Contract management has been a bit of a buzzword in legal circles for a while.

But what does it actually mean, and how important is it?

Can’t you just send out contracts via email, have them signed digitally, and then throw them in a Google Drive folder?

Does managing contracts really need to be more complicated than that?

The short answer is yes. Contract management is critical to get right, and is much more than just storing documents in a shared folder.

In this guide, we’ll answer four crucial questions about the importance of contract management:

1. What is contract management?
2. Why is contract management important?
3. Are there different types of contract management strategies?
4. What should you consider when choosing a contract management strategy?
5. What are the benefits of contract management?

What is contract management? 

Contract management is a legal process that includes managing, monitoring, and optimizing the full contract lifecycle.

That means it covers everything from the first draft of an agreement to the post-award activities that take place once a contract has expired.

The primary objective of managing contracts is to ensure that the rights and contractual obligations listed in an agreement are carried out. This means that each party complies with the terms and conditions set out in the agreement.

However, good contract management also seeks ways to minimize risk and maximize operational and financial performance.

Also read: Contract Lifecycle Management Process: All You Need to Know

Contract management is best considered with respect to the different stages and activities it includes:

• Contract authoring: When the agreement is initially written, stating what each party is obligated to do and entitled to receive
• Redlining and negotiation: Parties hold discussions to reach mutually agreeable contract terms, which may involve several iterations and amendments to the contract
• Contract execution: The contract is signed and becomes legally binding for the parties involved. This makes fulfilling the contract terms mandatory for everyone.
• Contract performance monitoring: Tracking contractual obligations, milestones, and KPIs as set out in the contract to ensure both parties involved live up to their requirements under the agreement
• Risk management: Monitoring for potential risks identified during the vetting stage and developing strategies to mitigate and deal with risks as they arise
• Amendments, addendums, and extensions: The application of changes and additions to the contract as the relationship develops (such as pushing out the final delivery date)
• Contract closure: When the agreement comes to its natural end (or is terminated early), contract managers ensure that obligations have been met and orchestrate any offboarding or closeout procedures

Clearly, then, there’s a lot to be covered in an effective contract lifecycle management process. So, what benefits does such an initiative bring?

Benefits of contract management

Best-in-class organizations thrive in the face of increasingly changing market dynamics thanks to robust systems and strategies established for business-enabling processes like contract lifecycle management.

Efficient contract management offers numerous benefits, contributing to diverse areas of business performance. From risk mitigation and cost control to improved compliance and enhanced relationships, effective contract management is a cornerstone of successful organizations.

Extract maximum value from contracts 

Great contract management helps companies ensure that the obligations of an agreement are met, reaping better value in turn. This is made possible by minimizing contract compliance issues, keeping invoices and accounts payable on track, and identifying contract renewal opportunities and getting in front of them.

Ensure compliance with regulations 

Healthy protocols ensure that contracts currently in play are compliant with local and federal regulations.

Also read: What is Contract Compliance? The Ultimate Guide

This is achieved through a variety of mechanisms:

• Clause libraries and contract templates ensure that standard language is used across all agreements
• Contract managers monitor changes to regulations and update agreements where necessary 
• Contract Lifecycle Management (CLM) solutions provide alerts if compliance is breached
• Contract audits are used to monitor the use of internal policies and identify opportunities for process improvement

“Owing to our operations in multiple geographies, a lot of work our team gets is on the lines of contracting and compliance. We are also required to be extremely familiar with licensing requirements of the countries within which we plan to expand. Understanding licensing and applying for the same considering all compliance requirements is a major part of what we do.”

~ Juliette Thirsk, Head of Legal, Peach Payments
Streamlining Legal at a FinTech Startup

Maintain healthy vendor relationships 

For many organizations, a large chunk of contracts are those held with third-party vendors.

Part of good contract management practices involves procurement managing vendor expectations and obligations. By holding regular performance reviews and realignment conversations, contract managers can maintain healthy supplier relationships.

Such business relationships are crucial to the ongoing profitability and competitive advantage of a company. In other words, they’re worth putting energy into.

Reduce contracting costs 

Strong contract management procedures can reduce the overall cost of maintaining agreements by introducing a few new habits:

• Digitizing agreements and saving the need for paper, ink, and physical storage costs
• Automating labor-intensive, repetitive tasks
• Reducing contract risk and improving regulatory compliance

Improved negotiation power 

Good contract management practices set up the basis for great reporting and insights into contracting behavior.

In many circumstances, this data can be used to great effect to power negotiation conversations.

For instance, your CLM system might tell you that, come time for renewal, you can push pricing up as much as 6% without impacting your win rate.

Also read: Mastering the Art of Contract Negotiation: Strategies for Success

Why is contract management important?

Good contract management is important as it provides a number of important business benefits.

It helps you accomplish the following:

Extract maximum value from contracts 

Great contract management helps companies ensure that the obligations of an agreement are met, reaping better value in turn. This is made possible by minimizing contract compliance issues, keeping invoices and accounts payable on track, and identifying contract renewal opportunities and getting in front of them.

Remain compliant with regulations 

Healthy contract management protocols ensure that contracts currently in play are compliant with local and federal regulations.

Also read: What is Contract Compliance? The Ultimate Guide

This is achieved through a variety of mechanisms:

• Clause libraries and contract templates ensure that standard language is used across all agreements
• Contract managers monitor changes to regulations and update agreements where necessary 
• Contract management platforms provide alerts if compliance is breached
• Contract audits are used to monitor the use of internal policies and identify opportunities for process improvement

“Owing to our operations in multiple geographies, a lot of work our team gets is on the lines of contracting and compliance. We are also required to be extremely familiar with licensing requirements of the countries within which we plan to expand. Understanding licensing and applying for the same considering all compliance requirements is a major part of what we do.”

~ Juliette Thirsk, Head of Legal, Peach Payments
Streamlining Legal at a FinTech Startup

Maintain healthy vendor relationships 

For many organizations, a large chunk of contracts are those held with third-party vendors.

Part of good contract management practices involves procurement managing vendor expectations and obligations. By holding regular performance reviews and realignment conversations, contract managers can maintain healthy supplier relationships.

Such business relationships are crucial to the ongoing profitability and competitive advantage of a company. In other words, they’re worth putting energy into.

Reduce contracting costs 

Strong contract management procedures can reduce the overall cost of maintaining agreements by introducing a few new habits:

• Digitizing agreements and saving the need for paper, ink, and physical storage costs
• Automating tedious, repetitive, time-consuming manual work
• Reducing contracting risks and improving regulatory compliance

Improved negotiation power 

Good contract management practices set up the basis for great reporting and insights into contracting behavior.

In many circumstances, this data can be used to great effect to power negotiation conversations.

For instance, your CLM platform might tell you that, come time for renewal, you can push pricing up as much as 6% without impacting your win rate.

Also read: Mastering the Art of Contract Negotiation: Strategies for Success

Types of contract management strategies

There are a number of different practices and procedures that you may (or may not) choose to adopt.

Here are five of the most important contract management best practices you might consider implementing as part of a holistic contract management process.

Centralize contract management

Your first step in improving contract management is centralizing the entire process.

This means that the software you use for contract creation is the same one you use to sign them, store them, and report on the effectiveness of your current contract management practices.

A contract lifecycle management (CLM) software is your best friend here. 

It acts not only as a central repository where all documents are housed but also orchestrates the distribution and signing of agreements and provides actionable insights to fuel further process improvements.

Also read: 8 Top Contract Management Software Platforms

Standardize contracts 

Many contracts you draft and sign share a lot of common qualities.

For instance, most of your employment agreements are going to include the same clauses about termination notices and privacy policies.

By standardizing contracts and language through pre-approved clause libraries and contract templates, you’ll streamline that whole process.

Not only will you make your contract management processes more effective, but you’ll automatically improve compliance and reduce reputational and financial risk by ensuring all agreements use the correct language that protects your company.

Design, document, and distribute contract management processes 

Healthy contract management involves the creation of good policies and processes, but it also requires that everyone involved in contract management follows them.

So, a good practice here is to develop a culture of continuous improvement.

First, you design the contract process and document it sufficiently so that it can be understood, interpreted, and followed by anyone required to do so.

The next step is to distribute that documentation to the relevant people and ensure they have unrestricted access to revisit the document when needed.

Then, as you learn more about what works and what doesn’t, you’ll make changes to the initial document (or create new contracts), starting again from step one.

Use automation to drive workflows 

Strong contract management practices are not only effective but efficient.

“It's good for a SaaS lawyer to be tech-savvy because it helps to know what tools are at your disposal and how to use them best. Go to the people who know how to use these tools well and ask them if it's possible to set up the workflows/automations you want within them.”

~ Sue So, Head of Legal, Hopin
Commercial Contract Management in Hypergrowth Startups

Workflow automation is a great strategy for killing two birds with one stone. The most common example here is the automation of the approvals process.

For example, you might set up a workflow to look something like this:

• Contract creator selects template
• Customer data is automatically imported from CRM
• Contract creator fills in blanks and approves
• Contract is sent to sales leader for initial approval
• Sales leader approves
• Contract is sent to legal department stakeholder or final sign-off
• Legal team makes relevant edits and approves
• Contract is routed back to the sales rep
• Sales rep sends it to the client in a personalized email

Also read: Contract Management Automation: Best Practices + Tools

Set up contract management reporting 

One final best practice for managing contracts effectively is to report on how well your contract management practices themselves are doing.

The best way to do this is to set up a contract management dashboard, which provides you instant insight into the specific reports and trends you want to see.

Also read: Contract Management Dashboard: A Comprehensive Guide

For example, you might determine that time-to-signature (the amount of time that passes between a contract being sent and a signed deal being completed) is an important metric.

You’d set that up in your contract management dashboard, then monitor improvements as you implement other strategies (such as moving to a solution that offers in-platform redlining).

What does effective contract lifecycle management include?

Effective contract management requires a systematic approach comprising various elements that collectively streamline all stages of the contract's lifecycle. Some of these elements include:

#1 Centralized contract repository

Your entire contract portfolio must be housed in a secure, unified location. This ensures optimal accessibility, better version control, and reduced risks of data loss.

#2 Robust workflow automation

Routine administrative tasks like contract reviews, standard approvals, renewal date management, and reporting must be automated using an effective contract management system. This reduces manual labor and allows contract managers to focus on more strategic tasks.

#3 Sufficient cross-functional alignment

Key stakeholders from various departments must collaborate sufficiently across various touchpoints. This includes sales teams, legal counsel, procurement units, and HR.

Adequate cross-functional collaboration ensures contracts are executed in shorter times with minimal business risks.

#4 Sound risk assessment and compliance monitoring

Risk assessment and regulatory compliance monitoring are essential components of a proactive contract management process. This involves regularly evaluating contracts (to identify potential risks for issues like contract disputes), developing mitigation strategies, tracking contract performance and compliance with regulations, and staying up-to-date with the compliance landscape.

How to choose the right contract management strategy

Considering one or more of the above tactics for improving contract management?

Here’s what to consider to determine whether it's right for you or not.

Does the strategy fit your business goals?

It's important to understand whether a given strategy aligns with your overarching goals.

For example, if one of your business goals is to reduce spending, then the mitigation of human error through contract templates and automated workflows is likely to be a good fit.

However, if your goal is to increase personalization across customer interactions, removing human elements from the journey might not be appropriate.

Also read: Rethinking In-House Legal OKRs, KPIs, and Goals

Do you have the resources to implement the strategy?

Consider whether you have the resources necessary to implement the strategy, both in terms of financial resources as well as human expertise.

For example, do you have the internal capability to build automated workflows? If not, this might not be a viable strategy, or you may need to factor in additional resources.

Can you demonstrate ROI for the strategy?

Successful contract management should either cut costs, drive revenue, or both.

Before you implement any strategy, consider how you’ll showcase ROI for it.

For example, you might measure how long it takes, on average, to draft a contract now, then measure that again once you’ve standardized contracts using templates and a clause library.

‍Also read: How Legal Teams Should Calculate and Showcase ROI

Is the strategy compatible with your current workflows?

Finally, check whether the strategy you’re about to implement is compatible with your current workflows or whether any changes need to be made.

For example, perhaps your sales reps are capturing electronic signatures via iPad for in-person sales.

Would this process need to change much if you moved to eSigning in a new contract management solution, or would it simply require a little retraining?

Improving contract management with SpotDraft 

The benefits of contract management done well are undeniable: cost savings, reductions in risk, and more efficient processes.

When the entire contract lifecycle—from new contract creation through to execution and renewal—is handled in a central platform, these benefits multiply.

‍SpotDraft's contract management platform allows teams to easily collaborate on contracts at every stage of their lifecycle so your team of professionals can improve deal flows and increase administrative effectiveness.