What is Contract Management? More Important, Why Does Contract Management Matter?
Two questions near and dear to my heart. Throw in a direct reference to Contracts and Contract Management Software, and I’m sold! On a more serious note, not only are these questions valid, but they are also timely – especially in the era of COVID when so many of us are working remotely.
So, as Maria, our dear friend from the Sound of Music - just in case the reference is not obvious - would say, “Let’s start at the very beginning…a very good place to start…”.
What is Contract Management?
Contracts are the currency of your organization and govern the many different types of relationships that an organization has. These relationships include those that an organization has with its employees, customers, vendors, partners – and really, everyone and every entity with whom it does business. Contracts are a legally binding document between at least two parties within which the terms and conditions of the relationship are agreed. Such terms and conditions include what is typically referred to as an offer, acceptance, consideration and mutual intent to be bound. In layman’s terms, a contract typically outlines the goods or services to be purchased, the conditions under which these goods and services will be procured, and the amount to be paid.
Contract Management is the art, the science, and the process by which these contracts are managed. Historically, a tremendous amount of time and effort were spent negotiating contracts – only for them to be put into a drawer, and dusted off only in the event of a disagreement. Today’s dynamic business world now demands a proactive approach to managing the complete lifecycle of organization’s contracts - as the rewards – and the risks – of not doing so have become great.
When we, the contract management software vendors, consider contract management, we do so under the premise of managing the entire lifecycle of the contract through the use of technology and automation. This lifecycle starts with the creation of the contract, itself, and progresses on to both the negotiation and approval process. Once approved, the contract must be signed, stored, and managed. Included in this management are renewals, terminations, deliverables and the fulfillment of a variety of obligations. As the complexity of contracts increases so does the task of adequately managing these contracts.
What is Contract Management Software?
It is here that Contract Management Software or Contract Lifecycle Management Software (CLM software) can provide tremendous value. Contract Management Software platforms allow many of these processes to be proactively managed. Contracts can be created from pre-approved templates through an easy to use wizard experience. Negotiation processes can proceed more fluidly with automatic redlining and check in check out document management functionality. Tasks can be created and assigned, bottlenecks escalated, and reports created. Permissions can be applied, key terms identified, and obligations can be managed – all through the use of automation.
Why Does Contract Management Matter to My Business?
And, while this all sounds very exciting, it begs that we return to our original question: “Why Does Contract Management Matter?”
I would suggest that the answer to this question can be segmented into the tactical and strategic.
The Tactical Benefit of an Effective Contract Management Process
At a tactical level, effective contract management allows for the minimization of lost time, and for the maximization of resource output. Consider, if you will, the current contract management process within your organization. When you want to request a contract – whether because you are interested in buying goods and services or in selling your company’s products – where do you go, and how do you do it? Once you have requested a contract, how long does it take you to receive it or to get it approved? What is the approval process? And, once approved, how does one go about having this contract signed? Prior to the implementation of our Contacts 365 contract management software platform, many of our very own customers spent endless amounts of time on only this - the initial part - of their contract management process.
Minimization of Lost Time
Fast forward to after the contract has been signed, and you need to locate this contract because you have a question or issue around what was agreed. Consider this exercise today while you’re likely working from home due to COVID. Does your organization store all of its executed contracts in a central repository that can be accessed electronically and searched, or are you making a trip to your office to look through a filing cabinet? You would be shocked at how many organizations are working through the latter.
Maximization of Resource Output
An effective contract management process allows your resources to quickly navigate the contracting process. A tremendous amount of time is saved both by the individual requesting the contract and also the resources involved in its approval and management. Instead of chasing down contracts, your employees can focus on what they do best – their respective jobs – whether they are part of the contract management process or otherwise.
The Strategic Benefit of an Effective Contract Management Process
From a strategic perspective, and contract management has become a strategic, C-suite issue, effective contract management supports faster revenue recognition, increased profits, reduced risk, and improved customer and vendor relationships.
Faster Revenue Recognition
Faster revenue recognition can be achieved through a variety of measures related to the contract management process. Consider again the questions posed to you regarding your internal process.
A tremendous amount of time is frequently lost as internal resources wait for a contract to be created or for a contract to be approved. As a sell side organization, one that it focused on selling it’s goods and services, this lost time results in delays in closing the deal - which translate directly to delays in delivering the good and services for which the contract has been requested. The end result - delays in recognizing the revenue associated with such delivery.
An effective contract management process supports faster revenue recognition through the use of templates with standard language as well as pre-approved alternate language suggestions. This is useful in two ways - by starting the negotiation with your template or your “paper” - the negotiation will likely conclude more in your favor. The conditions under which you deliver your revenue will be more inline with your standard, and to your advantage. Equally important, when alternative language provisions are necessary, by having these pre-approved and at your fingertips, not only can you proceed more swiftly through the contract negotiation, but also with more direction.
From a profit perspective, increases to revenue and your ability to efficiently recognize your revenue obviously boost your top line. But what about your bottom line? By reducing or eliminating inefficient operations, and by allowing your resources to focus on what they do best, your organization naturally reduces expenses. By way of example, instead of spending time providing status updates to the sales team regarding where a contract is in the approval process, your Contract Managers can focus on the work for which were hired – managing these contracts. Not only will your contracts be wrapped more quickly for less cost, the introduction of efficiencies will allow for an increased workload without increasing headcount. Again, through the use of templates and pre-approved language - yes, I do love to talk about templates! - what would have been previously escalated to more senior legal resources or to outside counsel can now be addressed internally – resulting in additional cost savings.
When considering the issue of risk, effective contract management processes help to reduce risk in a variety of ways. First, by using templates and preapproved language - last time, I promise - you reduce the exposure present within your contracts. When and if alternative language provisions are suggested, a contract lifecycle management application can route these language provisions for special approvals and can track the use of such provisions. CLM software also allows your company to closely monitor and manage the fulfillment of contractual obligations – both those that you are required to provide to your customers as well as those which your vendors are required to provide to you. Given more far-reaching legislation, security requirements, and general compliance obligations, proactively managing these deliverables is critical to effective internal operations.
Improved Customer and Vendor Relationships
Last, and while this does fall into the bucket of intangibles, proactive contract management improves both customer and vendor relationships – beyond simple costs savings and increased sales. We’ve all done business with organizations who are “on top it” and we’ve all done business with those who are not. An efficient approach to closing a contract and proactive management of this contract relays to your customer and vendors that not only are you committed to your own internal success, but are also committed to the partnership that you have with these companies.
Understand the Importance of Contract Management Software
So, again, to return to our Maria analogy, as Maria would say, “…when you know the notes to sing, you can sing most anything”. When you understand the importance of managing your contracts and implement an effective contract management process, your ability to manage and benefit from these contracts is material.