What is contract management?
Contract management - also known as contract lifecycle management – is a process for managing contracts and finances.
The core steps of contract management include:
- Drafting contracts
- Negotiating terms and conditions
- Reviewing and signing
- Managing renewals, terminations or renegotiations
- Managing contract finances
- Accounting and reporting items on financial statements
A contract can be any legally binding agreement between two parties.
Some common types of business contracts include:
- Purchase of goods and services
- Subscriptions for servers, cloud storage, payment systems etc.
- Rental contracts for offices, property or equipment
- Patents or trademarks
- Leases for company vehicles, production equipment and other items
- Framework agreements for legal, marketing and financial services
- Employee contracts
- Office building and services
- Service level agreements
Businesses can be on the ‘seller-side’ of a contract, such as when a company sells a subscription, or the “buyer-side”, when a company purchases goods from a supplier, distributor, vendor, or lessor.
In both cases, the goal of contract management is to ensure the businesses receive maximum contract value with minimum effort.
why is Contract management important?
Proper contract management makes it easier to understand commitments, negotiate new contracts, understand obligations, budget with accuracy, and avoid unnecessary expenses.
Poor contract management, on the other hand, leads to financial loss and even loss of reputation. CFOs, controllers, and contract manager often wonder:
- How can I keep up with all activities and maintain an overview of all contracts?
- What happens when employees who have signed automatically renewing contracts leave?
- What commitments are associated with specific locations and departments for the next 6, 12, 18 months?
- And what does that cash flow look like?
As a business grows, it becomes more difficult to answer these questions and maintain control of contracts.
Many people, at various locations, may be responsible for signing agreements. Documents end up spread across local servers or email boxes making it difficult to keep an overview of commitments and obligations.
There is a risk of duplicate purchases and unnecessary costs. Forgetting to cancel perpetual contracts or renew contracts on time, can also be costly. Even small monthly lease agreements, licenses or equipment rentals can add up to large costs over a year if they aren’t handled correctly.
The direct or indirect cost of poor contract management is often lost time, wasted resources, and unnecessary costs which build up quickly - and reduce profitability.
The biggest problems with poor contract management are:
1. Paying for things you don’t use
When there isn’t a central overview and control of contracts, businesses can accidentally double-up purchases, have overlapping contracts, and pay far more for an item than necessary.
2. Paying more than agreed
Controllers and finance managers need to check that invoices are correct compared to contracted terms. Discounts, returns, and other factors must be considered before paying bills. However, if the contract owner is unknown or if contracts are mismanaged, the company may overpay.
3. Dependent on key personnel
It may be natural to store contracts in email folders or local PCs, but this adds risk. Businesses are left to rely on contract owners to follow up on contracts correctly. What if the person gets sick or leaves the company? Who will make sure the contract is terminated on time or that it doesn’t renew without proper evaluation?
A contract that renews automatically – and unnecessarily – means unnecessary expenses that reduce profits.
4. Uncertain finances or cashflow
Contract management is important to corporate budgeting and cash control processes. CFOs must have a full overview of contract details such as value, payment terms, and frequency in order to manage finances properly.
Each of these details, however, is often a small part of multipage contracts. It can take hours or weeks to compile data in the format finance requires.
If you must go back and gather data when you are under stress, the amount of work can be overwhelming. Therefore, it is important contract data is organized and structured, as part of professional financial management practices.
What Are the benefits?
The smartest way to avoid problems and manage contracts is to use contract management software.
Software digitalizes manual process and simplifies steps throughout the contract lifecycle. Instead of relying on spreadsheets or random processes that may or may not be followed – contract management systems are the modern digital way to keep control.
Documents, copies of the original contracts, and relevant data are organized in one place – for contract managers, finance, and other relevant people in accounting, legal, etc.
Then, specific parts of the software support business processes like faster signing, counterparty authentication, or financial control.
In short, the software helps you avoid extra costs and wasted time.
- Easier access to contracts from multiple locations
- Faster and validated signing
- Better overview of suppliers
- Eliminate dependency on key people
- Clear ownership of contractual relationships
- Shorter and more effective contract review processes
- Eliminate automatic renewals and unwanted costs
- Improved budgeting and financial control
In the next section we see how how the various elements of a system work together to help you achieve these benefits.
Key elements of a contract management system
There are many software vendors – each with its own strengths and weaknesses.
For example, some software focuses on the first stage of contract creation, helping people work together to write and negotiate a deal, while others focus on the later stage related to cost control and follow-up.
In general contract management software should offer the following elements:
1. Cloud-based register
Modern software offers central cloud-based document storage so that registered users can access contracts from any location. This includes being able to search for contracts based on filters, text, or other criteria. Role-based access ensures various people are only able to review relevant information.
2. Faster signing
Digital signature has become an important part of convenient and efficient contract signing processes. As a result, contract management software supports users by enabling them to send documents for signing and receive back authorized contracts. These contracts are added to the register where they are securely stored.
3. Accurate supplier/customer database
Depending on whether you are on the buyer or seller side of agreements, a contract management system includes a database of your customers or suppliers. The exact information may vary, but normally includes a list of supplier company, organization number, contact data, and legal information.
4. Easier follow-up with notifications
Even when companies have established processes for entering contracts, it is equally important to review contracts and follow up important events like termination deadlines, renewal dates, etc.
Software systems support proper follow up because they send notifications (push messages) to specified people when there is an important event. That way there is no surprise deadlines and correct measure can be put into place.
5. Reports and financial control
One of the most important features of any contract management solution should be value and budget reports. These reports help you answer questions like: What financial expenses will you incur? Are invoices correct? What will be the movement in your cash flow?
The answers should be clearly and concisely presented in a contract management system and available for various legal entities - if you have subsidiaries or group structure.
The software should also be able to manage multiple currencies so that you have a full overview of costs, assets, and liabilities in the currency of your choice.
Most companies enter numerous contracts each year. Yet routines for how contracts are stored and managed are often unclear or difficult to implement. As a result, contracts are mismanaged and the financial impact of each contract is unclear.
By using software as part of your contract management strategy you will save time, avoid unwanted renewals, eliminate dependency on key personnel and have better control of revenues, expenses, and liabilities.
how to Choose the Best contract mangement system?
Choosing the best contract management software for your business can be tricky. There are many vendors, offering a range of solutions for various purposes and specializations.
The step are:
- define the main users
- define what problems they are trying to solve
- make a list of the necessary criteria
Once this is done you can match your requirements to the vendor profile.
Software review sites like G2 and Capterra, can help you narrow the candidates.
The goal is to identify the partner who will generate the biggest value for you both at initial implementation and as your business evolves.
We offer you several tips here: Find the right contract management system