6 Contract Management Best Practices

Your contract management determines whether your contracts are predominantly risk factors or vehicles for business growth. The fact is, how you handle your contracts affects your bottom line. Research by World Commerce & Contracting reveals that poor contract management costs businesses over 9% of their annual revenue. Implementing contract management best practices will help Legal improve contracting efficiency, which is a priority for many Legal teams. 

If you are wondering how you can improve your organization’s contracting efficiency, look no further. Read on to understand contract management best practices you can implement right away and why you should do so.

What is contract management?

Contract management is the process of managing contracts from creation to execution. Your contracts are your organization’s crucial business documents. Your organization’s relationships with your partners, vendors, customers, employees, and contractors hinge on the agreement it has with them. 

Effective contract management involves building a system that prevents contracts from stalling business operations, monitoring them to ensure compliance with contractual obligations and regulations, and avoiding missing critical deadlines, like contract renewal.

Benefits of contract management

Contract management has the following positive impacts:

Improve organizational efficiency

With automation, you can set up workflows with standard clauses for your recurring contracts, making creating contracts faster, storing contracts in a secure, searchable repository, and automating repetitive tasks. Your organization will be much more efficient in handling contracts.

Mitigate risk

With proper contract management, you can monitor contract execution to ensure your organization adheres to the agreed terms in performing its obligations under the contract, whether it’s regarding deadlines, the terms of product or service delivery, or payment. 

Your contracts contain information, some of which are protected by various privacy regulations. Contract management ensures unauthorized persons do not get access to contracts. Also, as new regulations come into force, you can easily bring existing contracts into compliance.

Minimize cost

With better contract management, your organization can spend less time contracting and less money on outside counsel. Also, when you maximize every contract renewal opportunity, whether to renew a contract or opt-out of an agreement that no longer serves you, it will result in cost savings. 

Build profitable relationships

Defaulting in your contractual obligation doesn’t just cost you money when you are sued. There’s also reputational damage that can make potential partners wary of dealing with you. With good contract management, you will meet your obligations and have satisfied contracting parties with which you can build long-term business relationships.

Contract reporting

Contracts do not just spell out rights and obligations. They are dynamic documents that contain valuable data. With contract reporting, you can easily pull data from your contracts and gain insight into how you create, negotiate, execute, and manage contracts. Using spreadsheets to track and report on contract data like active contracts, contract amounts, milestones, and key timelines leaves a lot of room for error.

Consequences of poor contract management

Poor contract management makes your contracting process inefficient, and it has repercussions.

Lost revenue

Contracting inefficiencies like slow negotiations, delays in approvals, and missing milestones are expensive. We said earlier that poor contracting costs businesses over 9% of annual revenue. In another report, 50% of business leaders said inefficiencies in their contracting process resulted in lost business opportunities. 

Without a way to track deadlines automatically and get notifications to carry out time-sensitive actions, there’s the risk of missing deadlines. Missing deadlines may expose your organization to liability, like using a licensed intellectual property outside the period covered. Relying on employees to track these deadlines with spreadsheets can only get you so far, as some contracts will slip through the cracks.

Inefficient collaboration and communication

Effective contract management requires high-level collaboration between both internal and external stakeholders. Using emails as a primary means of communication can quickly result in multiple confusing threads. During negotiations, contracting parties may forget to track changes during redlining. Before you know it, you can have a situation where people are working with different contract versions.

6 contract management best practices

Centralize and standardize agreements

Drafting contracts from scratch slows down contract creation. Legal can save significant time by standardizing and pre-approving contract language and terms. This way, contracts are created faster, and other departments can create some contracts without involving Legal. When contracts follow a template, they are easier to edit and review, as you will only focus on the terms that are peculiar to each transaction.

Storing your contracts in a central, searchable repository is no longer optional. This way, contracts are secure and easy to locate. The importance of storing contracts securely becomes more obvious when there is litigation. You need advanced legal record management that shows:

  • Who accepted the agreement
  • The version of the agreement that was accepted
  • The date and time of acceptance

Set sensible key performance indicators (KPIs)

Legal departments are under pressure to do more with less and prove their worth to the organization. To achieve this, Legal must shift from being reactive (to legal threats) to proactive (strategizing ways to influence revenue and mitigate risk). This will require setting KPIs.

However, do not set KPIs just for the sake of doing so. The KPIs you should set and the metrics you should track depend on your goal. So, the first question is, “what do you want to improve?” For instance, your goal could be to send contracts out faster. You can then break this down into specific KPIs, like creating contracts faster and reducing approval time. 

A good contract management solution will help you track performance metrics that provide insight into your contracting process and what you can improve on to become more efficient.

Tracking obligations

Many people sign contracts and forget about them until there’s an issue. However, contracts become more important after they are signed. Your organization has obligations you need to track to ensure you fulfill them, and in a large organization, there can be thousands of active contracts. 

Your contracts need to be easily accessible to fulfill your contractual obligation.  You can’t track or monitor the execution of a contract you cannot locate. 

Relying on individual employees to track obligation is risky as errors are inevitable. Good contract management software can help you stay on top of your obligations by sending you timely email reminders before they are due.

Team collaboration and visibility

Contract management is mostly the responsibility of Legal in most organizations. But, for Legal to ensure compliance and reduce risks across the entire organization, it needs to collaborate efficiently with other departments. When Legal is a bottleneck to getting deals done, it doesn’t help anyone. 

Legal must stop being a silo and make legal information available to those that need it. Empowering other departments with standard templates and workflows reduces your need to be involved in everything. You can use contract management software like Ironclad to ensure that contracts get Legal’s approval before they are sent out.

Legal also needs to make contracts visible without sacrificing data security. The right contract management software will enable you to balance visibility and control by helping you define who can access each workflow and record.

Automate communications

Using emails in contract communication has many holes, as emails are not centralized enough. You may forget to include the address of a relevant party when passing information, or important information may hide in email threads.

The best practice is to use a contract lifecycle management software (CLM) that tracks every activity and sends real-time notifications to relevant stakeholders. Automating your communications ensures no stakeholder is left behind in all contract stages. 

Clickwrap and a variety of signing options

Getting contracts signed without delay is still a challenge for many Legal departments. Apart from the traditional wet ink signature, there are other ways of getting contracts signed. Electronic signature and clickwrap have been widely adopted as valid ways of signing contracts online. 

Contracting parties now expect a seamless signing experience. Clickwraps and electronic signatures deliver that. Clickwrap makes signing contracts as easy as a click, and it’s ideal for high-volume contracts like website Terms and Conditions.

Contract management solutions like Ironclad allow you to embed your contracts into the user’s transaction flow, reducing the friction inherent with PDF or paper contracts. 

Use Ironclad for contract management best practices

Complying with contract management best practices is essential for contracting efficiency that matches your business growth. Improving your contracting capacity is no longer negotiable if you want to keep up with today’s fast-paced business environment and increasing regulatory scrutiny.

Good contract management will help you minimize risk and save on cost. Bitmovin, a multimedia tech company, saved $400k in outside counsel and cut contracting costs by 75% using Ironclad’s CLM to implement contract management best practices.

Ironclad’s CLM helps you implement contract management best practices at all contracting stages. Request a demo and start your journey to mastering contract management.

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