Key Concepts in Contract Process Management
Contract management refers to the process by which commercial contracts are created, executed, and fulfilled. The contract management process validates the responsibilities and obligations contained in each contractual clause. Every step in the process adds value. Each party to the agreement is required to fulfill its duty and then receive the associated value as a result of meeting that obligation. Each step also serves to protect the company. Failing to fulfill any step in the contract management process could result in some liability on the part of the entity that fails to meet its obligations. The specific steps contained in the contract management process flow will depend on the type of agreement. However, the contracting process is typically the same regardless of whether the agreement is business-to-business (B2B) , business-to-consumer (B2C), or business-to-government (B2G).
Issues relating to the contract management process can be complex and costly because the parties to the agreement may have a very different understanding as to what it meant when they agreed to the substance of the contract. This complexity is further heightened when multiple contracts are involved or the contracts contain multiple layers.
There are several specific steps that are common to all agreements. The very first step occurs before the execution of the contract. The parties negotiate the agreement terms and conditions. Once the parties reach an accord, each side executes the agreement. Then, the parties must ensure that the contract is carried out in accordance with its provisions. This prevents disputes and potential liability from arising later on in the agreement.
The Steps of a Contract Management Process Flow
The contract management process is typically a complex web of workflows involving multiple people and departments, from start to finish. A mature process contains the following key stages:
Contract Creation:
A standard or template contract must exist to expedite the contract creation process and form the foundation of the new contract. Any changes or deviations from the standard contract terms must be carefully captured and documented in the contract art of the contract. In some organizations, the terms and conditions may be negotiated at the outset.
Contract Negotiation:
Contract negotiation involves myriad forms of communication with a variety of internal and external resources, including the buyer, the seller, outside counsel, internal policy stakeholders, etc. Changes and revisions must be carefully tracked within the approved contract. Outside counsel may be used to review, vet and season new contractual terms and conditions.
Contract Creation & Execution:
The contract is complete once parties have agreed to the terms, conditions and language contained in the contract. The contract must be digitally or manually executed by those parties who have the need and authority to sign. At this stage, the contract should be stored in a digital repository and any relevant meta-data captured and recorded. The contract may also need further input from certain business owners to add or synchronize data from other systems such as ERM, Sourcing, Legal, Accounting, Procurement, AP/AR, CRM, HR and IT.
Contract Renewal:
Certain contracts contain pre-defined renewals dates. At a minimum, a commencement/end date must be recorded for each contract. It’s important that contracts are flagged for future expirations/renewals before they reach key threshold dates so that the necessary actions and decisions can be made. Other contracts have no defined renewal terms and contain provisions for termination/early cancellation. A process must be defined to track key milestone dates from that date forward.
Obstacles in Contract Management Process Flow
Organizations often struggle with compliance issues, poor document management, and ineffective communication throughout the contract management process. As an example, even though a signed contract may clearly stipulate compliance with certain state or federal laws, if the terms are not reflected elsewhere, the likelihood of non-compliance is significant. It is important that any contract management process begins with proper database set up to ensure the terms of the contract are properly reflected on the front end so compliance issues can be avoided on the backend.
In addition to the substantive issues associated with inefficient contract management processes, many organizations fail to track the various contract versions or locations of their documents. This can become costly if terms are misrepresented or the wrong version is referenced in the event of a dispute.
Organizations also struggle with communication barriers among the different departments within their organization: legal, sales, finance, and operations. The contracts each department reviews are unique to their discipline. In many cases, departments may try to convey contract terms relating to their specific area of discipline without communicating those changes with the other departments. For example, the finance department may negotiate terms related to payment plans without understanding the effect of those changes in the scope section. This failure to communicate among departments is one of the most common problems with contract management processes.
Strategies for Effective Contract Process Management
Perhaps the most important step toward an efficient contract process flow is a comprehensive company-wide contract management strategy that promotes best practices. A number of best practices are worth highlighting:
Use Technology
The first step toward managing and tracking contracts is to have a centralized system for storing them. Too many organizations do not know where copies of their contracts are because there is not a single, centralized repository for storing them. Having a repository such as a cloud-based document or content management system will allow for more effective and efficient searches of existing agreements. That’s the first step. Technology is the backbone of a successful contract process flow.
Documentation
Contract managers should develop and maintain a standardized procedural guide for their contract process flow. This should be in the form of a Microsoft Word or Google Doc template. This template should summarize the common pitfalls related to such agreements such as what to include in terms. It should also discuss best practices for establishing terms. Templates and best practices will ensure that employees returning from temporary leave will be able to immediately resume their duties with minimal disruption.
Auditing
Periodic audits are perhaps the most effective way to ensure that contract management procedures are being adhered to properly. Audits should be geared toward assessing the compliance of the company’s contract management process flow with the typical best practices of other companies and industry standards. The result of the audit should be a report documenting any deficiencies and making recommendations for updates to the company’s contract management procedures.
Leveraging Technology in Contract Management
As we have seen, a contract management process flow implementation can be undertaken in a number of ways. Manual, business process-oriented methods are useful for smaller organizations with less complex and more reasonable contract workload, but at the enterprise level, it becomes necessary to include Level 2 automation in the form of contract management software. Contract management software solutions allow for the creation of a standardized contract repository, searchable by metadata and executed documents. They allow for the standardization of contract forms and access to unrestricted and restricted forms for specific users. They allow for the customization of negotiation protocols, rules and "paths," along with integration with eSignature solutions and Salesforce.com. They allow for workflow automation and routing, integration with third party systems such as accounts payable , inventory and others. They allow for the application of best practices in terms of contract creation (management and marketing, sales, vendor, service, labor and technology) and the standardization of such best practices. In addition to providing for improved record keeping, compliance, collaboration and execution, Level 2 contract management solutions provide users with the ability to use analytics to make critical decisions about litigation risk, spent contract dollars, revenue growth potential, risk management, forecasting and end-user adoption. Such contract management systems vary in cost and reliability. Reliability depends on a number of factors, including product maturity, user base and corporately embedded resources. Solutions may be relatively low cost per user, but an organization should consider all associated costs for implementation, training, maintenance and upgrades when determining the cost of a contract management solution.
Advantages of an Optimized Contract Management Process
Expertly executed contract management solutions help empower and enable business success. The benefits of streamlining the contract process include efficiency, risk reduction and enhanced compliance. The automated tracking and management of deadline dates, document changes and financial streamlines makes for better decision-making and control. Implementing an organized system of audit trails also reduces costs and allows for better cost analysis. The time and resources saved by eliminating repetitive and mundane tasks allows your workforce can to focus on more important matters. Centralized data improves regulatory compliance by automating updates to documentation. Automated systems also allow for proactive action, such as renewing important contracts before expiration.
Emerging Trends in Contract Management
The upcoming years promise to bring some exciting advancements and greater efficiencies in the contract management process. Artificial intelligence (AI), automation, and digitization are three trends that appear to be making big impacts.
Increased Interest in AI in Contract Management:
Process efficiency is often hampered by inefficiencies in contract review. Early adopters have already harnessed AI to reduce these inefficiencies and modernize contract review processes.
Artificial intelligence can automate many tedious contract processes, including:
The ability to help contract participants learn from past mistakes in future contract negotiations and management is one of the major long-term advantages of AI technology.
Automation and Control:
Contract Management Systems (CMS) like Convoy:Link offer a streamlined solution for automating many contract processes. Modules like contract authoring and contract capability assessments standardize contract collaboration by giving users templates and check lists for each process.
Automation software also allows all stakeholders easy access to the same information. Everything is centralized , which makes it easier to track who is responsible for each contract stage and where contracts are in the process flow.
Data can also be aggregated for use later in identifying risks and common pitfalls in contract negotiations.
Digitization and Compliance:
Digital solutions are standardizing compliance measures for marketing and legal personnel, leading to more effective contract management on both sides of the discussion. Immediate reminders about non-compliance also help keep contract professionals up-to-date with their vendor standards and alerts allow both parties to make necessary corrections along the contract lifecycle rather than after the fact.
As document standards become more refined, it’s evident that the ultimate goal of contract management software solutions is long-term risk and compliance mitigation. Future iterations of these programs may allow historical data to play an even larger role in preventing re-occurring vendor compliance issues.