Contract Management – A Definition
Contract management is the process of overseeing and administering the various stages of a contract, from creation to execution and beyond.
It involves ensuring that all parties involved fulfil their obligations and that the terms and conditions of the contract are met. The goal of contract management is to optimise the value of contracts and minimise risk.
It is crucial in business operations as it enables organisations to effectively manage their contractual agreements and relationships. It helps mitigate risks, improves financial and operational performance, and ensures that contracts are aligned with business objectives.
Contract Management – The Steps
The stages of the contract management process involve several key steps that organisations must adhere to in order to ensure success.
By effectively managing each stage of the contract management solution, organisations can minimise risk, enhance contract performance, and foster successful business relationships.
Contract Management – Define The Need & Specification
This process involves understanding the requirements and goals of the organisation, which in turn helps create effective contract specifications.
It can help by developing a contract management team, as this will help in understanding the business needs to provide clarity on the purpose and desired outcomes of the contracts.
This includes identifying the specific requirements that the organisation is looking to fulfil through the contract management process. By clearly defining these needs, organisations can establish a solid foundation for their business contracts.
Developing detailed contract specifications is equally important as it sets the expectations and standards for the contracts. This involves outlining the scope of the contract, including the tasks, activities, and deliverables that need to be accomplished. It also entails establishing timelines and performance measures to ensure that the contracts are executed efficiently and effectively.
By considering these key factors organisations can develop comprehensive contract specifications. This process enables them to align the contracts with their business needs, maximise operational efficiency, and achieve their desired goals.
Contract Management – Draft contract
Contract drafting is a critical step in the process, involving carefully crafting the terms and conditions of the agreement, including contract milestones and contract obligations to ensure that both parties’ expectations are captured and risks are adequately addressed.
The advent of contract management systems has introduced the ability to automate the creation of contracts, saving time and reducing human errors.
These systems provide templates and pre-approved clauses that can be easily customised to suit the specific needs of even more complex contracts.
It is crucial for all parties to review the contract thoroughly to ensure that contractual arrangement covers their expectations and addresses any potential risks.
A contract management tool can facilitate this review by providing a centralised platform for collaboration and document sharing.
It allows all stakeholders to access the contract, make comments or suggestions, and track changes in real-time. This ensures that the contract reflects the requirements and interests of all parties involved, reducing the likelihood of disputes or misunderstandings.
Contract Management – Negotiation and Redlining
These play a crucial role in finalising the terms and conditions of a formal contract.
It will involve discussions and compromises between the parties to reach a mutually beneficial agreement and contractual relationship. This process requires careful consideration of each party’s interests, expectations, and potential risks.
A contract administrator or contract manager serves as the primary point of contact for both parties during the negotiation process. The contract manager is responsible for facilitating communication, addressing any concerns, and ensuring that the contract aligns with the parties’ intentions.
Additionally, they may need to consult with legal teams or the purchasing team to clarify specific terms or resolve any disputes that arise during the negotiation.
Redlining is a common process during contract negotiation where edits and revisions are made to the contract. This involves identifying and highlighting sections that need modification, addition, or removal to help build the initial buyer and supplier relationships.
A contract management system can greatly simplify this process by providing a platform for collaborative editing and document sharing. All parties can track changes, suggest revisions, and provide comments in real-time, streamlining the negotiation process and ensuring that there is a clear audit trail and the final contract accurately reflects the agreed-upon terms.
Contract Management – Risk and Resilience
Risk management is a critical component that ensures the sustainability and success of various type of contracts. By effectively managing and controlling risk, organisations can identify potential issues, contract risk and mitigate them proactively, and drive positive outcomes.
The contracts team plays a crucial role in supporting risk assessment and decision-making throughout the contract lifecycle. They collaborate with stakeholders to identify and evaluate risks associated with the contract, including legal, financial, operational, and reputational risks.
By thoroughly analysing these risks, the team can develop strategies to minimise their impact and increase the chances of successful contract execution.
Moreover, the contract manager and wider team facilitates positive change and evolution of the contract over time. They continuously monitor and assess the contractual agreement, identifying areas for improvement or modification.
By actively engaging with the parties involved, the team can propose changes that address emerging risks or adapt to changing circumstances.
Contract Management – Signing
Signing is a crucial stage in the contract management process as it signifies the parties’ agreement and commitment to the terms and conditions outlined in the contract. An effective method for getting contracts signed is essential to ensure a smooth and efficient process.
Determining the contract signing method is a crucial decision and it can be either electronic or written, depending on the preferences and requirements of the parties involved.
The signing stage involves several steps to ensure proper execution of the contract. First and foremost, all parties involved should be satisfied with the final draft of the contract before proceeding with signing.
Once satisfaction is achieved, the parties can proceed to sign the contract using either physical or electronic signatures as agreed upon. It is important to capture copies of the signed contract for reference and future needs.
Contract Management – Performance Assessment
This is essential to ensure the effectiveness of the original contract and identify areas for improvement.
By utilising key performance indicators (KPIs), organisations can measure the success of their contract management practices and make data-driven decisions to enhance efficiency.
One important aspect to evaluate is the relationship with contract partners. KPIs such as customer satisfaction and supplier performance can gauge the strength of these relationships. Regular feedback and communication can help identify any issues and improve collaboration.
Meeting milestones and deadlines is another critical factor in assessing performance. KPIs like on-time contract delivery and adherence to project timelines help measure the efficiency and effectiveness of the contract management process. Consistently meeting these milestones indicates a well-managed process.
The contract cycle length is also a valuable KPI to evaluate. This metric tracks the time it takes to complete the entire contract process, from initiation to signing. A longer cycle length may indicate inefficiencies in the process that need to be addressed.
Cost-effectiveness is another crucial KPI to consider. By analysing the costs associated with the contract management process, organisations can determine if they are achieving the desired outcomes within the allocated budget.
Assessing both the challenges and successes of the contract management process is crucial. Identifying areas of improvement can lead to process automation and optimisation.
By leveraging technology and implementing contract management software, organisations can streamline workflows, reduce manual errors, and enhance overall performance.
Contract Management – Renewal
Contract renewal is a critical aspect of contract management that involves the review and renegotiation of contracts upon their expiration. When contracts reach their end date, organisations must carefully evaluate their terms and conditions to determine if any changes or updates are necessary.
The process of contract renewal typically starts with a thorough review of the existing contract. This involves assessing the performance and outcomes achieved during the contract term, as well as identifying any areas that need improvement. It is also an opportunity to reassess the goals and objectives of the contract and make adjustments as necessary.
Automated renewal reminders play a crucial role in streamlining the contract management process. By setting up automated notifications, organisations can ensure that they are aware of upcoming renewal deadlines well in advance, allowing sufficient time for review and renegotiation.
This eliminates the risk of contracts inadvertently expiring and helps organisations stay on top of their contractual obligations.
Contract management software is an invaluable tool for tracking and managing upcoming renewal deadlines.
These software solutions provide a centralised platform to store and organise contract documents, making it easy to access and review contracts nearing expiration.
Contract Management – Exit and Termination
Exit and termination of a contract can be a complex process that requires careful planning and execution.
When a contract reaches its end or needs to be terminated, organisations need to navigate the challenges and risks associated with demobilising the current supplier and introducing a new one.
One of the key aspects of contract termination is the presence of break clauses within the contract. Break clauses allow either party to terminate the agreement under specific circumstances, such as poor performance or a significant breach of contract.
However, these clauses need to be carefully reviewed and invoked following the contract’s terms and conditions.
Demobilising the current supplier involves winding down operations, transferring assets or services, and ensuring a smooth transition for both parties.
Challenges can arise from issues such as transferring knowledge and expertise, managing contractual obligations, and addressing any potential disputes.
The exiting party also needs to carefully assess the impact of termination on their operations and ensure minimal disruption to their business.
In addition, introducing a new supplier requires extensive planning and preparation. This includes identifying potential suppliers, evaluating their capabilities, negotiating new contracts, and onboarding the new supplier smoothly.
Allocating sufficient time and resources to this process is crucial to mitigate risks, ensure a seamless transition, and maintain continuity of services.