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Six principles of effective contract management

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For companies around the world, contracts are essential tools in outlining and preserving relationships with clients, partners, vendors, and key stakeholders.

The way a business manages contracts impacts everything from risk mitigation to regulatory compliance, operational efficiency, and revenue. McKinsey & Company found that “suboptimal contract terms and conditions combined with a lack of effective contract management can cause an erosion of value in sourcing equal to 9 percent of annual revenues.” Still, few businesses properly invest in tools and systems to optimize their contract management process.

Contract Lifecycle Management (CLM) software is a tool that allows organizations to digitally optimize how contracts are managed at every step, providing a secure centralized repository of contract data across multiple departments and personnel. Workflow automation and other key features make it easier to initiate, execute, and monitor contracts.

By automating effective contract management principles CLM can reduce turnaround time, improve outcomes, and lower overall risk and spend. 

Consolidate contracts 

Disjointed filing systems and contracts spread across systems lead to more time and resources spent finding vital information housed in contracts. This leads to a higher chance personnel may miss outdated or underperforming aspects of contracts, risk compliance issues, and make tracking performance and optimizing renegotiations impossible. Consolidating contracts into a unified, dynamic repository helps prevent these issues.

A contract management software system provides a secure digital repository that allows all involved parties quickly locate and access specific contracts, templates, and clauses. The accessibility and security of a digital repository creates visibility and access, prevents data breaches, and makes it easier to track performance to meet company goals and improve negotiations.

Decrease time spent developing contracts 

Drafting new contracts can be time-consuming, and contracts may evolve during negotiations or may change due to renegotiations at the end of the lifecycle. Contracts go through many different departments across an enterprise, further causing the contract to change based upon personnel input. Though, multiple contracts may share specific standardized language and terms.

A critical goal of efficient contract management is to reduce the time spent drafting and approving contracts for personnel, with improved workflows and less mistakes. CLM offers automated systems for contract authoring and approval to achieve these performance goals. 

Create a forecast of expenses and revenues 

The tracking of contracts should streamline effective forecasting of revenues and expenses. Precise forecasting is essential for operational efficiency and maintaining stakeholder trust, as well as developing thorough growth projections. However, building these forecasts based on individual contracts takes time and resources that could be refocused on other vital tasks and goals.

A contract management goal should be to generate these forecasts accurately and effectively. CLM software can create reports based on customized metrics and analytics for companies, teams, and industries, while also providing insights into the renewal process.

Automate and combine contract workflow 

When it comes to contract approvals, the more hands a contract goes through manually, the longer the process can take. This also comes with a heightened risk for mistakes in compliance, unauthorized access, and additional issues that lead to hidden costs. Almost all management principles and practices can minimize risk, and effective contract management does so while promoting a faster, more productive process.

CLM software helps teams achieve management goals by automating complex workflows for sequential, parallel, and conditional approvals. It also allows for easily managed workflows with outside parties, streamlined reviews with redlining and version control, and secured digital contract signing. Contracts can also be handled at different stages by personnel from various departments, such as procurement, sales, and legal, thanks to automated alerts and workflows.

Contract visibility 

Frequently, very little focus is spent managing contracts after going through the approval process. Yet, effective tracking and reporting of contracts during their lifecycles can lead to reduced risks and the ability to identify underperforming or obsolete contracts. This visibility allows you to identify troublesome language or elements needing improvement in future negotiations and helps decide when obsolete contracts should be terminated.

CLM automation ensures relevant team members can perform crucial tasks efficiently and that deadlines and other important terms are met, better preparing teams when contracts need to be renewed or ended. Contract management software can also track multiple contracts’ terms and obligations with the same party for improved renegotiations. Software helps meet the performance expectations of the organization, its clients, and stakeholders.

Create a complete audit trail 

Compliance is an important consideration for any organization’s contract management KPIs. Compliance issues caused by manual audits of contracts can result in costs from fines and damaged reputations. Creating audit trails required to meet these regulations is a time-consuming process but is extremely essential to prevent errors.

Effective CLM software tools help oversee an automated audit trail to provide compliance across contracts. Domestic and international regulations evolve over time, and organizations must be able to adapt contract language and processes as the laws change. CLM allows monitoring and seamless transitions to guarantee compliance.

By focusing on the principles of contract management and incorporating the correct enterprise-level CLM platform, a business can reduce the cost of contract management, manage risk and compliance, and meet performance goals.

For organizations wanting to take the first step in implementing modern CLM, they should begin the search with a third-party software research firm, preferably based on real customer experiences like Gartner’s Peer Insights. These sources provide real information, not marketing speak, on capabilities and customer experience, which business leaders can use to zero in on the right CLM solution to fit the needs of their organization.

Colin Earl, CTO, Agiloft (opens in new tab)

Agiloft CEO and founder, Colin Earl, is a software industry veteran with over 25 years of experience as a developer, product manager, and CIO. Colin worked at IBM, General Electric, and three start-ups before founding Agiloft in 1991. His vision was to accelerate the building and deployment of enterprise business applications by removing the need for manual coding. Under his leadership, Agiloft has achieved this goal, creating a market segment for agile business software.