Contract management - an overview

Contracts are an essential component for a functioning company, regardless of size. More and more rules, such as the GDPR, lead to even more contracts to manage. Well-organized contract management can both contribute to the value creation of a company and, in extreme cases, determine the success or failure of an organization. The following article describes what constitutes good contract management and how to effectively manage contracts with the help of software. 

Content: 

1. what is contract management? 

2. contract management - tasks 

3. what are the contract risks, how can they be identified?

4. how can a company manage contracts effectively? Contract management software

5. selection criteria of a contract management software

1. what is contract management?

Contract lifecycle management (CLM) can be defined as the process that ensures legal compliance with a contract. Accordingly, it includes all steps and actions of the processing of contracts in an organization and its tools to implement them. 

Contracts are an essential part of any business, whether it is an SME or a corporation. Examples of the most common contracts in contract management are: 

It is not so much a question of filing the documents themselves, but rather of monitoring the contents and deadlines in order to fulfill obligations and liabilities arising from the contracts and to monitor one's own rights.  

Many companies still manage contracts using analog filing systems and a manually maintained Excel spreadsheet. This system is not only very time-consuming, but also prone to errors. In addition, reporting or analyses are difficult to perform. 

Good contract management is essential for companies: errors in monitoring due dates or missed cancellation deadlines pose high financial risks for companies

To avoid these mistakes, and not least to save time and resources, contract management software systems help to maintain an overview. Contracts can be managed digitally and deadlines and due dates can be met through automated processes. In addition, everyone can access the software solution regardless of location. 

Optimizing contract management with the help of software leads to more transparency. The overall risk is reduced and standardized processes reduce errors and help the organization increase efficiency

1.1 Delimitation contract management 

Pure contract management, which is considered a subarea of contract management, is classically concerned with the administration and filing of contracts, as well as the archiving of expired documents. However, contract management is also responsible for contract fulfillment. The more structured the work here, the easier it is for organizations and companies to maintain an overview. 

1.2 Contract controlling as a component of contract management 

In addition to contract management, contract controlling is an essential component of contract management. 

In contract controlling, risks are monitored and reports are created, for example, to investigate which contracts contribute to a company's sales growth. The statistics and reports produced by contract controlling can serve as a basis for further corporate decisions and clarify the following questions: 

  • Do new contracts make sense, and if so, with which contractors? 
  • What is the ratio of existing customers to new customers?
  • What about the opportunities and risks of the individual contracts? 

2. contract management - tasks 

2.1 Preparation of draft contracts 

The sometimes very time-consuming creation of contracts can be quickly facilitated by automated processes and good templates. In most cases, existing templates are taken and supplemented with the necessary data, information and conditions. 

In principle, the principle of freedom of contract prevails in Germany, which means that the contract can be freely determined with regard to both the contracting parties and the subject matter of the contract, provided that the law or good morals are not violated. 

2.2 Contract negotiations

The negotiation phase includes all workflows that arise during the creation of a contract. Especially in the case of manual administration, this is probably the most time-consuming step. Revised contract versions can get lost in emails or changes in documents can become untraceable. Contract management software tools can reduce the effort as well as the resulting error rate to a minimum.

According to PwC, automated contract management can speed up negotiations by 50%. 

2.3 Binding signature 

The legally binding signature, though the smallest part in contract management, is arguably the most important, because its validity depends on it. Nowadays, most contracts can also be signed electronically across countries.

Electronic signatures facilitate this step immensely, so that a contract can become legally effective within a very short time. 

Perhaps also interesting: Electronic signature

2.4 Monitoring of deadlines and dates 

In order to avoid financial and legal consequences, all deadlines and dates of a contract must be continuously monitored and kept in view. 

These can be: 

  • Notice periods 
  • Delivery times
  • Statute of limitations 
  • Completion dates 
  • Installment dates 
  • uvm. 

Ideally, the reminders are automated. 

2.5 Search and analysis

The entire contract inventory should be stored in a clear location that is accessible to all relevant departments and teams. In order to be able to quickly adapt the contracts to corresponding changes, it is essential to store the contracts in searchable files (free text search). Modern contract management software usually provides the appropriate platform for this. 

2.6 Filing and archiving 

Ideally, the contracts are stored directly in the digital contract file so that they can be called up at any time by free-text search, regardless of location. 

Archiving refers not only to expired contracts, but all documents and emails. 

2.7 Evaluation and reporting 

Evaluations and the creation of reports fall within the scope of contract controlling. With a well-organized contract management system or software, reports and evaluations can be created at the push of a button, which can then serve as the basis for further business processes and decisions. 

2.8 Risk management 

Contract risks (see also point 3. What are the contract risks?) must be identified, monitored and evaluated to avoid financial and legal consequences. 

2.9 Integration with in-house systems 

Many companies use interfaces to integrate the contract management system with internal systems to avoid manual input. 

2.10 Implementation of data protection according to DSGVO

Last but not least, it is also the task of contract management to protect all data according to DSGVO. Good contract management software providers offer very high standards in terms of data security and data protection

3. what are the contract risks and how can they be identified? 

By entering into a contract, the business partners always assume a risk at the same time. Risks can arise, for example, from: 

  • Missed contract extensions
  • Missed notice periods
  • Liability claims due to failure to deliver the subject of the contract on time
  • Misunderstandings due to incorrect legal formulations
  • uvm.

In general, risks can be divided into the following groups: 

Often, the risks arise because organizations do not have sufficient visibility into their contracts. In order to ensure efficient business through contracts, organizations should be aware of all risks arising from the obligations of the contracts. Not least because breaches of contract can result in high financial losses

To identify and assess contract risks, the four phases of general risk management are applied to contract management. These are: 

In order to quickly get an overview of the individual phases of the contract risks and to be able to create corresponding reports, a software for contract management helps. The software's functions make it much easier to manage risk.

For example, automatic deadline reminders can provide timely warning of expiring contracts or notice periods, saving unnecessary costs. 

Reporting and export functions help to identify future liabilities and thus avoid liquidity risks

Manual processing of these risks is hardly feasible for some companies with up to 1,000 contracts and, above all, very time-consuming, considering that the contracts are all filed manually and the key data must be laboriously transferred to an Excel spreadsheet. 

4. how can a company manage contracts effectively? Contract management software

In order to manage contracts in a legally compliant and effective manner, a well-designed system is required that provides the relevant teams and departments with transparency and clarity regarding the inventory of contracts

In many companies, these systems are still analog, or partly created with Microsoft Excel itself, which entails many manual and error-prone process steps

To avoid this, there are also standardized products from software providers that offer a holistic solution for contract management. Good providers place high value on data security according to DSGVO and store the data on German servers. 

When selecting the right contract management system, it is important to ask whether the individual requirements of a company are covered. For example, a self-made Excel list may be sufficient for a small business. From a number of approx. 30 contracts, it becomes a small challenge to keep the overview. 

5. selection criteria of a contract management software

The choice of contract management software offerings is not only vast, but also meets different expectations and needs. Before an organization chooses a solution, it should ask itself the following questions: 

  • How many contracts are to be managed in the system? How many new contracts are added each year? 
  • Which departments should work with it? How many access rights are needed? 
  • Should other systems be integrated with it? For example, an ERP? 
  • Which goals should be pursued in contract management? Digitization, fast access, reporting, data security? 
  • Where should the data be located? On-premise or in the cloud
  • What is the monthly budget
Sebastian Wengryn
CEO

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