11 Contract Management Best Practices to Drive Business Value
Contract management is the key to cost-effective collaboration and productivity at all levels of the enterprise. When executed correctly, it involves developing and implementing best practices to process, monitor, and enforce compliance – all within common contract terms relative to your business and commercial relationships – to ultimately uphold an agreement’s intended business value.
But it’s not just about signing agreements and storing them in a file cabinet. It’s a dynamic process that requires ongoing attention. Luckily, by bringing innovative contract lifecycle management (CLM) software at the heart of it all, enterprises can realize better business outcomes across every stage of the contracting lifecycle.
In this article, we’ll explore contract management best practices and how to implement effective contract management tools to help drive better business outcomes.
Knowledge Before Action: The Benefits Of Good Contract Management
Before jumping into the steps for implementation, it’s important to further understand the benefits you’ll reap. With these benefits under your belt, you’ll have fuel to help you overcome the hurdles that typically come with any time of change management.
Here are a few benefits you can expect:
1. Cost Savings
Effective contract management helps organizations save money and maintain financial control. For example, AI-powered contract lifecycle management (CLM) software can help you negotiate more favorable pricing terms and closely monitor contract performance. Your entire organization can then use data from these contracts to reduce unnecessary expenses and enhance overall financial performance.
2. Improved Efficiency
Well-managed contracts promote efficiency and productivity within organizations. By streamlining contract processes, automating routine tasks, and establishing clear communication channels, contract management eliminates administrative bottlenecks and ensures that resources are allocated effectively. This allows employees to focus on value-added activities, improving efficiency and productivity.
3. Strengthened Compliance and Reduced Risk
Organizations face increasing regulatory requirements and legal complexities. Effective contract management helps organizations stay compliant with legal and regulatory obligations. By monitoring contract terms, ensuring timely compliance, and maintaining accurate records, organizations can reduce the risk of legal problems, penalties, and reputational damage by monitoring contract terms, ensuring timely compliance, and maintaining accurate records.
Putting Contract Management Best Practices And Principles Into Place
Now, let’s dive in!
Here are the fundamental best practices and key elements of effective contract management that can act as the foundation of a strong contract lifecycle management practice:
1. Create A Contract Repository
Traditionally, once contracts are signed, they’re stored across various IT systems within an enterprise software stack. If you’re really behind the times, you’re still storing contracts away in filing cabinets.
Such siloed, static repositories are difficult to manage and even more difficult to extract insights from. Even the simple task of finding the right contract at the right time requires a tremendous amount of manpower. Besides driving up overhead costs, it could lead to business disruptions, missed deadlines, third-party breaches, and non-compliance with contractual obligations.
By digitizing and migrating your contract portfolio to a centralized, cloud-based contract repository, you empower users to access contracts anytime, anywhere, and easily analyze for insights. This central repository is a single source of truth, giving you a bird’s eye view of third-party engagements.
2. Leverage Artificial Intelligence And Automation
Technology plays a crucial role in enhancing contract management processes. Whether using cloud-based contract management systems (discussed above), electronic signatures, first draft generation, or advanced data extraction, organizations streamlining contract management with new technology like generative AI will come out on top.
Artificial Intelligence and automation, especially, are creating waves in the contracting space. AI-powered contract management systems can analyze large volumes of contracts, automatically identify potential risks and opportunities, and provide valuable insights to contract managers and legal teams.
3. Harness Contract Intelligence
The National Contract Management Association (NCMA) says that 54% of enterprises struggle to access specific contract terms and clauses without wasting time sorting through their contract portfolio. Further, more than half can’t analyze their contracts by vendor, customer, product, or service line to achieve full negotiation leverage or optimize performance from a vendor or customer.
CLM software offers a powerful solution, with in-depth contract analytics, to transform contract data into actionable insights through AI-powered extraction.
With AI contract analytics, organizations can effortlessly extract and evaluate embedded contract information such as metadata, clauses, obligations, and more at a granular level. This can provide insights into risk and offer intelligence based on retrospective data to gain an edge in future negotiations.
4. Standardize The Contract Creation Process
Contracts are traditionally created in silos by individual business units without any insights into existing contractual relationships or contract risk factors. When authoring contracts, it’s a common – but not so good – practice to pull up outdated templates and make basic metadata changes before signing off.
As a result, enterprises are likely to face major risks down the line. The only way to get around this issue is to ensure standardization across the contract creation process.
An AI contract management solution can simplify this by helping enterprises create and implement a library of templates and standard clauses. Contract managers across legal, procurement, and sales departments can effortlessly select the right templates and legalese from these libraries to generate new contracts.
Through this technology-led standardization, businesses can eliminate friction points, speed up new contract negotiations, and resolve disputes promptly.
5. Establish Contract Management KPIs
“How do you ensure successful contract management?” Answering this question is critical for realizing the intended value of contracts.
This is where contract management KPIs play a key role. Defining KPIs and tracking them with the right CLM tool will help you take the necessary actions to build an effective contract management program.
Here we look at some of the metrics you should consider:
- Contract initiation & creation cycle times – Measures the “time-to-contract” and the efficiency of your contract drafting process.
- Process compliance – Ensures adherence to a standardized, approved contracting process
- Contract risk – Reduces risk exposure from non-compliance to contract terms, policies, statutory guidelines, regulatory requirements, etc.
- Contract deviations & missing clauses – AI CLMs can automatically detect deviating and missing clauses and terms
- Obligation management – Measures performance against contractual obligations to ensure deliverables are fulfilled.
- Disputes and issues – The number of contract claims, issues, and disputes by contract and supplier to see trends and resolve recurring problems.
6. Configure Contract Approval Workflows
During the execution phase, multiple stakeholders evaluate and approve drafted contracts, including legal, sales, and finance teams. This lengthy process is often riddled with unnecessary back-and-forth and avoidable errors.
Businesses can simplify the contract approval process by leveraging configurable workflows. Simple contracts, such as non-disclosure agreements, can be auto-approved using conditional triggers. More complex arrangements can be cascaded down a highly configurable workflow to streamline and accelerate approval.
Such innovation can resolve ambiguity regarding approver roles and contract amendments. With Sirion, for example, team members can rely on a digital contracting workspace to communicate changes and maintain a complete audit trail of approvals, changes, and sign-offs.
7. Automate Legal Review Processes
According to Gartner, AI-powered solutions will reduce manual contract review efforts by 50% by 2024. Businesses can leverage AI today by implementing contract lifecycle management software to improve productivity within their legal department, limit the need for manual corrections, and expedite the contract review and redlining process.
An additional benefit to automated legal review is better risk management. Using CLM software, businesses can enable AI-led legal reviews to minimize risk exposure and accelerate contract negotiations.
This simplifies legal oversight. Through more accurate evaluations of risks against specific criteria, businesses can quickly identify areas of concern, such as missing clauses and clause deviations.
8. Enable Better Collaboration
Collaboration is at the heart of effective contract management, as it connects all parts of the enterprise. Collaboration with the counterparty is equally important for relationship management and ensuring the contract’s intended business outcomes are realized.
Enabling this collaboration with traditional contract management approaches is challenging due to the inherent siloed way of working of enterprise teams. This leads to confusion, disputes, and sub-optimal results.
Next-gen CLM platforms can help you break functional silos and unite all stakeholders on a single platform. During negotiation and legal review, advanced workflows and collaboration capabilities, including Microsoft Word and Outlook integrations, enable collaborative redlining and negotiations.
After signature, leverage a shared view of performance data and overall engagement to you and the counterparty, allowing both to come together for governance meetings, raise issues, take action, and resolve disputes collaboratively.
9. Holistic And Integrated Risk Management
In today’s uncertain and disruptive business environment, you need a holistic risk management approach that goes beyond the traditional scope to address all sources of enterprise risk in commercial engagements.
Next-gen contract management software offers just that – helping enterprises mitigate different kinds of risk, such as:
- Third-party contractual risk – Use AI to find missing clauses and clause deviations in contracts to reduce exposure from non-compliant contracting; also ensure regulatory compliance
- Performance risk – Proactively identify and address gaps in contract performance to reduce disputes and strengthen counterparty relationships
- External risk – Preempt influence of external market forces on contractual relationships with insights from real-time, real-world data
- Alignment risk – Mitigate by ensuring conformance to organizational objectives and other contracts
- Perception risk – Gain an accurate picture of supplier performance by bridging the gap between perception vs. actual performance
10. Optimize Vendor And Supplier Management
Effective vendor management is key to nurturing long-term relationships with suppliers and customers. Not only does this help achieve business goals, but it also reduces the risk of supply chain disruption and error on the buy side and revenue disruption on the sell side.
Contract management is a critical tool to align your commercial relationships and their outcomes to the underlying contract. Many CLM platforms offer supplier management functionality that enables you to monitor and track ongoing supplier performance. This will help you ensure that you achieve business outcomes.
With both parties accessing the same performance data on a single platform, you can better resolve disputes, issues, and claims, leading to better collaboration and relationships.
11. Conduct Regular Performance And Compliance Audits
Setting up best-in-class contract management processes will not have the desired impact unless you ensure compliance.
So, during the contract creation phase, contract managers must ensure compliance with the approved process, templates, clauses, and approval hierarchy. After signature, track and execute obligations and service levels agreed upon in the contract.
Conducting contract compliance reviews and audits is an effective way to achieve this. Audits can range from supplier audits, risk audits, and regulatory audits. Doing these manually is inefficient, time-consuming, and error-prone.
Given the critical nature of these audits and performance reviews, you should always leverage technology.
How To Simply The Contract Management Process
The short answer – contract lifecycle management software simplifies the process.
One of our favorite features of CLM is Sirion’s obligation management functionality, which allows you to align performance to what’s promised in the contract by measuring compliance with contractual obligations and service levels till fulfillment. This reduces business risk due to non-performance and helps you implement contract management best practices.
Learn more by booking a discovery call with a contract management expert today.