This article is written by Aishwarya Divate, pursuing a Diploma in Advanced Contract Drafting, Negotiation and Dispute Resolution from LawSikho. The article has been edited by Prashant Bvaiskar (Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Irrespective of the types of business we have, one aspect is unequivocally central to the organisation’s contracts. Daily contracts are the backbone of the company and form a relationship that an organisation has with stakeholders like suppliers, partners and customers. The effective contract management drives.
Contract managers who want to take greater control of contracts need a good command over contract language and its substance.
There are two recent developments in particular how contract managers can gain benefit, firstly to set comprehensive guidelines for clear contract language, and the second is automated review of contracts.
Contracts are associated with lawyers. But business contracts pertain to business dealings. A relatively small part of business contracts relates directly to the law—the legal framework for the transaction and how disputes are handled. So the lawyers, although routinely involved to the extent of greater or lesser in setting all the business standards for the people dealing the business, handle most or all of that task.
What is Contract Management and its importance?
Contract management refers to the business processes that manage the creation, implementation and evaluation of contracts to maximize business performance and minimize risk.
Contract management is pivotal for your business. Contracts, being legally binding, determine a business’s stakeholder relationships, pricing structures, the scope of work, rights and obligations, timelines for projects, warranty provisions, etc. contract management can dramatically improve the performance of the organisations.
In recent days the role of contract management has been developed and it is evolving and it entails understanding every aspect of a contract’s lifecycle to extract meaningful data and insights. To achieve the company’s objectives and better performance Businesses are engaging in contract lifecycle management.
The objectives of contract management are to ensure that the contract is:
- Delivered on time, at the right place and at the right time.
- Completed to the required specifications, standards and/or quality.
- Completed within the agreed price.
Throughout the life of the contract the contract management continues. It means that the borrower needs to plan for, and undertake:
- Effective and efficient management performances.
- Methodical and measured change control.
- Active risk mitigation and management.
- Resolution issues and disputes.
Elements of successful contract management
It’s not enough that an organisation has professionals in place to handle contract management. employees must be augmented with the presence of processes and software companies to satisfy increasing compliance and analytical needs. When a contract management strategy is successfully implemented, organisations can expect to see:
- The expected business benefits and financial returns are being realized.
- The supplier is cooperative and responsive to the organisation’s needs.
- The organisation encounters no contract disputes or surprises.
- The delivery of services is satisfactory to both parties.
Stages of contract management
There are many components of contract management. These stages make it easier when it’s time for a new round of contract to manage the end-of- quarter crunch that tends to happen. Here are the few steps of each stage:
The first stage is the initial requests the contract management begins the process with identifying the contracts and pertinent documents to support the contract’s purpose.
Authorising contracts manually by writing contracts is time consuming, the use of automated contract management processes can be streamlined.
Negotiating the contract. Employees should be able to compare the versions of the contracts and note any discrepancies to reduce negotiation time after drafting the contract.
Approving the contract. Getting the management approval is very necessary. Users can pre-emptively combat this by creating the approval workflows, including parallel and serial approvals to keep the decisions moving at a rapid pace.
Execution of the contract. By executing the contract, it allows the users to control and shorten the signature through the mode of electronic signature and fax support.
To ensure the deliverables. This requires a great deal of project management, by being met by the stakeholders and the value of the contract is not deteriorating through the phases of growth.
Revisions and amendments
Getting all the documents pertinent to the initial contracts drafting is a difficult task. When the items are found overloaded the systems are required to amend the original contracts.
Auditing and reporting
Contract manager reviews the accounts and contract audits that are important in determining both organisation compliance with terms and conditions of the agreement and the possible problems that may arise.
Generally manual contract management methods can often result in missed opportunities and lost business revenue. Automating the process allows an organisation to identify the renewal opportunities and to create new contracts.
Contract lifecycle management is too critical and it goes through various stages and contract managers need to monitor all the potential changes or breaches of contract. It is necessary to follow the contractual obligations and to ensure both sides of the contracts.
Contract management key roles
For an organisation contract managers play a very critical role as they direct and oversee the contracts through their lifecycle. Contract managers serve as the main facilitators for negotiations, recommendations, record keeping, monitoring, change management etc.
- Contract drafting, evaluation, negotiation and execution.
Contract managers cover a variety of industries from government to technology to any company that has a large number of contracts. To oversee contracts successfully from drafting all the way to execution, in numerous areas the contract managers are required to be skilled. For example, some of those areas are legal compliance, negotiation, and relationship management.
Often contract managers serve as the key point of contract between a business and the third parties to ensure timely reviews and approvals of any variations. Streamlining communication and monitoring processes are very important for success in an organisation. It has a tool which will keep all the conversations and edits and improves a contracts lifecycle and a contract manager’s efficiency.
- Maintaining contractual records.
Keeping thorough records of all documents that an organization has, even after a contract is seen through to execution, is essential for the efficiency and compliance of an organization.
A contract manager needs a good filing system. In today’s digital world the tools aren’t enough for the rapidly increasing pace of business. Storage is another benefit of digitalization.
- Developing and implementing procedures and policies.
Policies and procedures ensure employees carry out an organisation’s vision. It also establishes the procedures involved in the contract process to reduce organisational expenses. It also increases efficiency and sets precedent for decision making.
Relationship between contract management and project management
The contract manager and project managers have similar types of tasks and challenges, their positions and functions within an organisation are fundamentally different. Exclusively contract management focuses on contract management. In comparison project managers oversee all the new projects till the completion.
Contract managers help the clients decide which contract to be signed through research and risk assessment. Contract managers negotiate the terms of the agreement on behalf of their clients once the clients sign the agreement. Including contract management the project manager comparatively may be in charge of a variety of project components.
Why is contract management software important?
An important question for the organisation to ask is if investing in CM software has a relevance. Contract management software suits the organisation’s requirements that might be complicated and time consuming. The right software can always make the work effective, efficient and productive in the long-run.
- Contract management software automates the lifecycle of the organisation’s contract, manual efforts that work into tactical tasks and it will reduce the probability of the human errors.
- Contract management software will also enable higher efficiency at every stage of the contract management and it also reduces the contract cycles.
- Contract management software will help to centralize a repository for the contracts in a cloud system while simultaneously enabling more comfortable access to critical contract information by all relevant stakeholders.
- Contract management automation powered artificial intelligence boosts data analytics. It forecasts costs, and revenues and also identifies how to drive the performance.
Benefits of contract management
The significant benefits of contract management is:
- Aids Business Functioning
Efficient contract management will help and simplify how the organisation should function and it also structures business expectations, the mechanisms needed for their fulfilment and allows to analyse how the organisation achieves the objectives.
- Improves Functional Efficiency
Contract management best-in-class involves the use of various software development or tools that automate the process of managing contracts. The personnel can focus on the more strategic aspects of contract management like evaluating the contract performances, identifying the areas for improvement, etc.
- Improves spend visibility and minimizes spending
By structuring the engagement of an organisation with its stakeholders, especially with its suppliers, contract management simplifies transactional, and performance tracking. By increasing spend visibility, contract management also helps to identify the higher cost savings opportunities for the organisation.
- Enforces and Improves Compliance
Contract management system that indicates the terms and conditions and procedures to be followed implements and it enhances the level of compliance amongst the relevant stakeholders. Increase in compliance invariably helps in mitigating a large number of risks within the organisation.
Why do some contracts fail?
The key reasons the contract fails are as follows:
- Supplier and/or service contract compliance unsatisfactory, leading to end user dissatisfaction.
- Predicted contract spend escalates beyond the budget due to spiralling costs.
- Inadequate resources assigned to contract management.
- The context, complexities and dependencies of the contract are not well understood.
- Authorities and responsibilities relating to commercial decisions are ambiguous.
- A lack of performance measurement or benchmarking by the customer.
- A failure to monitor and manage retained risks (statutory, political and commercial).
- Lack of integration.
Therefore contract management best practices to standardize contract creation using the terms and obligations of the contracts and legal language that applies to a large subset of the contracts. It also tracks contract approval time and it allows an organisation the advantage of receiving contracted goods and services, it ensures a quicker move towards a positive relationship. Contract managers also help and supervise all the aspects of a contract throughout its lifecycle.
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