There are a bunch of contract management best practices, tools and techniques out there. But how do you know what to prioritize when trying to incorporate them into the way your organization does business?
Welcome back to the third part of our Contract Management 101 series. In this post, we’ll outline what’s generally considered to be best practice in contract management and, in doing so, help you on your way towards becoming a contract champion.
If you haven’t already, take a look at the first post of the series to learn more about what contract lifecycle management is and how new technologies are changing the execution of it. As well as the second post if you want to dive into some typical challenges of contract management and how to avoid them.
Put simply, contract lifecycle management is the process of managing contracts to maximize performance throughout the whole lifecycle.
To identify best practices, it’s helpful to break the lifecycle down into phases and consider how the challenges presented by each (discussed in detail in our last post) can be most effectively navigated.
Before we start, it’s important to reflect on the context and overarching purpose of effective contract lifecycle management. For almost every organization this will be the same — to reduce costs and risks while remaining in control of their contracts.
In general terms, key questions for determining if your contract management is successful are:
- Are both the business relationships and agreements being generated and entered into satisfactory to all parties involved?
- Does the value generated from the organization’s contractual relationships match or exceed the expected value?
- Are contracting and efficiencies being realized and/or inefficiencies being counteracted?
With this in mind, it’s time to take a look at some of the practices which define the most effective contract management.
Best practices of contract management
A big part of building successful contract management strategies is establishing end-to-end control over the entire contract lifecycle. Which can be widely achieved by clearly defining roles and establishing routines, while utilizing automation.
— Nils-Erik Jansson, CEO of Precisely
One of the initial bottlenecks of traditional contract processes is contract creation. Traditional methods which are heavily reliant on manual copying and pasting and multiple read-throughs are simply incredibly time-consuming and very prone to human error.
Therefore, increasing the efficiency of this first phase of the contract lifecycle is a big step towards building a best practice contract management framework.
Many organizations have already come some way towards achieving greater efficiency in their contract creation by developing contract templates and/or standardized, pre-approved wording for clauses that are consistently included in their contracts — so-called “boilerplate” terms. But, just standardizing templates and clauses can only get you so far.
The next step on the path to truly efficient contract creation is the centralized control of this content.
As mentioned in our earlier post on the benefits of contract creation and drafting software, standardized contract templates are generally created in rich text editors such as Word. But text editors are made for just that—editing texts—and not for document assembly.
At the core of the functionality of such programs is the ability for documents to be freely edited by anyone, resulting in a loss of control for the legal department (or other oversight function).
Because of this, we highly recommend using software with a dedicated editor and an automated contract creation solution. For starters, this eliminates the risk-prone and repetitive copying and pasting when drafting a contract in a regular text editing software.
For ease of use and simplicity when it comes to drafting, a questionnaire-based solution is hard to beat. Such solutions allow users to generate contracts by simply answering questions which correspond to the variable clauses, such as “What’s the name of the counterparty?” or “What’s the governing law?”. By simply entering or selecting the relevant response to such questions, the contract will be automatically drafted to reflect the details of the deal at hand.
This way, team members (with or without legal expertise) can automatically create new contracts from templates as needed. Meanwhile, the business retains control over the content and can rely on the fact that all new contracts conform to the pre-approved wording every time.
In addition to making the contract creation quicker, this level of control also lets you focus less on linguistics and reduces the need for multiple read-throughs. This, in turn, reduces the review time of each document since only the variable parts, such as clause inputs, will need to be reviewed. With this sort of standardization, you’re also able to re-use legacy contracts and existing templates more freely, without extensive editing.
It’s clear that using a dedicated contract drafting and creation solution is among the most fundamental practices you can implement to improve and streamline your contract management procedures.
Approval and execution
After the contract is created, it’s time to review the terms before approving and, finally, executing to close the deal. However, each of these stages of the contract lifecycle can be unnecessarily time-consuming and, in the absence of clear workflows and responsibilities, can contain multiple bottlenecks.
Which individuals are responsible for reviewing and approving a specific contract isn’t always clear as day. Often, it’s not just one person or department, but multiple stakeholders. As a best practice, we recommend clearly defining roles and routines for the approval of contracts.
Start by determining who is/are responsible for approving certain contracts and establish a corresponding workflow. Then, you can use modern contract lifecycle management software to automatically route contracts to the right approvers and notify them of when there’s a contract in need of review and/or execution.
If you’ve read the earlier posts in this series, you know how we feel about the old paper-and-ink regime when it comes to signing! Luckily, electronic signatures are fully legally binding in a majority of countries, and for a majority of contracts.
Using an e-signing solution, which is included in many contract lifecycle management software solutions, can reduce the time to signature from weeks or days to hours or even minutes. E-signing of contracts is definitely a best practice for anyone doing business today — the cost and time savings are significant.
Storage and compliance
Archiving is one of the fundamentals of contract management. It goes without saying that storing contracts scattered in binders, stuffed into filing cabinets or saved on a local hard drive is hardly best practice nowadays. Indeed, one of the most basic functionalities of contract management software is to provide a secure and centralized repository.
This is obviously necessary for keeping your contracts safe from unauthorized external eyes. While best-in-class solutions also allow for customizable user permission levels for the sake of internal security. This functionality can be used to limit insights into specific projects or documents and determine who can perform edits to contracts, who are allowed to approve of them, and more.
The most basic activity in the full contract management lifecycle is to store the contracts in an electronic and searchable way.
– IACCM & Capgemini Automation Report
The best solutions also offer the ability to search contracts based not only on the document’s name, but also based on full text and metadata tags (which can be used to define other important information or content relevant to the contract). This sort of extensive searchability makes it quick and easy to locate a specific contract, stakeholder or clause.
In summary, the key elements of good contract storage are keeping your contracts protected, limiting user roles and insights, and having the means for quick and easy access through extensive searchability.
Monitoring and renewal
Usually, the formation of a contract will give rise to several dates and deadlines, such as deliveries, renewals, renegotiations and terminations.
Missing these crucial contract dates can have a directly damaging effect on your business and revenue. Yet, monitoring these can be quite a challenge on its own, especially as the number of agreements that your business enters increases. Luckily, there are digital and automation driven tools available and integrated into the best contract management solutions.
Obviously, best practice dictates that you keep close tabs on any document-related deadlines and establish routines for taking timely action.
One common trap for even the most diligent business are those contracts that don’t have any deadlines but are instead automatically renewed if not expressly terminated — so-called “evergreen” contracts. To avoid this, we recommend a solution that allows for smart reminders to be set for any event in the contract lifecycle.
Using such tools, you can monitor your evergreen contracts particularly closely and review them periodically. If they’re not valuable to your business, they should be renegotiated or terminated to avoid unnecessary costs.
Successful contract management
The key takeaway is that you should continuously look for ways to maximize performance throughout the whole contract lifecycle. This can be done by analyzing your contract management process for inefficiencies or success factors, and evaluating the methods you’re using. From there, you’ll be able to identify and establish more best practices on your own.
And so, the third part of our Contract Management 101 series has come to an end. We hope that you’ve gained some valuable insights on contract management best practices and the beneficial effects of using modern software in your processes.
Don’t hesitate to contact us if you have any questions or would like to learn more about how Precisely can streamline your contract lifecycle.