Contract management is the process of digitizing agreements with your stakeholders to power your CLM while optimizing for transparent contract reporting. 

Contracts that pose risk versus contracts that act as a business tool – there’s a thin line – it’s how you deal with contracts. World Commerce and Contracting research shows that poor contract management costs companies 9% of their bottom line.

Effective contract lifecycle management requires: 

• Building silo-free systems to ensure a smooth flow of business operations;
• Constant monitoring for better visibility and control over compliance requirements;
• Mastering contract obligations; and 
• Facilitating collaboration to drive alignment across teams.

Smart legal teams prioritize effective contract handling by using contract lifecycle management best practices. That’s why 92% of organizations plan to transform the way they handle contract management processes. 

And that’s where best practices can come in handy. 

What is contract management

Contract management is all about overseeing and analyzing the agreements an organization has with clients, partners, suppliers, and employees.

Your contracts need to be well-managed from start to finish to ensure the outcomes are successful. This will ensure smoother delivery and boost profitability for your business.

The contract management processes involves:

• Storing and organizing your contracts well
• Negotiating contract terms
• Ensuring your contract meets compliance needs
• Analyzing contract progress and data

Whether simple or complex, every contract requires effective management to stay on track and within budget. When done right, it enhances performance and reduces risk.

5 Contract Management Best Practices

1. Set Responsible Key Performance Indicators (KPIs) 

The right KPIs will produce accurate results for your organization. To achieve your organization's goal, you must plan ahead of time for risks using strategy. To ensure that you track and measure what matters, base your KPIs on your goals. 

Setting KPIs involves asking the right questions based on what you want to improve. Your goal could be to improve contract compliance. This can then be broken down into specific KPIs, such as well-defined processes, developing the right metrics to track compliance, and identifying what causes non-compliance.

A case study in a Cullen Group report described a federal government department that discovered a multi-year contract provider was only 40% compliant. Missed work cost the company $200,000 per year. It was determined that the root cause was the government department's failure to follow up with the provider or take steps to manage contracts competently.

Contract cycle time, contract risk, deviations, and dispute reduction are some other metrics to consider. According to IndustryWeek, organizations with a well-defined contract compliance process save up to 80% more than other organizations. Without the right KPIs in place, you will be distracted from your goal and not understand why - because there is nothing to measure against. You will not be able to spot leakage points unless clear performance standards are established.

Setting KPIs provides organizations with leverage, such as the ability to compare contract data across relationships over time. This can be used prior to contract negotiations to determine a company's competitive advantage. Benchmarking against historical data and industry averages can help you spot patterns, gain contract direction, and compare with others in the industry.

Integrating data not only from contracts but also from across an organizational project will help you align contractual processes with overall project processes.

Click here to explore this helpful guide on how to set, manage, and track KPIs for in-house legal teams the right way.

2. Put Communications on Autopilot 

Integrating all contract stakeholders can be difficult because it relies on individuals to build and nurture relationships in an undefined manner. Poor communication can lead to missed opportunities, decreased accuracy, and harmed relationship capabilities.

Modern businesses are adopting the "one-stop shop" approach to collaborate and get a bird's eye view of all contract timelines. Smooth communication requires the development of a policy dictating the frequency, channels, and roles of various stakeholders in the communication process. To facilitate centralization and transparency, contract managers must integrate these policies into contract lifecycle management systems. Communications will then run on autopilot, ensuring that no stakeholder is left behind at any stage of the contract.

The constant following up and keeping in the loop is out of the way so you can stay on top of all your tasks and ensure successful contract management.

3. Make Contract Creation and Access Easy

Which operations team doesn't want their workflows to be uninterrupted? Not any that come to our mind. 

When teams have access to tech stacks that can make their contract handling processes simpler, they are ready to make a responsible investment. At the outset, standardizing contact creation, review, and access will help you save costs, time, and a headache. However, that is not the only thing a legal department is looking for. You want to track progress against your KPIs, identify gaps, take action, and ultimately meet your goals.

If one of your KPIs is to digitize historical contracts, you're not looking for time savings, but accuracy and reducing silos. Contract repositories can help by locating the right contract at the right time, eliminating contract cycle disruptions and risks.

When it comes to standardization, it’s critical to eliminate friction points because they pose the most risk. To do so, organizations must create risk parameters that are aligned with their implementation efforts.

4. Build Tight Security and Gain Control 

Every organization prioritizes tightly knit security. Before contracts can be digitized, they must be protected by a strong security infrastructure. While digitizing historical contracts, what if there were no security compliances or policy enforcements to mitigate data breach risks? Companies would never go that way. 

‍“Contract access to unnecessary stakeholders always puts the business at risk. In fact, organizations end up paying lumpsum amounts or huge liabilities in the wake of security breaches.”
~ Supin Prem, Senior Manager, Legal Tech, SpotDraft

Contract security must be tightened because they contain the most valuable data for your organization – data that drives your business. It is critical to have robust security controls in place to protect confidential documents. A solid system must be accompanied by ongoing monitoring and checks to identify access permissions and flag security issues.

Also read: The Perfect Contract Risk Assessment Checklist

5. Foster and Adapt to an “Evolving Business” Mindset 

Contracts are rapidly changing because the market conditions in which they operate change on a regular basis. The economy, industry, and legal ecosystem all have an impact on how businesses manage contracts with one another and their stakeholders.

With constant changes, it becomes critical to move business relationships forward. Contract management software must be adaptable in order for businesses to respond to changes in time. For example, if a shareholding criteria changes due to a new law, existing contracts must be updated, and metadata within the CLM must be adjusted.

Also read: 8 Top Contract Management Software Platforms

Impact of poor contract management

Poor contract management isn’t just annoying when keeping track of important dates and renegotiations. It can adversely impact your organization. Here are some possible consequences of poor contract management: operational disruptions, damage to your reputation, and even potential lawsuits.

Missed Renewals

Missed renewals can slip through the cracks when contracts aren’t tracked properly. This might mean losing a key supplier, sticking with bad terms, or even paying for duplicate services, none of which you want.

Also read: Why Contract Expiration Dates Are the Most Important Part of Contracts

Friction on Deals

‍“Leveraging a CLM has been key because it has reduced a lot of friction from handoffs between legal and business. Rather than going back and forth over email, Slack, Word, Zoom, DocuSign, and a whole tech stack, the CLM acts as a single source of truth.”
~ Jonathan Franz, Head of Legal, Crunchbase
Navigating Economic Turbulence and Thriving in Chaos

One major challenge in contract management process is unclear goals and scope between parties. Without transparency on objectives, the contract lifecycle management processes can quickly become overwhelming, leaving both sides unsure of what they’re truly agreeing to.

Data Inaccuracy

Storing contracts in different places makes it challenging to track the latest versions and ensure accurate data. This can result in overpaying or underpaying suppliers, decisions based on outdated info, and even legal risks due to non-compliance.

Poor Decision-Making

When businesses lack clarity on their contracts, making smart decisions on pricing, supplier ties, and managing contracts risk becomes tough. This can lead to missed vendor rewards or consolidation chances, ultimately causing financial losses and strained relationships.

Unable to Negotiate for Better Terms

When contracts aren’t well-managed, it’s tough to renegotiate better terms when the chance comes up. This can leave your business overpaying for goods or services.

Why Contract Renegotiation Is Key As Explained By John Mackonen I Source: Platform X

Increased Dispute Risk

Unclear or poorly enforced contracts can easily spark disputes between parties. These conflicts often lead to costly and time-consuming resolutions.

Why Contracts Are A Safety Net As Discussed By Business Lawyers: Source: Platform X

Final Thoughts

Building an effective contract management system becomes easy when you adhere to contract lifecycle management best practices. Using best industry practices to power your contracts is a no-brainer. Businesses are going beyond simply adhering to best practices in order to stand out from the noise.

The bottom line is to test and implement practices that are appropriate for your company's priorities. Set the right KPIs for your company so that you only measure what matters. 

‍“I have seen a demo of SpotDraft’s CLM technology and they should be on your short list of vendors to talk to about a contract management system.”
~ Sterling Miller, CEO and Senior Counsel at Hilgers Grabens PLLC
Ten Things: “Cool Tech” For In-House Counsel (2022 Edition)

SpotDraft contract lifecycle management software(CLM) is a best-practice compliant solution for legal teams, allowing you to overcome effort-intensive manual processes with world-class automation technology.

We’re down for an in-depth chat on how you can implement contract management best practices with SpotDraft.

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