What is Contract Management? Process, benefits, and more

An inefficient contract management process can result in the loss of up to 40% of a contract's value according to Juro, with a powerful contract management software tool, procurement teams can not only manage contracts but also improved overall procurement process. This can be achieved through end-to-end automation, centralised contract repository, risk profiling and ensuring regulatory compliances. 

Through this blog, we will uncover the importance of contract management, the process it follows, the best practices it entails, and how it can be streamlined.

Why is contract management important?

Contract management holds utmost importance for businesses as it prevents them from plethora of legal and financial risks. A poor contract management system causes financial loss due to missed deadlines, payment discrepancies and legal costs to settle litigation due to possible contract disputes. One common example of such a dispute is poorly defined contract terms which can result in vague clauses. 

Contract management’s significance also extends to maintaining operational efficiencies of businesses. It keeps the contracts organised, streamlines approval cycles, and prevents resource wastage. It also ensures efficient resource allocation by automating time-consuming and repetitive tasks. This allows businesses to reallocate resources towards more value-driven tasks, ultimately leading to increased productivity and profitability. 

Contract management process 

Contract management follows a systematic process, encompassing six main steps. Each of them holds significant importance for the successful execution of contract agreements. Know them below: 

Contract initiation 

This is the first and most important step in procurement contract management as it lays down the foundation for the strategic, commercial and legal value of the process. It starts with the procurement team realising the requirement for a contract which could be for a new supplier engagement or existing suppliers’ extension. Here, crucial details such as the expected scope of work and deliverables, budgets and supplier information are provided by stakeholders. Compliance, legal and finance teams are also involved in discussing meaningful discourses such as:  

Contract drafting or contract creation 

In this step, a contract is created by using approved templates. Legal and procurement teams come together to form a comprehensive document that further outlines the agreement and expectations. The goal of this step is to create a document that is legally approved and aligns with the objectives of the involved entities. Risk and policy checks are also thoroughly executed in this phase before sharing the document for the negotiation phase.

Negotiation and review

After the contract drafting, the contract is shared to the other party post which, the negotiation process begins. Both parties discuss the contract in detail to arrive at mutually agreeable terms and clauses for the business. Editing the contract is one of the key proceedings at this stage. This is because crucial changes in the contract such as pricing, timelines and liabilities from the supplier’s side may happen to keep favourable terms.  

This back-and-forth process is known as redlining. There are also possibilities of involving legal and finance teams' re-engagement for the required rework. The negotiation stage is also the backbone to form a balanced, fair and harmonious contractual relationship.   

A contract management tool having version control becomes indispensable at this step. With the help of it, the changes are tracked and are not lost in the complex process. This smooths out the redlining process. 

Contract approval and execution   

After the negotiation contract is finalised, it is approved by internal stakeholders before the official signing takes place. Internal stakeholders include procurement managers, legal, financial and compliance teams, and business unit heads. Contract approval and execution are critical because official signing between involved parties is done at this stage, and it marks the formalisation of the agreement. This step also signifies the commitment to abide by the obligations of the contract.

Performance monitoring 

One of the important stages of contract management is performance monitoring. It’s a value-driven stage which entails several methods such as supplier performance tracking, contract obligation monitoring and feedback. Each of these methods is briefed below:  

Renewal or termination 
This is the final stage of contract management where legal, finance and procurement teams collaborate to assess the performance of the contract made with the concerned suppliers. The metrics involved but not limited to are compliance levels, performance delivery, and renewal risk index. Depending on these metrics, the two sub-stages of this step can be either of the two: 

Common challenges in contract management  

Even after having an exhaustive contract management process in place, there are complexities that procurement teams face. Know some of the most common challenges that hinder the streamlining of this process.

Poor contract visibility

Poor or limited contract visibility is a result of limited access, multiple contract repositories, and usage of methods like manual tracking of contract data using spreadsheets. These factors cause problems like difficulty in accessing specific contract data, leading to wrong decision-making by stakeholders.   

Moreover, similar issues consume time, impact transparency, pose compliance risks and even result in the loss of key contract details like renewal dates. Collectively, these can culminate in a contract spiralling out of control and affect business negatively. 

Inefficient approval workflows 

A well-crafted approval workflow is essential for an efficient procurement process. Without it, difficulties arise, such as the risk of information loss and maverick spending. Legacy and outdated systems used for approvals are one of the infamous reasons behind this. Such an approach often requires approvals to go through several stakeholders and carries manual intervention, leading to delays, higher operational costs, and risk of non-compliance.  

Missed renewal deadlines 

Another significant challenge, missed renewal deadlines, pose serious problems to a smooth contract management process. These problems can be in the form of strained business and supplier relationships, revenue loss due to service disruptions, damaged business reputation, and more. These issues mainly happen due to a lack of automated alerts to the procurement and financial teams. A comprehensive contract management system provides automated renewal alerts with lead time, delivering several key benefits like:  

Inefficient tracking 

Inefficient tracking occurs due to a lack of monitoring, managing and retrieving data on supplier contracts during the contract lifecycle. An operational model like this prevents procurement teams from having clear visibility into important dates related to suppliers, performance metrics and renewal cycle information. These increases compliance risks, as it leads to negligence in tracking and adhering to required regulatory terms.   

Additionally, it limits supplier accountability. Limited supplier accountability makes procurement teams unable to hold suppliers accountable for underperformance. Such a scenario puts businesses under pressure to continue their contract with an underperforming supplier. 

Contract management best practices

Now that you are acquainted with the common challenges of contract management, here are the best practices to overcome them: 

Standardise contract templates  

One of the key steps you can take to optimise your procurement contract management is by standardising your contracts. This means using pre-approved and uniform contract structures for drafting. Businesses save time with standardised contract templates as it slashes the need to begin the process from scratch with every new contract. Organisations also set and attain an approved set of terms and languages which they can select quickly and continue the contract process hassle-free.  

Establish clear roles and responsibilities  

Contract management involves multiple departments and hence, it is essential to set clear roles and responsibilities to get clear accountability and maintain efficiency during the process. With clear roles and responsibilities, stakeholders from different departments save time by avoiding duplicated efforts. This strategy also enhances stakeholder relationships. 

Therefore, it is necessary to have a well-defined framework outlining segregation of roles and responsibilities from the beginning of contract drafting and approvals to supplier performance renewals. Clear ownership bolsters transparency and supports each stakeholder to contribute better towards strategic procurement outcomes like building stronger supplier engagement.

Centralise contract storage   

It is vital that business contracts are standardised and stored centrally in a digital format. The significance of this lies in the fact that storing contracts digitally allows better accessibility with searches, data analysis and enhanced security through access control management. Centralising contract management provides many advantages. Here are the top three of them:  

Automate contract workflows  

Automation of contract management processes can accelerate negotiation cycles by 50% as per Procurement Tactics. It is enforced to support efficient workflows and elevate collaboration among stakeholders. Additionally, it provides two major benefits to contract management workflow which include: 

Conduct regular reviews 

Conducting regular reviews is critical for driving business growth and ensuring that it receives anticipated procurement benefits. The methods in this include tracking deliverables and deadlines and ensuring that the business is operating on the agreed-upon contractual terms.  

It also plays a pivotal role in adapting to growing market demands through real-time performance tracking. It gauges if there are opportunities like smarter renewal or termination decisions to make for further improvements in the procurement process.

Tool to manage contracts efficiently  

A robust procurement contract software is necessary for businesses to gain control over the entire contract cycle from initiation to renewal. It also ensures compliance, transparency and data-backed decision-making for businesses.   

OneAdvanced contract management system has built-in features that support renewal alerts, supplier onboarding and offboarding, and real-time dashboards. All these streamline workflows and bolster accountability across departments.  

If you are among businesses looking to streamline contract management and partner with a future-ready platform, connect with us today!