Table of contents
- Why is Contract Management Important?
- What are the Consequences of Poor Contract Management?
- Contract Management Best Practices
- Contract Management Best Practices - Key Takeaways
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Effective contract management is not just a business necessity – it’s a strategic advantage. Poor contract management can cost companies up to 9% of their annual revenue, according to a study by World Commerce and Contracting. That’s a significant loss that, luckily, can be mitigated by implementing contract management best practices.
By implementing contract management best practices, you can increase your profits, boost efficiency, and streamline your contracting process. This article will delve into these recommendations, providing you with a roadmap to effective contract management.
Why is Contract Management Important?
Contract management is the cornerstone of efficient contracting. It refers to the process of managing the whole contract lifecycle, from contract creation, through execution, to analysis. It involves the administration of contracts between a company and its vendors, clients, employees, or partners. Effective contract management ensures that both parties meet their contractual obligations and that the contract performance aligns with the agreed terms.
There are many benefits of proper contract management, such as:
- reducing financial risk,
- improving supplier performance,
- increasing business efficiency,
- fostering better, long-term relationships with partners.
Moreover, contract management ensures compliance with regulations and helps in identifying and mitigating potential issues before they escalate into significant problems. In essence, contract management is a strategic tool that can drive business success.
What are the Consequences of Poor Contract Management?
Poor contract management can lead to missed deadlines, breached contracts, and legal disputes. It can also result in financial losses due to penalties, overpayments, and lost opportunities.
Furthermore, it can damage relationships with partners and tarnish a company’s reputation. The consequences of poor contract management are far-reaching, affecting various aspects of a business. Therefore, it’s crucial to avoid these pitfalls by implementing contract management best practices.
Contract Management Best Practices
1. Create a Contract Repository
One of the first steps toward effective contract management is creating a contract repository. A smart choice is a cloud-based contract repository, as it is secure and easily accessible. It allows you to search for specific terms within your contracts, making it easier to manage and track them.
A well-organized contract repository can significantly enhance your contract management processes, making them more efficient and effective. Additionally, a contract repository equipped with Optical Character Recognition (OCR) technology will allow you to search for text even within images or scanned documents.
2. Automate Repetitive Tasks
Automation is key to efficient contract management. By using a contract management system, you can automate repetitive tasks such as contract creation, approval, and renewal. This not only saves time but also reduces the risk of human error. Automation can also ensure consistency across your contracts, leading to better contract performance and compliance.
3. Standardize the Process of Creating Contracts
Standardizing the contract creation process is another best practice. By using pre-approved contract templates and clauses, you can save time, reduce errors, and improve compliance. This also ensures consistency across all contracts, making them easier to manage and enforce.
4. Enable Team Collaboration
Contract management is a team effort. An online contract editor with a redlining and commenting feature can facilitate team collaboration. It allows team members to review, edit, and comment on contracts in real time, leading to faster contract finalization and execution. Team collaboration can also foster a sense of ownership among team members, leading to better contract outcomes.
5. Optimize Negotiations
Negotiations are a crucial part of the contracting process. Instead of sending emails back and forth to your customers or vendors, use a cloud-based Contract Lifecycle Management (CLM) tool.
CLM tools allow for real-time negotiation and editing of contracts. Additionally, using electronic signatures can expedite the contract signing process, making it more efficient. Optimized negotiations can lead to better contract terms and a smoother contracting process.
6. Streamline the Approval Process
Streamlining the contract approval process can significantly reduce the contract cycle time. By using contract approval workflows, you can receive quicker approvals from the necessary parties.
Setting up predefined approval workflows ensures that contracts are reviewed and approved by the right people at the right time. This can not only speed up the contract approval process but also ensure your contracts follow all guidelines, as they are reviewed by the appropriate parties.
7. Set Contract Management KPIs
Setting Key Performance Indicators (KPIs) for your contracts can help you measure their performance and identify areas for improvement. Contract management software can track contract KPIs, providing you with valuable insights into your contract management processes. By tracking KPIs, you can continuously improve your contract management processes, making them more effective and efficient.
8. Automate Deadline Tracking
Missing a contract deadline can have serious consequences, such as financial losses. A CLM tool can help you set and track your deadlines, ensuring that you never miss a contract milestone. Moreover, getting deadline notifications can keep you on top of your contract obligations. Automated deadline tracking can significantly reduce the risk of contract breaches, leading to better contract performance.
Contract Management Best Practices – Key Takeaways
In summary, contract management is a critical aspect of business operations that can significantly impact a company’s bottom line. By implementing the recommendations outlined in our article, you can enhance your contract management processes, increase efficiency, and reduce risks.
In summary, what are the most effective contract management best practices?
- Create a contract repository:
A cloud-based contract repository provides a secure and easily accessible platform for storing and managing contracts.
- Automate repetitive tasks
Using a contract management system to automate tasks can save time and reduce errors.
- Standardize the process of creating contracts:
Pre-approved templates and clauses can streamline the contract creation process, improve compliance, and ensure consistency.
- Enable team collaboration:
An online contract editor facilitates team collaboration, leading to faster contract finalization and execution.
- Optimize negotiations:
A cloud-based CLM platform with a redlining feature and electronic signatures can make negotiations more efficient.
- Streamline the approval process:
Contract approval workflows can expedite approvals and ensure that contracts are reviewed by the right people.
- Set contract management KPIs:
KPIs can provide insights into contract performance and identify areas for improvement.
- Automate deadline tracking:
A CLM tool can help you track contract deadlines and send notifications to ensure you meet your contractual obligations.
Remember, the key to effective contract management is leveraging the right tools and technologies. A comprehensive contract management solution can help you implement these best practices and transform your contract management processes.
By following these recommendations, you can ensure that your contracts are not just legally binding documents, but strategic assets that contribute to your company’s success.