What is Contract Management?
Contract management encompasses all the processes that deal with the execution of contracts within an organisation. It maps all the contractual processes between the customer and the contractor. It covers the entire lifecycle of a contract, which is why it is also known as Contract Lifecycle Management (CLM). The approach starts with the initial contract negotiation and continues through the creation, management, adaptation and execution of a contract, right up to its archiving. Thus, contract management is a kind of umbrella term for all activities and processes that involve the creation and execution of contracts.
Since contract management covers a wide range of topics and involves many different departments and areas of a company, it is often divided into two or even three sub-areas for the sake of simplicity: contract administration, contract controlling and, thirdly, contract archiving.
Table of Contents
What does contract management involve?
The term ‘contract administration’ is often associated with contract management, and the two are often used synonymously. However, there is much more to contract management than contract administration. Contract management also includes contract controlling with analysis, (risk) assessment, auditing and archiving.
Contract Management
The main objective of contract management is to optimise the contract system. The focus is on collecting and structuring information for a contract. Typical contract management tasks include:
- Tender comparison and processing
- Contract preparation, including drafting and negotiating contracts
- Reviewing contracts and documents
- Monitoring contract performance against the terms of the contract
- Clear presentation of relevant contract information as a basis for other departments
- Monitoring of deadlines and periods, e.g. cancellation periods
- Invoicing, including automated invoicing for recurring invoices
- (Archiving)
Contract Controlling
Like contract management, contract controlling is concerned with the collection of information. However, the information collected is aimed more at analysing and evaluating contracts in order to make risk assessments. Specifically, the goal is to evaluate which types of contracts with which contractors are lucrative and generate high revenue. Frequently asked questions in contract controlling therefore include:
- Who are the most important contract partners?
- What is the annual revenue potential of each contract partner?
- What is the current ratio of existing to new customers?
- How high is the value of existing contracts?
- How high are the costs of existing contracts?
- What are the opportunities and risks associated with each counterparty?
- What are the risks associated with each contract?
Archiving
Archiving contracts is the third sub-discipline of contract management. In particular, it deals with the aspect of audit compliance. Among other things, it must be ensured that archived contracts and related documents can be stored in a specific location in such a way that they cannot be changed in the long term. In the age of digitalisation, companies are increasingly moving towards digital archiving of their corporate documents. With the ever-increasing flow of information and the growing volume of documents that need to be archived in an audit-proof manner, a central storage location is particularly beneficial. This ensures that contract controlling and contract management can also access all important documents and contracts.
Note: In many organisations, archiving is considered part of contract management. However, as document archiving can be complex and extensive, we consider it to be a separate sub-discipline.
Who is involved in contract management?
From a business perspective, contract management plays a central role in a company. There is no doubt that it is a core business process that touches almost every department in the organisation. Good contract management is characterised by the fact that several departments are not involved in the same task or matter, thus avoiding unnecessary parallel processing.
The following departments in the company usually have regular contact with contract management:
- Sales: Concludes and manages contracts with new customers.
- Purchasing: Enters into and manages contracts with business partners such as suppliers, brokers and partners.
- Legal department: Monitors compliance with legal and corporate regulations.
- IT: Responsible for the procurement of software, e.g. contract management software, as well as leasing contracts, e.g. for hardware.
- HR: prepares and manages employment contracts, application documents, digital personnel files, etc.
- Finance and accounting: creates invoices (with contract management software, automated invoicing is also possible).
- Controlling: deals with the risk assessment of existing contracts.
- Management: coordinates and monitors the overall business interests of the company based on contractual risks.
Project management staff are particularly affected by contracts and agreements. During the course of a project, for example, various agreements may arise that result from the collaboration with the customer or partner or that have been agreed in advance. These legal agreements, which represent a commitment, need to be recorded and monitored. This is also part of contract management.
Why does it make sense to have a contract management system?
When a company works with partners and customers, there are always risks on both sides. In order to minimise these risks, expectations and wishes are set out as agreements in the form of contracts. However, poor contract management can have serious consequences for the company, the partner or the customer.
For example, not having standardised contract management software or using it inefficiently can be a major risk. This often results in unequal access to information for the different departments involved in contract management. In addition, audit-proof archiving and the ability to find important documents and contracts are not guaranteed if there is no proper archiving system in place. Contracts can even get lost completely. In addition, it is usually difficult to keep track of contractual agreements without a standardised system. Legal requirements are simply ‘overlooked’. As a result, unnecessary costs and unwanted renewals are incurred, while profitable revenue opportunities are missed. In the worst case, a contract may be unwittingly breached, resulting in fines or other legal consequences.
Effective contract management is the key to avoiding these risks and problems. Cost is probably the biggest motivator for businesses. Professional contract management frees up resources that can be used elsewhere. In addition, ongoing monitoring of contractual deadlines and dates makes it very easy to meet all termination deadlines. Reporting and monitoring obligations are also less likely to be overlooked.
The company B. Electronics, based in Hanover, wants to move to Munich. The lease for the new premises has already been signed, but the old lease has to be terminated. However, the employee responsible has left the company and the termination date is in one week. If the contract is not terminated, it will automatically be renewed for another year.
- With intelligent contract management software, any employee with access can monitor the notice period and, in case of doubt, inform the responsible person or the managing director. Notices of expiry are automatically sent by email.
- Without efficient contract management, the deadline could be missed. No one feels responsible, there is a lack of oversight. The deadline is missed, and the contract is extended for another year.
Note: The situation is similar with leasing contracts, for example. The same principle applies here, and similar measures can be taken.
Managing contracts using Contract Management Software
Contract management is practised in almost all organisations. However, there are significant differences in the way and ‘quality’ in which this contract management is carried out. As already described, working with contractual partners involves a number of risks. To minimise these risks, it makes sense to use a software solution. However, the use of software is not limited to large companies. Small and medium-sized companies can also benefit, as the solutions are not as costly as they used to be. The use of contract management software therefore ensures a noticeable reduction in costs.
The software used for contract management is usually referred to as Contract Management Software (CMS) (not to be confused with Content Management Software, also known as CMS). Contract management software can operate at different levels: as on-premises software, as cloud software or as a cloud-based Software-as-a-Service (SaaS) model. The advantage of SaaS solutions is that they are a kind of ‘rental model’, where you pay monthly fees rather than the full cost of a new software solution.
When selecting software for their own organisation, IT buyers should choose the solution that best fits their business strategy and meets all their requirements.
Digital contract management with Microsoft 365 and SharePoint Online
Microsoft 365 and SharePoint Online are already in use in many companies. However, employees are often unaware of their potential because they only work with Microsoft Teams, for example. Nevertheless, Microsoft 365 with SharePoint Online and the Power Platform already provides the basic tools for efficient contract management software.
But it takes a certain amount of expertise and, above all, resources to build highly functional (business) applications on your own from the given basic configuration. That is why we at Portal Systems specialise in providing pre-configured, standardised business applications. With our cloud-based software solution for contract management – Shareflex Contract – it is possible to perform intelligent document management anytime and anywhere. Shareflex Contract supports users throughout the entire contract lifecycle, making contract management as easy as possible.
The integrated SharePoint Online environment in which our solution operates also takes into account the important aspects of ‘audit security’ and ‘document archiving’, as Microsoft 365 fully covers the topic of ‘Compliance & Security’. This ensures greater security and order in your organisation. If you would like to know more about Microsoft 365-based contract management, please contact us. We can help you find the right solutions to support and drive your business digitally.
Hamburg, 10 October 2022
Author: Sara Glöckner
Category: Business Wiki
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