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The Importance of Correct Contract Management for Your Company

Jun 2, 2023 · 3 min read

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Contract management is a crucial aspect of modern business operations. It plays a pivotal role in ensuring the smooth functioning of an organization and its relationships with suppliers, customers, employees, and other third parties. This comprehensive guide will help you understand the ins and outs of contract management, its benefits, key steps, and how it can be optimized through automation and specialized software.

What is Contract Management?

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. It involves overseeing end-to-end contracting with suppliers, customers, employees, and other third parties throughout the entire contract lifecycle.

The primary objective of contract management is to effectively implement contracts and oversee them from initiation to execution, ensuring that contractual obligations are met and that both parties achieve the intended benefits.

Why is Contract Management Important?

Effective contract management is essential for the success of a business. It helps organizations:
  • Reduce costs and improve company performance
  • Minimize exposure to risk and ensure compliance with contractual terms and conditions
  • Streamline administrative tasks and improve efficiency
  • Enhance visibility into contracts and their performance
  • Monitor and track key obligations and milestones
Failure to manage contracts effectively can result in value leakage, financial loss, and strained business relationships. According to the International Association for Contract & Commercial Management (IACCM), poor contracting practices lead to an average value leakage of around 9.2% of company revenue.

Key Steps of Contract Management for Procurement

At a high level, there are seven main steps in the contract management process. Each of these steps is briefly described below:

Step 1: Request or Initiation

The contract management process begins with a request for a new contract or the review of an existing one. This request is routed to procurement and/or legal departments, providing a central place for reviewing and processing requests.

Step 2: Contract Creation & Authoring

Contract creation and authoring involve assembling a contract using existing and approved templates and clauses combined with a set of business rules. This self-service capability allows users to independently create contracts within the boundaries set by the legal team, improving the speed and efficiency of the contract cycle time.

Step 3: Contract Negotiation & Review

During this stage, the contract is shared with the other party, and the process of redlining and negotiation begins. Key to this phase is the ability to collaborate with internal users as well as the third party (e.g., supplier). Having good document comparison, change tracking, version control, and audit trails is essential for this process to run smoothly.

Step 4: Contract Approval & Execution

Contract approval workflows keep the process moving efficiently and effectively by making sure all those that need to review and approve do so. Workflows can typically be configured based on the type of contract, region, amount, entity, risk, etc. Execution of the contract via e-signature makes for a smooth end to the process.

Step 5: Contract Performance & Analytics

Post-signature contract performance monitoring is crucial, as this is when the contract is live. The contract lifecycle can last for several years and often involves numerous milestones, obligations, payments, rebates, discounts, etc. Understanding, tracking, assigning, and completing these obligations is critical to achieving the value within a contract. Assessing risk throughout a contract's lifecycle is also essential, as regulations change or business evolves, certain contracts may need to be amended to reflect a new environment.

Step 6: Contract Amendment

Amendments are a part of a contract's lifecycle. Things change from the original contract, and amendments need to be dealt with efficiently, without compromising the process or the guidelines in place. Contract Management tools make this process easy and keep track of all changes.

Step 7: Contract Expiry or Renewal

Having visibility into which contracts are about to expire or renew through automated alerts and notifications can significantly help legal teams prioritize their time.

Benefits of Contract Management Automation

Contract management automation offers several benefits, including:
  • Faster contract creation cycle times
  • Better contract visibility
  • Improved compliance to contracts
  • Proactive assessment and mitigation of risk

Contract Management Software: Who Uses It and Why?

Contract management software is an electronic solution that helps streamline and automate the contract management process. HR, legal, and procurement teams are the departments that use it the most frequently because they deal directly with creating, tracking, and signing contracts. Companies of all sizes and industries can benefit from using contract management software.

Some benefits of contract management software include:
  • Improved contracting efficiency
  • Better supply chain visibility and management of obligations
  • Enhanced contract compliance
  • Reduced exposure to risk

The Bottom Line

Contract management is an essential aspect of modern business operations. By understanding the key steps, benefits, and automation potential, organizations can better manage their contracts and ensure smooth business relationships. Investing in contract management software can help improve efficiency, visibility, and compliance while reducing risks and costs.

You can create contracts for your company with ease on Enty. The key thing i that you won’t need any legal skills whatsoever to do that. Just answer a few simple questions, and you’ll get a ready-to-use contract in the blink of an eye. Also, you can store documents on the same platform and use data from contracts in other services.

Purchase the Lite subscription for just €14 a month and get a solution for contract creation, invoicing, and HR automation at one place!
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