The main purpose of a contract is to link all business agreements, mitigate all risks in these agreements and create strategic relationships. In this way, contracts usually go through 7 stages of contract management.
Contract management has taken on a greater role in the daily tasks of a business today. This is happening because companies are working towards being more efficient, i.e. increasing productivity, without necessarily having to increase their headcount. As the number of contracts in business transactions increases, there is an urgent need to save time in contract management and not take up even more.
A comprehensive understanding of the contract management process minimises time and effort spent on administrative tasks and enables the goal of speeding up the search for new contracts and automating existing contracts.
Essential Phases of Contract Management [7-steps framework]
Stage 1: Preparation - identify needs, set goals, define expectations and risks
In the first phase of contract management, the most important thing is to clarify the basic conditions for a healthy contract life cycle.
Contracts are legally binding documents that should not be taken lightly. It is therefore important to be organised and prepared with the right resources.
If you correctly identify the need, the reasons and the goals that make a contract necessary, immediately all further decisions become much easier.
Contract management should:
- Try to define and mitigate risks in a relationship
- Anticipate potential scenarios that may occur during the life of the document
- Consider different outcomes in the contract
For example, the terms and conditions within a contract should specify what happens if the client files for bankruptcy, goes out of business or sells the company, along with any other contingencies that may arise.
Another example is a contract on pricing conditions for customers. The goal here is to financially secure the company in each scenario and ensure payment once the tasks specified in an agreement are completed.
In this initial phase, it should always be noted that good contract management should ensure strong business relationships by bringing together the mutual interests in a contract in an efficient and transparent manner
Once the reasons for drafting a contract have been fully clarified, it is time to start drafting the contract.
Stage 2: Draft the contract
As soon as it comes to the actual drafting of a contract, it is quite advisable to consult a lawyer, especially if there are ambiguities.
Even better, provide your non-legal users with a contract playbook that has been configured by your in-house lawyers. This will ensure that all business scenarios comply with current standards and that all necessary clauses and conditions are automatically included.
When drafting the terms of the contract, it is important to ensure that the wording is precise. Any ambiguity leaves contracts open to interpretation, even down to a comma. The laws of the respective state and country must also be taken into account, especially if the two parties are in different locations.
Stage 3: Obtain approval before concluding the contract
In contract management, this stage is quite natural: in companies that require manager approval or have audit procedures, all requirements for approval must be met before the contract is finalised.
For example, a company needs to meet procurement guidelines before approving a contract. Using contract management software, this process is as simple as setting up an approval workflow. This way, anyone who needs to approve the contract receives a notification and can view, edit and comment on the contract in real time.
Stage 4: Conduct contract negotiations
Regardless of how much research, planning and preparation goes into the first draft of a contract, negotiation almost always follows. Contract negotiations should begin with transparency and trust. Anticipating and researching the needs of the other party before the conversation simplifies the process and creates a strong foundation for a lasting relationship.
Again, when redlining begins, it is easiest to use a contract management platform so that both parties can view the working document to make changes and collaborate in real time.
Emails and offline documents can be confusing and cause costly mistakes, but a single "source of truth" for talks and contracts, leads to faster negotiations and a contract that is transparent for both sides.
Stage 5: Signing of the contract
Signing should actually be the easiest stage of the contract life cycle. Both parties agree that the wording is exact and the next step is simply to make it official.
Nevertheless, in practice it is usually different: Many companies conclude contracts not locally but across the country or even the world, and getting signatures is not as easy as meeting in person. Especially when deadlines are tight or time zones are not convenient for both parties, overnight mail or even email may not be the best way to get signatures faster.
Contract software that supports legally binding electronic signatures (e-signature) can solve all these problems and allow you to move faster, get signatures and increase sales.
Level 6: Keeping up with changes and revisions
Contracts are rarely stagnant. Revisions and amendments are a common part of the contract life cycle. Keeping track of changes and their implications for each party can be confusing.
This is another reason to implement a reliable process to easily record edits and changes. It is important to keep track of changes and ensure that both parties are aware of and agree to all revisions. Again, the appropriate contract management software can help by fully automating this.
Step 7: Manage contracts after signing
Contract management does not end with the signing of a contract. The last essential phase of contract management involves the actual administration of contracts. After all, once contract documents have been signed, they must be archived and managed in a plausible manner. Here, conducting regular audits from time to time ensures that all parties fulfil their obligations and realise value.
Reminders should be set for deadlines and renewals. Missed renewals mean missed opportunities to continue a business relationship. This clearly has consequences that may be the most important for a company: lost revenue.
Awareness and contact well in advance of the renewal date conveys reliability and valued maintenance of business relationships. Furthermore, this effort further builds trust and loyalty.