Contract management helps businesses oversee and administer contracts throughout their lifecycle from creation to execution. Contract management starts when a vendor or contractor is selected as a partner and when terms and statement of work are created and agreed on.
You might be surprised to realize just how many contracts your business actually has in play right this minute.
Large enterprises often work with tens of thousands of current contracts, while even small businesses have dozens or hundreds of active agreements.
The sheer volume alone — without even considering any legal, compliance, and risk implications — makes contract management a necessary practice.
In this article, we’re going to outline exactly how contract management works. We’ll discuss the stages involved in the contract management lifecycle, how CLM software supports this process, and best practices for using contracts in your own organization.
How does contract management work?
A contract is a legal written agreement between two organizations who wish to do business with each other. It holds both parties legally responsible to certain responsibilities and gives certain rights to which they have legal recourse.
In the vast majority of cases, one company is purchasing goods or services from the other, though there are other forms of arrangements (such as partnerships) that also fall under contract management.
Contract management is about orchestrating everything that has to do with putting such an agreement in place and ensuring that the terms of the contract are followed.
What are the stages of the contract management process?
Contract management is a broad process covering the entire contract management lifecycle from forming an agreement, initial planning, and right through to the contract’s eventual termination or renewal.
Contract management is a broad process covering the entire lifecycle of an agreement, from initial planning right through to the contract’s eventual termination or renewal.
These are the main stages in the contract management process:
- Request, planning, and initiation. Once initial sales conversations are complete, legal gets involved to gather the necessary information required to draft an agreement.
- Contract authoring. An initial agreement is drawn up.
- Negotiation. The two parties involved negotiate specific clauses and terms under the contract.
- Approval and signing. Once all parties are in agreement, they sign the document to signify acceptance and make it legally binding.
- Contract execution. The terms of the agreement must now be carried out, the most simple of which involves the delivery of goods or services and the payment for them.
- Implementation, monitoring, and auditing. Both parties are responsible for ensuring the terms of the agreement are met — i.e. that both parties’ rights and responsibilities are fulfilled.
- Renewal or termination. In the case of a one-off contract, the agreement finishes once payment is made and goods or services are received. In ongoing contracts, such as software subscriptions, once the expiry date is reached, the agreement is either terminated or renewed. If the latter is the case, the process may move back to negotiation or simply to ongoing execution and monitoring.
There’s a lot going on in this extremely broad process, which is why most organizations who are managing even a modest number of agreements employ contract management software.
Who uses contract management software?
Contract management software is a specialized type of software platform equipped with features and functions that support all aspects of contract management, from drafting and e-signatures to obligation monitoring and performance reporting.
Some of the people who use contract management solutions include:
- Legal teams
- Procurement managers
- Finance and accounting departments
- Sales and business development
- Company leadership
- IT and software managers
- Human resources teams
- Project managers
What is an example of contract management?
Let’s say your company would like to onboard a new accounts payable automation solution.
After running through the strategic sourcing process, you’ve identified a software platform you’d like to purchase. You’ve got sign-off from procurement, and you contact the sales rep to say you’d like to proceed.
The contract lifecycle then kicks off on their end.
It starts with a request for a contract, where sales collaborates with the legal time to plan and initiate the agreement. Then, legal dives into contract authoring, typically drawing on standardized terms and even a contract template.
Your vendor sends over the agreement, and negotiation begins, where you have an opportunity to discuss details such as uptime requirements, service level agreements (SLAs) for customer support, implementation expectations, and so forth.
Once you and your supplier have reached an accord, you both approve the contract and sign it. This may require several stakeholders to get involved, such as legal teams and even company leadership on both ends.
The next step is contract execution, where the terms of your agreement are carried out. The supplier provides access to the aforementioned software, you send overpayment or provide credit card details for an ongoing subscription, and both companies’ IT teams get together to manage onboarding, data transitions, and integrations.
Most software today is sold on a subscription basis, which means you’ll need to engage in ongoing monitoring of the contract, ensuring the terms you’ve agreed to are met. You’ll monitor support response times, for example, and perhaps engage in quarterly business meetings with your supplier to review performance.
Your vendor will also ensure that you live up to your obligations under the contract, which in this case, mostly looks like making sure you pay your bill on time.
If you’ve signed a contract with a fixed term — 12 months, say — then you’ll need to review performance at the end of the period and consider whether you wish to renew or terminate the contract.
If renewal is the appropriate action, you may wish to move back to the negotiation stage to adjust any of the terms of the contract before signing again.
What are the benefits of contract management software?
Contract management software — designed specifically to support the CLM process — provides organizations with a number of important benefits.
- Improved efficiency through powerful custom automation that reduces repetitive manual work
- Greater visibility over contract performance and improved vendor accountability
- Cost savings through vendor consolidation and performance management
- Better renewal management that provides additional negotiation opportunities
- Greater connectivity through integrations with accounts payable and financial operations for seamless workflows
- Enhanced risk and compliance management
How is contract management software different from eSignature solutions?
E-signature software provides a method for signing contracts digitally.
Contract management software is a much more capable and advanced category of software. E-signatures are usually one of the features they offer, among contract authoring, vendor monitoring, template libraries, and collaboration functions like redlining.
6 best practices for drafting, negotiating, and executing contracts
1. Keep language clear and precise
There’s no need to get unnecessarily obtuse with legalese here. All that serves to do is obfuscate obligations and enshroud entitlements.
See what we mean? Keep contract language simple, and both parties will have an easier time understanding and meeting their contractual responsibilities.
2. Make sure you include a vendor vetting and risk assessment phase
Whenever you’re considering entering a contract with a new supplier, you should first thoroughly vet the vendor and assess any risks involved.
This may involve financial stability checks in the cases of business-critical suppliers, as well as discussion with previous customers, and an assessment of security and data risk (especially when buying software),
3. Put a plan in place for contract compliance and vendor performance management
Have your vendor management strategy — including any reporting expectations and performance management meeting cadences – outlined before you sign on the dotted line.
Share it with your supplier before entering into an agreement, so they’re also aware upfront of how they’ll be measured. This will help them meet your expectations.
4. Use standardized templates and clauses
When creating contracts for your own sales agreements, it's a smart idea for more efficient authoring to use standardized templates and a pre-drafted clause library.
Here, you can begin from a solid base (the template), drag and drop any necessary clauses you want to add or remove, and then simply adjust language as needed to suit the specific use case.
5. Speed things up with electronic signatures
The same software you use to manage contract templates should also support e-signatures.
This allows both parties to sign electronically without needing to print and scan contracts. This keeps things cleaner (scanned documents are never super clear), but it also speeds up sales and procurement processes.
6. Leverage automation to improve contract management
Automation is your best friend when it comes to managing contracts.
Effective use of automation can help you:
- Auto-sign contracts
- Receive alerts when contractual obligations go unmet
- Stay on top of contract renewals
- Import data directly from your CRM into a sales contract
Beyond contract management
Contract management is a critical practice for reducing costs, maintaining legal compliance, and getting the most out of your vendors.
A good CLM platform with built-in automation can be a powerful way to streamline workflows. But it’s not the only software solution you should consider for that purpose.
Contracts always involve payment, whether you’re making it to a vendor or receiving it from a customer.
For that, you’ll need accounts payable and accounts receivable automation software to support tasks like one-click payments and automated invoice matching.
BILL, a financial operations platform, takes care of all of the above and even comes with dozens of native integrations with the finance tools you’re already using.
