Every business relies on paperwork, and it doesn't take long before effectively managing contracts becomes critical to operational success. Failing to manage contracts properly is a costly mistake. According to the IACCM, the global association for contract management, poor contracting practices lead to an average value leakage of around 9.2% of a company's revenue.
In this article, we will cover everything you need to know about contract management, how it works, who should use it, and why it is important.
What is Contract Management?
Contract management is defined as the comprehensive process of effectively planning, managing, and overseeing commercial contracts with various entities such as vendors, partners, customers, and employees throughout all stages of their engagement in business. The goal of contract management is the effective execution and oversight of contracts from start to finish.
For example, suppose a company seeks to contract an IT service provider. The company creates a contract outlining the scope of work, deliverables, timelines, and other relevant terms. Once the vendor agrees and the contract is signed by both parties, the contract is initiated and managed for performance. During the execution of the contract, the company evaluates the vendor’s ability to fulfill their obligations and ensures compliance with the contract.
This highlights how contract management encompasses the entire contract lifecycle, from creation and initiation to execution and evaluation.
The AI-powered HR system from DocSuite enhances contract management efficiency by analyzing data more accurately to identify risks and opportunities, providing strategic decision-making guidance, speeding up approval and execution processes, and reducing errors and costs associated with manual management.
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Who Benefits from Using Contract Management Software?
Currently, about 65% of companies use contract management software solutions, according to the Corporate Legal Operations Consortium. Here are some examples of who might benefit from such solutions:
Small businesses
that regularly issue contracts but lack the budget to hire a dedicated contract manager.
Large companies
with a contract specialist looking to streamline their contract workflows.
Organizations
aiming to transition to a cloud environment to handle contract management, electronic signatures, and secure, dedicated storage.
As with most digital software, contract management programs bring a variety of new administrative and managerial tools to the table. Whether you have a dedicated contract manager or are trying to run the business with minimal staff, these tools are valuable at every stage of the business.
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Signs of Successful Contract Management
Contract management solutions truly succeed when they help your business mitigate logistical issues, reduce costs, and improve contract creation times. Learn how contract management software can address your specific pain points based on your business type:
Software and Technology:
For IT organizations, renewing contracts with clients is critical. Managing multiple vendor contracts and ensuring compliance with contractual terms and service level agreements can be challenging. With the right contract management system, you can easily track contract expirations and renewals, and review terms while keeping your client informed.
Professional Services:
HR departments manage a range of contracts, including employment agreements, non-disclosure agreements, and contracts covering employee benefits. Keeping track of all these can be daunting, as HR often requires the involvement and approval of managers and legal teams. Using legal contract management software ensures that all stakeholders have reviewed and approved the contract.
Retail or Wholesale:
Managing retail or wholesale operations can be daunting, especially when dealing with numerous vendor contracts, tracking warranties, and ensuring compliance with pricing and discount agreements. All these require precise management and frequent updates, leading to potential errors and time lost on other business needs. A contract management solution can save you significant time handling your files and help keep all your business documents organized and secure.
For example, DocSuite's HRAI system offers a complete solution for managing the entire contract lifecycle (from contract creation and approvals to contract signing and necessary follow-up throughout execution) while adhering to various standards.
Understanding Contract Lifecycle Management (CLM)
Contract Lifecycle Management (CLM) oversees commercial contracts from their creation through every stage of the post-award process, helping companies save time and money. It standardizes contract workflows by mapping out each step and identifying potential challenges, ensuring contracts remain active and valid.
By breaking down the workflow into logical stages, CLM simplifies the process for users, contract administrators, and legal teams to resolve issues and move contracts along the operational path.
The type of contracts you need to manage depends on the company but may include any of the following:
Sales contracts
Supply agreements
Purchase and supply agreements
Employment agreements
Outsourcing contracts
Registration rights agreements
Subscription agreements
Leasing contracts
Consulting agreements
Distribution contracts
Intellectual property agreements
Stock option agreements
Underwriting agreements
Software licenses
At a high level, business processes may appear similar from company to company, but each organization requires different assets to produce an effective product or service.
Given that even a small organization may regularly issue dozens or hundreds of contracts, it’s easy to see how these essential documents can become disorganized without consistent oversight.
There are three primary solutions for companies trying to solve these issues:
Hire a contract manager.
Adopt a Contract Lifecycle Management (CLM) process.
Use contract management software.
Effective contract management can be time-consuming, but by allocating the right tools and resources, you can easily manage your paperwork and the associated contractual obligations.
Depending on internal processes and who needs to be involved in each step, the precise stages of CLM vary from company to company. As companies grow and subdivide into departments, the CLM process tends to evolve into a more complex workflow.
Small companies may sign contracts without legal consultation, while larger companies involve legal teams for greater oversight.
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The Role of AI-Powered HR Systems
The role of the AI-powered HR system from DocSuite in managing contracts includes:
Accurate Data Analysis:
The system analyzes data accurately to understand contract patterns and predict potential challenges and opportunities.
Risk and Opportunity Identification:
The system helps identify potential risks and existing opportunities in specific contracts based on data analysis and predictive reports.
Strategic Decision Guidance:
The system provides guidance and recommendations for strategic decision-making related to contract management, helping make smarter, data-driven decisions.
Accelerated Approval and Execution:
The system reduces the time and effort required for contract approval and execution through advanced automation processes.
Error and Cost Reduction:
The system minimizes human errors and increases efficiency in contract management processes, leading to cost reductions resulting from errors and adjustments.
Effective contract management is essential for most businesses, but keeping up with all the paperwork can be challenging if you do it all yourself. Fortunately, there are tools and resources to help you along the way.
Effective contract lifecycle management, a contract manager, and contract management software are three main ways companies keep their contracts organized and up-to-date. Regardless of your company's size or where you stand with your contracting system, the right system can assist you!