Estimated reading time: 5 minutes
• Contract management is the overseeing of a contract throughout its lifecycle. It starts with the creation, and execution, to the evaluation of vendor performance with the goal of maximizing the value an organization gets from such a contract.
• Contract management is also a risk mitigation method. Proper management of contracts can help an organization reduce costs by up to 30, while poorly managed contracts could cause a loss of revenue.
• There are other reasons managers should adopt a contract management strategy.
Contract management relies heavily on the automation of processes and the setting up of reminders for such things as expiring contracts. This forces an organization to streamline operations by creating a central repository for contracts that’s searchable. The process of creating contracts and renewing them becomes faster by relying on standardized templates.
Mitigation of Risk
Contract management involves assigning responsibilities for the execution of your organization’s obligations in contracts while also checking whether vendors are fulfilling their part. Proactive contract monitoring reduces the risk that your organization will breach contracts with third parties. Similarly, by evaluating vendor performance, the risk of vendor non-performance reduces.
Active contract management will help your organization build long-term, useful relationships with third parties. Defaulting on contractual relationships not only brings legal consequences, but it also results in reputational damage, sometimes irreparable. Creating and maintaining relationships with third parties leads to mutually beneficial partnerships.
Risk of Poor Contract Management
Poor contract management, on the other hand, can have severe implications for a business. For instance, slow negotiations when renewing contracts can lead to a disruption in operations. Poor relationships with vendors could lead to missing out on discounts that could have improved margins. Without a contract negotiation and management strategy, a business is normally flying blind in engagement with stakeholders. This will jeopardize any corporate goals the business may have.
Best Practices in Contract Management
How can businesses establish contract management in their operations? Certain best practices are always great to adopt.
Centralization and Standardization of Contract Agreements
The legal department in your business should be tasked with standardizing and approving the correct language and terms to use in your contracts. This will streamline and quicken creating new contracts with vendors. Your business will also save major costs in man-hours that would otherwise go to drafting new contracts from scratch.
When contracts are drafted in a certain format, they are also easier to review. Contracts should also be kept in a single repository for easier retrieval and perusal of the contract metadata. It should be easier to find out who approved the contract, the contract amount, the period, and so forth.
Develop Contract Management KPIs
Your company should establish yardsticks for determining whether the contract management process is yielding expected results. For instance, preparing templates for contracts should lead to faster contract approval processes. Proactive engagement with vendors prior to the expiry of existing contracts might lead to cost savings. Signing longer contracts might also lead to lower unit prices.
Tracking such metrics from one period to the next is a good contract management practice.
Automation of Communications
Relying on email for contract lifecycle management is too risky when an organization has hundreds of contracts running. One staff member will likely forget to reply or send an email to their colleague. The best solution is to rely on contract lifecycle management software. In such a system, it is possible to assign responsibilities and set up notifications for all relevant stakeholders when an event happens, or an item requires approval.
Contract management software also improves visibility within the organization. For instance, it is possible to check whether due process was followed before a purchase was made or a contract was approved. It’s possible to conduct an audit, which is also a way for the organization to protect itself from suits.
Anticipation of Contract Expiry
Good practice requires that business plan for contracts that are about to expire. There should be criteria for deciding whether to renew a contract with the same vendor or switch to another. Factors that influence such a decision include changes in budgetary allocation for the department, inflation, the vendor’s past performance in terms of quality, and whether another vendor is available. The sourcing department has a continuous role in scouring the market for new opportunities. It’s important to incorporate their findings when going about contract renewals.
Information Security and Access Control
Controlling access to contract information is an important undertaking in the contract management process. Besides creating a contract repository, it’s crucial to ensure that only people with the right credentials can access certain contract data. You should also safeguard confidential information about third parties that you may be privy to during the contract.
Handle Disputes Well
Your contracts with vendors or other third parties should include a clause on dispute resolution. This will ensure that resolutions happen quickly because both parties have agreed on a method for resolution. Avoiding litigation will save your business legal costs. Litigation can also be a drawn-out process that results in the interruption of operations.
However, it’s more important to monitor contract performance continuously to find issues that may require a solution before they escalate to a dispute.
Get the Right Software
Proper contract management is a factor of policies supported by the right technology for execution. The right contract repository and contract lifecycle management software are important investments for any company working with many vendors. These applications will add visibility to contracts while ensuring the business honors obligations to vendors.
To find out more on the right e-procurement software for your business, schedule a call with ProcurePort’s agents here for a free consultation.