Every company has a case for contracts that have the potential to increase revenue and maximize value. How can companies best use them to serve the right purposes and meet goals?
Contracts are a vital part of building relationships and completing business transactions. But what other purposes do they serve?
In 2017, the International Association for Contract & Commercial Management (IACCM) conducted a study on what people found were the most relevant reasons to create contracts.
Contracts have many purposes and thus many different reasons why they are important. For starters, contracts are the main source of revenue and relationship-building for an organization.
Why are contracts important?
Contracts are important because they formalize agreements between parties, setting out terms and responsibilities. They play a crucial role in revenue generation by outlining payment conditions, and they improve operational efficiency by clearly stating roles and timelines. Moreover, contracts ensure compliance with relevant regulations and facilitate good relationships through clear communication and collaboration.
Now, let’s take a more in-depth look at a few of the key elements of why contracts are an important focus for a company.
1. They serve as a record of commitments for both parties.
At their very core, contracts are relationships. First, two parties agree to work together and forge a connection that, if fostered well and beneficial on both sides, can last years. A contract is the visual representation of that relationship.
Contracts also hold each party to their original agreement. For example, in a SaaS contract, one party agrees to provide the other with software for a specified amount of time.
The other side agrees to pay the provider for that same amount of time. First and foremost, a contract is the trail that holds both sides accountable for the terms they set at the beginning of the relationship. Read more about how to start drafting a contract and the basic parts of one here.
2. Agreements prevent conflicts and mitigate risk.
Contracts often go through a negotiation and redlining process that ensures both sides are getting the best deal possible. Obviously, good negotiation should lead to a mutually successful outcome that prevents conflict down the line and sets the foundation for a strong partnership moving forward.
When managed correctly, contracts should have a comprehensive audit trail of every change, comment, and edit made. Interestingly, many modern businesses have all their processes automated — with this exception.
Emails back and forth are difficult to track down and compare versions. A contract lifecycle management platform should have an online negotiation feature with a comprehensive audit trail. That way, everyone can see who made what edits at any moment in time.
3. Contracts help an entire organization maintain compliance.
Unless employees have a legal background, it’s likely they’re often not thinking about compliance. Luckily, having a process set in place for contracts, helps employees remember they need to create a contract that has to be approved by Legal. With modern contract management software, companies can set up contract approval workflows to make sure they stay compliant.
4. Contracts serve as a collaboration and communication tool.
From their very creation, contracts are by nature relational and collaborative. Teams can work together to determine their needs through the creation of a contract, building healthy communication, and opening up collaboration across departments.
Then, once the contract is sent out to a third party, the collaboration continues at the start of a business relationship. Next, negotiation can be used as a tool to foster a high quality of collaboration.
After a contract is signed, both sides can feel confident in the final outcome because of solid communication.
5. Ideally, agreements also help generate revenue.
Contracts are binding agreements that say one side will deliver services in exchange for payment. Furthermore, being able to have contracts processed efficiently and under the correct terms helps companies generate more revenue.
A blockade to a signed contract means a blockade to more revenue. Conversely, faster contract processes mean organizations are able to sign more deals and bring in more income.
Generating more revenue isn’t just about the contract itself, but the process around it. That’s why it’s important to look at what tools a company uses for contracts.
Unfortunately, being stuck in the past with PDFs, email, and a stack of documents on a desk isn’t going to help bring more revenue. To move to the future, the entire contract management process has to be efficient and centralized in a single source of truth.
6. Contracts increase operational efficiency.
Looking at contract management processes and evaluating the greatest needs for improvement will help organizations work more efficiently. In turn, working faster and smarter means using the right tools.
Again, a contract management platform is one of the best ways to automate contract processes. Instead of tedious emails, a few clicks means an approval is on its way. With the help of an e-signature feature, signatures take days or hours, not weeks or months.
Clearly, having all people, processes, and documents in one place is critical for aligning with the current pace of business.
7. Agreements extend a company’s brand and values.
Although this may not be the first thing that comes to mind when most people think about contracts, they are an extension of the company brand. Additionally, sending out a contract is a symbol that an organization cares about having a detailed record of a relationship that they are making a commitment to.
Everything from wording to negotiations gives each party an idea of how the other functions. What’s more, a solid company brand shows through care in contract creation and the interactions that follow.
The importance of contracts – key takeaways
The reasons to pay attention to contracts are clear. Every organization has contracts — from the first employee who is hired through every deal signed.
In a nutshell, the main reasons why contracts are important are:
- They are a documented record of commitment for both parties.
- They mitigate risk and prevent conflicts.
- Contracts help with maintaining compliance.
- They foster collaboration and communication between parties.
- Agreements help generate revenue.
- They increase overall operational efficiency.
- Contracts are an extension of a company’s brand and values.
In conclusion, ensuring that contract management processes are efficient and the tools being used are the best will help make each of these seven reasons stronger.