far, so good – for normal cases, at least. However, exceptions fall out of sight – e.g. contract termination before the end of the contract term. A modern contract management system should also be able to deal with this eventuality by calculating and presenting early termination penalties which may arise through the early termination of a contract.
Perhaps one of the most interesting aspects of contract management is the issue of legal certainty. While critics of digital solutions like to question the legal certainty of the electronic signature, they completely miss how poorly conventional, paper-based contract processes meet modern compliance requirements.
Anyone who prints, scans, reprints and then scans paper contracts like in the good old days buries any claim to transparent legal certainty and compliance. Digital solutions, on the other hand, log every single step along the entire process and document the contract history in chronological order.
In addition, contract management solutions also meet the essential requirements of commercial and tax law. Now lawmakers are demanding specific retention periods for documents on commercial and tax law. This also includes contracts. The retention periods vary between six and 10 years. Audit-compliant archiving of contract documents is strongly recommended in order to also be able to comply with these contract retention periods with a digital solution. What is important at this point: Following the GDPR (2018) coming into effect, a combination of contract management and archiving solutions must oversee the locking and erasure of archived contracts.
This makes digital contract solutions a crucial component for audit-compliant archiving and transparent versioning of contract documents. They create legal certainty, meet the highest compliance requirements and thereby reduce business risks for companies of all industries and sizes.
Special features in contract management
Contract management in purchasing
In purchasing, contract management offers special benefits if your company works with digital procurement processes. The purchasing department receives a catalogue of suppliers and their contractually defined conditions from contract management. This ensures that wild and unplanned purchases (also known as “Maverick buying effect”) is virtually eliminated. When it comes to strategic purchasing, contract management ensures that applicable laws and compliance guidelines are adhered to. Furthermore, efficient contract management with consolidated information helps purchasing agents when negotiating conditions with suppliers.
Contract management in sales
Transparency is the be-all and end-all in day-to-day business for the sales team. Access to all the necessary contracts is just as much a part of that as reviewing the contract history. Furthermore, contract management integrated into CRM systems provides valuable and helpful support in sales – especially while giving new sales staff introductory training (onboarding process). If there is integration in the sense just mentioned, you will benefit from a high degree of automation: contract negotiations are completed more quickly this way. This, in turn, results in benefits: it ensures a faster cash flow on the one hand and creates new freedom in the sales team on the other – freedom for the sales team to deepen and build on relationships with customers!
Ideally, an integrated contract management system will also support access times to contracts. That is why, when selecting a contract management system, you should look for Single Point of Truth architecture – and the age of spending an eternity searching through paper contracts will come to an end. At the same time, you can minimise risks arising from contracts by increasing compliance within the company through integrated contract management. Authorised sales team staff have an overview of every deadline, are kept informed about them and can act proactively. Thus, digital contract management optimises your business processes while simultaneously decreasing costs that would otherwise be incurred.
How to Implement Digital Contract Management in Your ERP System
A very large group of people is often involved in processing contracts. In addition to the responsible employees from the respective departments, internal or external lawyers may be involved in this process, as well as members of the management team, business partners or even customers. As a result, it’s often difficult to give contract management a uniform structure with the usually available tools from the ERP system, shared folders, chat and email programs.
Do you use an ERP system supplied by Microsoft, Sage, Oracle, SAP or another provider and want to digitize your contract management? The first thing you should do is use your time to analyze your company to detect exactly where the pain points lie in contract management.
Once you’ve recorded these points and clearly structured them in the form of a requirements specification, it will be much easier for you to determine what specific requirements your company has for the digitalization of contract management.
How to Create a Requirements Catalog for the CLM Software
Once you’ve assembled your project team, you should create the requirements catalog for the CLM software in collaboration with stakeholders from the various departments.
The first step is to determine the current status quo of contract management in your company. To do this, make a record of:
- In which departments – and at which locations, if any – contract management plays a role
- Which individuals are actively involved in contract management
- How the role and rights management of the contract management system is structured
- What contract types are used across departments
- Which other business processes are affected by contract management.
Then work out with stakeholders what you expect from digital contract lifecycle management in the future. You should consider the following aspects:
- The software solution must map the workflows that are currently associated with contract management while simultaneously raising them to a higher level by structuring them in a more efficient and user-friendly manner. To do this, note very precisely which processes, departments and people are involved here in your company and how they are structured.
- At the process level, the software must meet the requirements for reviewing and approving contracts that exist in your company. To do this, compile rules that exist for the various contract types.
- An important point that should be considered separately is the media format of the contracts: where does contract management in your company work digitally, and where does it work with paper? Are there processes with mixed formats? The CLM software should address this and, if necessary, offer additional solutions to standardize workflows.
- Note that there are specific legal requirements for some contract types, such as how they must be filed and retained. Make a note of all contract types to which this applies, together with the relevant legal requirements.
- This also raises the question of archiving contracts: how are your digital contracts currently filed? Should these legacy contracts be migrated to the new system?
- Do they need the option to fully digitalize legacy paper-only contracts by scanning and using OCR to insert them into the new system to make them searchable?
Digital contract management solutions
The tasks in contract management are not only complex, they are also of significant importance for the success of the company. That is why the use of a digital contract management solution is strongly recommended. They support the contract manager in nearly all their tasks, reduce the error rate in the contract management process to a minimum and can be easily integrated into Enterprise Content Management and other operational systems.
All contracts are available digitally in one place, and the important key data can be read out and monitored automatically. A dedicated legal system controls access to the contracts, and every access is logged. All activities within contract controlling can be carried out significantly faster and more efficiently in comparison to solutions using Excel, Outlook and/or SharePoint.
easy contract is the modern, web-based contract management system with which you can cover the complete contract management lifecycle. Create contracts with this contract management solution in almost no time at all. Always together, from drafting the contract – including amendments – and signing the contract with a digital signature through to archiving the contract. Contract management in SAP is also available.