Contract Management Best Practices

A comprehensive guide

Contract management refers to the process of creating, executing, and managing contracts between two or more parties. It is a crucial aspect of business operations, as it requires meticulous attention to detail and legal compliance to ensure that both parties fulfil their obligations. Effective contract management is vital because it can positively impact a company's financial performance, reputation, and ability to manage risk. It can also help businesses avoid costly disputes, penalties, and legal consequences. In this comprehensive guide, we'll delve into the essential contract management best practices and how contract management software can help every business maximise productivity and success.

Benefits of Effective Contract Management

Stay legally compliant

Effective contract management plays a critical role in helping businesses stay legally compliant. Contracts are legally binding agreements that outline the rights and obligations of each party involved. Therefore, it is essential to ensure that all contracts comply with applicable laws and regulations. Failure to comply with legal requirements can result in costly penalties, legal disputes, and damage to a company's reputation.

By implementing contract management best practices, businesses can ensure that all contracts are reviewed and approved by legal experts who can identify and address any legal issues. This process can help businesses stay compliant with changing laws and regulations that may affect their contracts.

Improved operational efficiency

Effective contract management can improve operational efficiency by removing messy and ineffective workflows. When an organisation digitises their delegation of authority matrix, they outline the levels of authority for different employees within an organisation and their ability to approve contracts. By improving this process with technology, businesses can ensure that all employees are aware of their levels of authority and can approve contracts without delays or confusion. This helps speed up the contract approval process and reduce the risk of errors or miscommunications. By improving operational efficiency, businesses can focus on other important aspects of their operations, such as innovation and growth.

Increased transparency and accountability

Effective contract management can also increase transparency and accountability within an organisation. By implementing a centralised contract management storage system, businesses can ensure that all employees have access to the same information about contracts, such as contract terms, expiration dates, and compliance requirements. This can help prevent misunderstandings and disputes between employees and departments, as all parties have access to the same information.

Moreover, businesses can establish clear roles and responsibilities for each employee involved in the contract management process. This can help ensure that everyone understands their duties and is held accountable for their actions. By promoting transparency and accountability, businesses can build trust among their employees and stakeholders.

Strengthened business relationships

Effective contract management can also strengthen business relationships with clients, vendors, and partners. By having a clear and organised contract management process, businesses can improve communication and collaboration with their counterparts. This can help build trust and foster a positive working relationship, which can lead to long-term partnerships and mutual success.

Furthermore, businesses can harness contract management as a tool for negotiation and risk management. By understanding the terms and conditions of their contracts, they assess potential risks and negotiate better terms to protect their interests. This can help prevent disputes and improve the overall business relationship.

Ability to scale risk management

In addition to the above benefits, effective contract management can also equip businesses with the ability to scale risk management. By implementing a robust contract management system, businesses can grow faster without adding more risk or creating bottlenecks

Understanding the Contract Lifecycle

Before diving into the best practices for contract management, it's important to have a basic understanding of the different stages of a contract's lifecycle and how contract management software can support.

1. Contract preparation

Contract management software can help businesses identify the need for a contract and select the appropriate parties. It can also help outline the terms and conditions of the contract, including key milestones, deadlines, and deliverables.

2. Negotiation

Contract management software can help businesses manage the negotiation process by allowing all parties to discuss and negotiate the terms of the contract. Ideally the contract management software will allow parties to track these changes via redlining in real-time. This can help ensure that all parties are on the same page and are in complete agreement of the terms of the legally binding contract they are signing.

3. Execution

A benefit of contract management software is that it helps stakeholders to execute the contract with speed and precision. The software typically will enable all relevant stakeholders to review, approve and sign the document digitally. This significantly reduces the lengthy wait times associated with paper contracts requiring wet-ink signatures.

Once the contract has been signed, contract management software can help businesses manage contract documents and store them securely. It can also help automate workflows and track obligations to ensure that all parties are meeting their commitments.

4. Performance monitoring

Contract management software can help businesses monitor contract performance by tracking key metrics such as delivery times, quality standards, and compliance requirements. This can help identify potential risks and opportunities for improvement.

5. Renewal or termination

Contract management software can help businesses manage contract renewals or terminations by automating workflows and tracking key deadlines. It can also help identify potential risks and opportunities for improvement.

When businesses leverage contract management software, they can improve their contract management processes and maximise their productivity.

Best practices for contract management

We'll now cover our top recommendations for implementing effective contract management best practices to ensure your in-house legal teams can maximise productivity.

Simplify the contract creation process

One of the best ways to simplify the contract creation process is standardise agreements using templates. This not only saves time, but it also ensures consistency across contracts. Additionally, by providing other departments in the business with pre-approved templates, they are empowered to create their own contracts with minimal legal involvement. This reduces the number of legal requests which frees up valuable time for the legal team, allowing them to focus on more high-value tasks. However, it's important to ensure that the templates are regularly reviewed and updated to reflect any changes in legal requirements or business practices.

Create a centralised contract repository

Another crucial aspect of contract management best practices is to create a centralised contract repository. This repository should store all contract documents in a secure and organised manner for easy access and retrieval. By having all contracts in one central location, businesses can ensure that all contract-related information is up-to-date and readily available. This can also help avoid the risk of lost or missing contracts, which can have serious legal and financial consequences.

Use e-signature

E-signatures streamline the signing process by allowing parties to sign documents electronically. This can save time, reduce costs, and improve efficiency. Additionally, e-signatures are legally binding and provide a secure and auditable trail of the signing process, which helps minimise the risk of disputes or challenges in the future. By using e-signatures, businesses can reduce friction and speed up the turnaround time in getting contracts signed.

Clear roles and responsibilities

Clearly defining roles and responsibilities is another important aspect of contract management best practices. This ensures that everyone involved in the contract creation and management process understands their responsibilities and what is expected of them. This can help avoid confusion, delays, and mistakes.

Configuring approval workflows and delegations of authority is made easy with contract management software. This allows businesses to define specific approval processes and set up delegations of authority to ensure that the right people are involved in the contract management process. Overall, this helps speed up the approval process and ensure that contracts are reviewed and approved by the appropriate individuals.

Clear roles and responsibilities not only improve contract management processes, but also how the organisation interacts with their in-house legal department. By clearly defining the responsibilities of each stakeholder involved in the contract creation and management process, it can help ensure that everyone is aligned and working towards the same goals. This creates a more collaborative and cohesive team dynamic, which can improve communication and increase productivity.

Automate Communication and Collaboration

Contract management software also facilitates communication and collaboration between parties involved in the contract creation and management process. With this tool, stakeholders can easily redline and annotate the most up-to-date version of the document, making it easier to track changes, suggest modifications, and provide feedback.

Contract management software also automates communication, sending notifications and reminders to the relevant parties to ensure that milestones and deadlines are met. This helps to ensure that everyone involved in the contract creation and management process is aware of any changes or updates and can speed up contract negotiations.

Additionally, contract management software allows businesses to keep internal comments and feedback internal, ensuring that only relevant stakeholders have access to sensitive information. This helps to maintain confidentiality and security, while still allowing for effective collaboration within the organisation.

Monitor Expiry Dates and Key Milestones

Another important feature of effective contract management is the ability to monitor expiry dates and key milestones. With automation software like Plexus, businesses can set alerts for important contract dates, such as renewal deadlines or termination clauses, and ensure that they are not missed.

When it comes to contract management best practices, understanding the importance of lead time is crucial to successfully negotiate a renewal. Waiting until the last minute to start the renewal process can lead to missed deadlines, rushed negotiations, and potentially costly mistakes.

To ensure a smooth renewal process, businesses should start the renewal process early. This gives them time to review the existing contract, identify any necessary changes, and negotiate with the other party.

Monitor Contract Compliance and Risk Management

Effective contract management is not just about creating and negotiating contracts, but also monitoring compliance and managing risks. It is important to ensure that all parties involved in the contract are meeting their obligations and adhering to agreed terms and conditions.

Contract management software can help businesses automate the process of monitoring compliance by setting alerts for key events, milestones, and obligations. This ensures that businesses are aware of any potential breaches and can take corrective action before it becomes a major issue.

Measure Contract Performance, KPIs & ROI

Finally, another crucial aspect of contract management best practices is measuring contract performance, Key Performance Indicators (KPIs), and return on investment (ROI). This allows businesses to evaluate the success of their contracts and make informed decisions for future negotiations.

To effectively measure contract performance, it is important to set SMART (Specific, Measurable, Achievable, Relevant, and Time-bound) KPIs that align with the ultimate goal of the contract. For example, if the goal is to reduce costs, a KPI could be to achieve a certain percentage of cost savings.

Regularly reviewing contract performance is also crucial to identify areas for optimisation. This includes analysing KPIs and ROI to evaluate the success of the contract and identify any areas for improvement. By regularly reviewing performance, businesses can identify any issues early on and take corrective action to ensure the success of their contracts.

Conclusion

Implementing contract management best practices is essential for businesses looking to maximise the productivity of their in-house legal teams. This includes creating a centralised repository for contracts, establishing clear roles and responsibilities, starting the renewal process early, monitoring compliance and managing risks, and measuring contract performance, KPIs, and ROI. By following these best practices, businesses can streamline their contract management processes, minimise risks and errors, and maximise the productivity of their in-house legal teams.

FAQS

How can contract management technology improve contract management?

Contract management technology can improve contract management in several ways. Firstly, it can help businesses automate the process of creating and storing contracts, reducing the risk of errors and ensuring that all contracts are stored in a centralised repository. Secondly, it can help businesses monitor compliance by setting alerts for key events, milestones, and obligations, reducing the risk of breaches and enabling businesses to take corrective action before it becomes a major issue. Finally, it can help businesses measure contract performance, KPIs, and ROI, enabling them to evaluate the success of their contracts and make informed decisions for future negotiations.

What is contract performance management?

Contract performance management is the process of monitoring and evaluating the success of a contract. It involves setting key performance indicators (KPIs) and measuring the return on investment (ROI) to evaluate the effectiveness of the contract. This includes tracking compliance with contract terms, identifying any areas for improvement, and taking corrective action to ensure the success of the contract.

What is the role of the contract management team?

The contract management team is responsible for overseeing the entire contract lifecycle, from the creation of the contract through to its termination. Their role involves drafting, reviewing, negotiating, and finalising contracts, as well as ensuring compliance with contractual obligations and managing any disputes that arise.

What are contract management metrics?

Contract management metrics are key performance indicators (KPIs) used to measure the effectiveness and success of a business's contract management processes. These metrics include:

1. Contract compliance - This KPI measures the degree to which a business adheres to the terms and conditions outlined in their contracts.

2. Contract cycle time - This KPI measures the time it takes for a contract to move through the entire contract lifecycle, from creation through to execution.

3. Contract value - This KPI measures the financial value of a contract and the amount of revenue generated or savings achieved through the contract.

4. Contract risk - This KPI measures the level of risk associated with a contract, including legal, financial, and reputational risks.

5. Contract renewal rate - This KPI measures the percentage of contracts that are renewed or extended after their initial term.

6. Contract termination rate - This KPI measures the percentage of contracts that are terminated early.

By measuring these metrics, businesses can identify areas for improvement in their contract management processes and take corrective action to ensure the success of their contracts. Implementing best practices for contract management can help businesses improve their performance in these areas and achieve their objectives.

How can the ROI of contract management be measured?

Implementing best practices for contract management can bring significant benefits to a business, including improved efficiency, reduced risk, and increased cost savings. However, to truly understand the impact of contract management, businesses need to measure their return on investment (ROI). Here are some key metrics to consider when measuring the ROI of contract management:

1. Contract compliance: One of the most significant benefits of contract management is improved compliance. By measuring the percentage of contracts that are compliant with all terms and conditions, businesses can determine how much risk they have mitigated and how much money they have saved.

2. Contract cycle time: Contract cycle time refers to the time it takes to create, negotiate, approve, and execute a contract. By measuring contract cycle time before and after implementing contract management best practices, businesses can determine how much time they have saved and how much more productive their in-house legal teams have become.

3. Cost savings: Contract management can lead to significant cost savings by reducing errors, increasing efficiency, and negotiating better terms. By tracking the cost savings associated with contract management, businesses can determine their ROI and make informed decisions about future investments in contract management.

4. Contract value: By measuring the value of contracts managed through a contract management system, businesses can determine how much revenue they have generated as a direct result of their investment in contract management.

5. Customer satisfaction: Contract management can also have a significant impact on customer satisfaction. By measuring customer satisfaction before and after implementing contract management best practices, businesses can determine