Contract management in a company is often underestimated or overlooked in favor of other documents. However, it is worth noting the importance of this area of management, especially in the context of process optimization. In today’s article, we’ll take a look at why contract management in an organization is important and the benefits that can come from implementing a proper contract management program.
Contract management in a company – why is it important?
When we talk about documents in a company, we generally think about invoices or incoming letters. Sometimes about other financial documents like warehouse documents or orders. Contracts in this context are often overlooked because there are few of them, so most potential users think it’s a waste of time to implement a system to manage contracts. This is a serious mistake!
Efficient contract management is one of the key elements of good business management. Knowledge of current and planned contracts is crucial at every level of management, from the team leader level to the CEO. With a contract management application, you can quickly get information about current contracts, the degree of their execution or the completion date. You can also control changes in contract provisions by recording annexes and assignments.
As a rule, when we say “contract” we mean commercial contracts. However, it is worth remembering that in addition to typical commercial contracts, a company may need other types, which also need to be managed. Among the most commonly used contract types, in addition to commercial, are:
- NDA (confidentiality agreements)
- Data processing entrustment agreements
- Civil law contracts
Stages of the contract management process in an organization
Before implementing a contract management system or application, it is important to decide what aspect of contract management you are interested in and the level of detail needed to properly record contracts. This depends on the size of the organization, how the flow of information is managed or, finally, the number of contracts being processed. In general, the contract management process can be divided into four main sub-processes:
- Preparation of the contract. At this stage, the need for a new contract has arisen in the company. However, before signing it, it is necessary to agree on the details between different departments, approval of the contract provisions by superiors, verification of the contract in the legal department and, finally, agreement with accounting and inclusion of the contract in the financial plan
- Negotiating the contract. At this stage, contact with the potential contractor is important. The contract circulates between our company and the contractor’s company, successive versions appear. It is important to reign over this correspondence, that is, the correct management of the versions of the contract, merging changes, working together on the document. All the time necessary is the legal or accounting departments, and the end necessary is the acceptance of the contract by superiors. In this process, it is also worth remembering the electronic signature implementation of a significant way to facilitate the signing of the contract by both parties.
- Contract execution. When we have finally closed the negotiations and signed the contract, it is time to execute it. If it is a simple contract for the delivery of a batch of goods, there is usually no problem with this, but if we have a contract for a successive delivery or a contract stretched over time, an efficient contract management system becomes a necessity. At this stage, it becomes important to link the contract with invoices to monitor the status of the contract in real time. It is also worth setting up alerts to remind you of the approaching end of the contract, exceeding the value limits from the contract, etc.
- Change management. A contract, during its term, can change. We can sign annexes or assignments that change the duration of the contract, its value or even the counterparty. A well-designed contract management system should allow us to manage the entire document structure with visualization of changes on the base document.
As we can see, a comprehensive system for managing contracts in an organization requires the implementation of many elements responsible for the various stages of the process. Fortunately, not all stages are essential. When choosing a contract management system, we should decide which elements are important to us. We can limit the implementation to handling contract execution only, or focus only on contract preparation. Whichever we choose, the system will help us get contracts under control.
The above descriptions of the various stages of the process are only an outline of the capabilities of modern contract management systems. Much more space is needed to describe them fully. In subsequent articles, we will present separately each of the processes that make up a comprehensive contract management system, using NAVIGATOR as an example of its implementation.
Why implement a contract management program?
As we saw in the previous paragraph, a contract management program can be very sophisticated and therefore complicated. If our company processes 3 contracts quarterly, implementing such a sophisticated system will only add work for employees, giving nothing in return. However, if we have several hundred or even dozens of active contracts, plus another several dozen at various stages of preparation, then without a good system we have guaranteed chaos. However, even with several should consider the implementation of applications to manage. It is worth looking for an application that is scalable so that you can easily add more functionality.
It is a good idea to start the implementation by selecting the module you need most. As a rule, this is the module of record and implementation of contracts. Thanks to it, we can control the status of signed and active contracts. System reminders ensure that we will certainly not forget about the expiring telecommunications or energy supply contract. In addition, by linking to other accounting documents, such as invoices, purchase orders or acceptance reports, we can control the costs associated with the contract, payment terms or the schedule for contract execution. Well-built system of authority helps to distribute contracts among authorized employees. Each of them simply has access to a unified repository of contracts, where they can search by various criteria such as contractor, amount, date or keyword for the right document. An electronic version of a contract, especially one signed electronically, provides a sufficient archive for such documents. Even the scans of documents stored in the system are sufficient for day-to-day work, and with them we can keep the paper originals in a safe place.
If you already have implemented processes of recording and execution of contracts then we can implement further modules. If we have an extensive process of opinion and approval of contracts – it is worth implementing its version implemented in the contract management system. Then we have full control over the opinion process, all activities and opinions are visible on an ongoing basis. The system stores the full history of work with the contract document. The risk of error or mistake on the part of the user is reduced. In addition, selected people such as the initiator of the process, management or accounting have a full view of what is happening with the document. An additional aspect of the contract preparation process is also worth noting. We can integrate it with the planning and budget management process. All the units involved – substantive, accounting, management – have a constant view of the budget and can place the drafted contract in the financial plan.
The process of negotiating a contract is worth implementing when both parties use an electronic signature. Fully automating the process and eliminating paper circulation significantly reduces the time it takes to sign a contract. In addition, when exchanging electronic versions, as in the internal preparation of the contract, the ability to track changes and control the status of the contract in real time significantly reduces the possibility of mistake or error. Anyway, implementing this module without the internal contract preparation module misses the point. Only together do the two processes show their strength, reducing the amount of work needed to agree on a contract.
The last module, contract lifecycle management, is generally implemented in organizations that need to process hundreds of contracts and where contract changes are the order of the day. This process is the most complicated and usually the most difficult to implement. It assumes the construction of the entire structure of documents from the base document (contract) through all derivative documents (annexes, assignments). In addition, very often a virtual document showing the contract after changes is built on the basis of these documents. The idea is to ensure that the person reading the contract always has access to the latest version and does not have to manually make dozens of corrections on the original contract, while at the same time maintaining a complete history of document versions. In the case of large, long-term contracts, to which there are more than a dozen annexes, only by implementing a contract management system does one manage to keep changes under control. To all of this, we should add that the contract lifecycle management process, implemented last in the contract management system, also benefits from the modules of contract preparation and negotiation, as well as contract execution. Thus, we have a system in which all the knowledge about the contract is stored – from the moment of the request to sign the contract, through all the agreements to the execution based on invoices. And this is for each document, i.e. the basic contract, annex or assignment.
Did you know that the global market for contract lifecycle management solutions will grow from $1.47 billion in 2023 to $3.47 billion in 2030?
In this article we tried to describe a complete system for managing contracts in an organization. Due to the vastness of the topic, we have not been able to describe all aspects of this system, so this is the first article in a series on contract management in the company. In subsequent articles, we will try to introduce the individual elements of a complete contract management application and describe the possibility of combining this system with other systems in the company, such as CRM, purchasing system (procurement) or budgeting.
*Source: https://www.fortunebusinessinsights.com/contract-lifecycle-management-clm-solution-market-106472
Graduate of Jagiellonian University in Kraków with a degree in Informatics, Mathematics and Physics Department. In the company, he plays the role of analyst and quality control specialist. Specializes in modeling business processes, designing IT systems, and describing business requirements. Has over 20 years of experience as an IT systems designer and system analyst, has also run a big project for the construction and implementation of IT systems in the finance-accounting area. He is a lecturer at the College of Economics And Computer Science in Cracow, sharing with students his knowledge of workflow system operations, like NAVIGATOR.
