Contracts and contract management
In order to be able to grasp the topic of contract management properly, we would first like to take a closer look at the basic topics "What are contracts", "Why are contracts complex" and "What are the tasks of contracts".
What is a contract?
Contracts are an integral part of our economic life together. They are everywhere you look. From everyday employment contracts that govern the working relationship between employee and employer to less common share takeover agreements that govern the acquisition of shares in an acquisition.
According to the definition on Wikipedia, a contract is the agreement declared by two or more contracting parties on the establishment or substantive amendment of a debt relationship (see also § 311 BGB). It is based on at least two concurring declarations of intent.
A contract therefore only becomes effective if there are at least two corresponding declarations of intent, namely offer and acceptance, with regard to the essential content of the contract.
The definition alone is complex and a number of conditions must have occurred for a contract to be valid in its simplest form. If you add some conditions and qualifications, you quickly get a very complex work, which often can be fully penetrated only by experienced persons.
Contracts are used in every department and industry - by companies of all sizes. Here are some types of contracts that are used in companies:
- License agreements
- Certificates of achievement
- Service Level Agreements
- Order data agreement
- Confidentiality agreement
- Employment contracts
- Rental agreements
Why are contracts complex?
Contracts in sales and many other areas often have to regulate several matters at the same time. On the one hand, for example, the supply side must be understood - that is, what is being sold at what time and how much of it. This includes a comprehensive description of the services and products offered.
In the description of the offer also already begins the further essential task of a contract: The delimitation of the risk for offerer and buyer. Both parties should define in detail what is the subject of the contract and what is not. In this way, misunderstandings can be settled at a glance in the contract. However, as products become increasingly complex and are developed for specific uses, the description of them also becomes more and more comprehensive.
According to the product description delimiting the offer, the limitation of liability, warranty or exclusion of liability is an essential part of any contract. This part serves to further limit the risk in the event of damage.
The above-mentioned elements, regulation of the offer and limitation of liability must be taken into account by all contracting parties. One-sided contracts that are written exclusively for the benefit of one party rarely find buyers in the B2B environment. More frequently, one encounters contracts that must take into account both or, in the case of multiple contracting parties, many items. As a result, the contract grows in scope and complexity, since exceptional situations often have to be taken into account.
What are the tasks of a contract?
In summary, the following primary - but not exhaustive - tasks of a contract can be noted:
- Basic recording and documentation of a business or transaction
- Description of the offer / description of the services
- Delimitation of the offer
- (Monetary) consideration upon acceptance of the offer by the accepting party (prices and payment terms)
- Terms of delivery / performance (when, how and where the offer must be delivered or performed).
- Limitation of liability for the provider
- Limitation of liability for the customer (damage that continues to eat away)
How can a contract be concluded?
Contracts can be concluded orally or also by handshake... Electronic contracting is also possible, whereby a mouse click can be legally binding at the latest since the EU regulation of 2014.
In any case, it is important to be able to prove the conclusion of a contract, which is why oral contracts should be concluded or recorded in the presence of a witness if they are agreed in the course of a telephone conversation or video conference. In some cases, however, the law explicitly requires the written form.
For complex contracts, the oral agreement is not suitable, as the advantage of a written or electronic agreement is that all components of the agreement can be retrieved again afterwards without any doubt and at any time. This can occur as soon as there is a disagreement or details of the contract are no longer remembered in detail.
During the oral agreement, details are often not exhaustively discussed or the parties can only reproduce fractions of the agreement. In the event of damage, such agreements often end in disaster.
Why are the details of a contract important?
A contract is the legal basis for how agreed transactions are conducted. The details of a transaction are essential to the settlement of mutual obligations. Agreed terms and conditions must be implemented unless they violate applicable law.
Since changes to agreements after they have been legally signed are only possible if all contracting parties agree, one is well advised to check contracts thoroughly in order to avoid mistakes.
Moreover, the path to an amicable settlement is often blocked as soon as the damage has occurred or the parties are in dispute. In both cases, the amounts at stake are usually large and can constitute the beginning of a crisis. As is well known, the devil is in the details.
At this point, contract management can help to significantly reduce the risks posed by incorrect data. For more information, see the chapter on contract management.
Why should you always work with experts for contract processes?
Contracts, as explained above, are complex constructs whose description and delineation often manifest themselves in complex language. The use of experienced negotiators has the advantage that these constructs can be quickly identified and comparatively quickly replaced with alternative clauses if the first version is not to your company's advantage.
Experience in the negotiation itself as well as in the subject matter of the contract to be concluded is advantageous for a successful conclusion, since only this knowledge - how to act correctly in a negotiation situation and which points a company in this industry cannot do without - makes an adequate approach possible.
Experts can thus bring your contracts to a conclusion more quickly and, if necessary, make the pie bigger for all parties through skillful negotiations.
A well-rehearsed and clearly defined process through efficient contract management can also help in negotiating contracts, relying on traditional paths to generate added value in negotiations without losing sight of the risk perspective.
What Is Contract Management?
"Contract management is the process of providing administrative support for contract creation, negotiation, administration and signing. The task of contract management is to optimize each of these process steps so that they can run without friction losses. A number of administrative measures are used in this process."
In the simplest case, the process of contract management is just managing and filing contracts in a filing system with the goal of speeding up access to documents when needed. In the simplest case, this would be a hanging folder. There is usually no analysis of the data contained in the contracts or management of the contract beyond its conclusion.
At the other end of the contract management spectrum is contract lifecycle management, or "CLM" for short. In this case, contracts are managed administratively over their entire lifecycle. Thus, at the beginning of the process is contract creation, which is operated within the framework of a fully comprehensive CLM system via coordinated templates. In contrast to a simple contract management system, contracts continue to be monitored even after they have been concluded.
What are the tasks of contract management?
As stated above, contract management encompasses all aspects of managing contracts for customers, from initial negotiations to final payment. This includes reviewing contracts, negotiating terms, setting up contracts, and ensuring compliance.
The contract management tasks listed below can be performed without the use of dedicated software, although the implementation of these functions can be performed much more efficiently with the help of specialized tools.
- Categorization of contracts and development of a filing system to quickly find contracts again
- Filing and management of contracts
- If necessary, digitization of contracts in paper form
- Extraction of metadata, key parameters and deadlines of concluded contracts
- If necessary, integration and provision of key contract data in selected software systems
- Regular risk assessment of the contract portfolio (evaluation of the contract portfolio for cluster risks)
- Granting access rights to authorized persons
- Audit-proof filing of emails and correspondence that led to the negotiation result
- Reminders for responsible persons on important deadlines
- Creation of templates for important contract processes
- Attachments of guidelines and manuals for the preparation of contract documents
- Preparation and implementation of guidelines for the negotiation of contracts
- Establish approval processes for the release and shipment of contracts
- Establish a signature process for selected contracts
What is contract management software?
Contract management software (CMS), or contract lifecycle management software (CLM), is a type of enterprise software that helps organizations manage and create their contracts in an organized manner. In this regard, contract management software can be used to manage, create, negotiate and sign all types of contracts, including service level agreements (SLAs), supplier agreements, supply chain agreements and others.
Through the use of software, the tasks of contract management defined above are taken over partially or holistically by specialized software. In the case of contract storage, for example, the software manages all contracts and the access authorizations for authorized persons. This means that process owners can always access contracts without having to go on a lengthy search, and contract data as well as deadlines and scope of services can be called up effortlessly.
Organizations without contract management software often rely on tried-and-true tools like Microsoft Excel and network drives to manage the details of signed contracts and file the contracts themselves.
This often makes working with the information contained in the contracts a lengthy process, as contracts and data are stored in at least two independent management systems. Authorizations must exist for both systems, and the data must also have been carefully processed in order to be available when needed.
Both are rarely the case in practice. The search for the data thus quickly becomes a gauntlet.
In addition to easy access, the audit-proof storage of contracts is also a core task of contract management software. Access to electronically stored contracts is saved in an audit-proof log file and all files are technically protected against subsequent changes. Protected in this way, contracts can also be accessed securely via mobile devices if employees need access while on the road or from the home office.
How can contract management software help with contract creation?
In addition to the management and archiving of contracts, the automatic creation based on existing templates is one of the core tasks of contract management software. Data in other systems, such as CRM systems, in which customer and product data is managed, can be taken into account when creating contracts.
This means that data does not have to be re-entered several times, which can often lead to errors. Employees can thus save a great deal of work time by using contract management software to create contracts for the same documents over and over again. It is also possible for the sales department or other specialist departments to create contracts using a software-based contract wizard without a great deal of prior knowledge.
The contract management software can also take into account different scenarios during contract creation or negotiation. Additional explanations and assistance in the form of videos support employees in selecting the right clauses. The generation of the documents can be controlled completely dialog. The input controls the result of the contract.
In the process, numbers, totals, dates and deadlines that are dialog-based can be queried and used to show or hide paragraphs. In this way, contracts can be created appropriately for the respective scenario with just a few entries. The author does not have to deal with complex contexts or legal issues during contract creation, as this is controlled automatically and rule-based by the software.
After successful creation via the contract software, the created documents are automatically filed and can, if necessary, be forwarded via a secure link to other contracting parties for signature and negotiation, or if this is not desired, individualized Word documents or PDFs can be created in layout and sent by email.
From a legal point of view, the automated creation of contracts via contract management software offers the advantage that all contracts are created on the basis of legally reviewed and approved text modules, which can be easily kept up to date via a central editor for all templates. Alternative clauses can be added and further text modules can usually be conveniently added via the editor.
As a result, even complex documents can be easily created by legal laypersons and the involvement of the legal department is no longer necessary for standard contracts.
Often, multiple templates can also be traced back to one template for different scenarios through the use of intelligent control elements. The maintenance time for templates can thus also be reduced.
In combination, automatic contract creation results in fewer typing errors due to the transfer of data from other systems, shorter response times when creating contracts, and easier maintenance of templates.
Version management and negotiation of contracts
In the aftermath of a contract negotiation, even years after the contract was concluded, it can be important to determine who had comments at which point in the document and what the respective intention of the respective contracting party was at that point. This is particularly important in order to be able to determine, in the event of any disputes, how this arrangement came about and what was actually meant at this point.
Even in the current negotiation phase, it can be important to be able to determine what was changed in the contract during a negotiation. Contract management software currently takes two different approaches to negotiation and version control.
One direction is software-based matching of Word documents created during negotiation. In this process, the discrepancies between two Word documents are identified and then approved by an authorized person. The prerequisite for this is that each contract version has been saved separately and the contract software uploaded. In practice, this requirement poses great challenges for employees, as in large negotiation rounds, comments and changes are received via email and changes regularly overlap.
The other path currently being pursued by software providers of the younger generation is the direct negotiation of contracts via the software. For this purpose, no Word documents need to be created initially, and contracts can be negotiated internally first and then externally with other contracting parties.
The changes are always identified directly in the software (redline) and deviations do not first have to be identified through a tedious comparison of several documents. In addition, innovative software providers also offer a separation between internal and external negotiations to ensure that internal comments remain internal and are not passed on to the customer. In any case, even after the contract has been signed, all changes and comments can be traced back to all parties at any time, without major administrative effort.
Of course, even these innovative software vendors, offer the possibility of downloading the contracts as MS Word document at any time, should the customer want to go back to the old world (although we would not understand).
Integrations into existing applications and why this makes sense
Software applications usually do not exist in isolation, but must communicate with other software suites. This starts with the integration of Excel spreadsheets into Word documents and continues with contract management.
Customer data is often already stored in CRM or SAP applications and must be taken into account during contract creation. If there are no direct integrations, then address data of the counterparties must be entered laboriously.
The same applies to key parameters that have already been agreed. In an organization based on division of labor, conditions for cooperation are already stored in the CRM systems for the sales people. The legal and sales support departments in turn have to incorporate these parameters into the contracts when they are created in order to be able to offer customers the desired products or services at the agreed conditions. Missing integrations in turn mean duplicate input into the contract editor.
Modern contract management software can accept data from other systems via a dedicated API and process it during contract creation. This means that data does not have to be entered multiple times, which significantly reduces the frequency of errors.
Once negotiations have been completed, the agreed conditions must in turn be passed on to an accounting system or an enterprise resource planning system. Here, too, without integrations into existing software structures, there is a risk of tedious and inefficient duplication of entries. In any case, contract management with and without integrations into other software applications must be able to retrieve all contract data for controlling and compliance reasons.
Contract management with non-digitized contracts
Paper contracts unfortunately remain a necessary evil in many places around the world. However, the number of companies that actually still use physical contracts is steadily decreasing as a generation of new business leaders takes the helm and paper-based contracts burden companies with a multitude of disadvantages. The audit-proof storage of contracts alone presents companies with major challenges.
The digitization of contracts should therefore always be at the forefront of contract management. With the growing use of cameras on smartphones, the necessary infrastructure should be ready to hand. Once contracts are available in a digital format, the original and signed documents should only be kept as a backup for emergencies. Access and work with the contracts should then always be done via the digital version.
Using OCR (Optical Character Recognition) software, contracts can even be converted from conventional PDF documents, which usually display the document only as a photo, into text documents that can be easily edited in a text editor.
The use of artificial intelligence also enables the search and evaluation of the documents processed in this way according to selected parameters down to selected text passages.
What role does the GDPR play in contract management?
With the introduction of the General Data Protection Regulation (GDPR), the rights of data subjects with regard to the transparency of data processing have been strengthened. Thus, data subjects have a right to information about the processing of their data. At the same time, rights to rectification, erasure and restriction of processed data were created.
Contract management should therefore be in a position at all times to respond quickly to requests from data subjects with an evaluation of all personal data processed within the scope of contracts that relate to the person making the request. Correct and continuous updating of data by contract management is therefore necessary for compliance reasons.
What role does accounting play in contract management?
Accounting is one of the most important customers of contract management. Contracts must be posted regularly and evaluated and processed for reporting. Corrections to contract data must always be reflected by accounting without long delay. Invoices must be created and sent on the dates that were agreed upon during the contract negotiation. (Automatic) reminders for the invoice dates are therefore often necessary. If necessary, provisions must also be set if the billing period and service provision do not coincide.
Patchy contract management can therefore also pose major challenges for the accounting department.
Contract controlling - what is it and why is it important?
Controlling is a collective term that includes planning, coordination and control of the company. Contract controlling as a subarea of corporate controlling provides the necessary data resulting from contract processes as a basis for further planning and control of the company. Contract controlling is thus also the ongoing monitoring and risk management of concluded contracts.
A contract concluded with a customer usually results in a number of obligations that the company had better fulfill in order to avoid having to pay contractual penalties or having to reckon with a reversal of the transaction. A company must therefore know at all times which products or services must be delivered to which customers and by what deadline, and which raw materials or employees it needs to do so.
The task of contract management is to support the company with the necessary data and analysis to assess the risk on the one hand and to plan the necessary resources on the other.
Usually, traditional Excel spreadsheets are used in many companies to record master data, material data and deadlines. The disadvantages of this very static data processing are obvious. All changes, renegotiations and follow-on sales must be properly entered into the database in order to be taken into account in planning. Entry errors and discrepancies can lead to high costs and insufficient risk provisioning.
Innovative systems can automatically read out this data and forward it to the necessary points in the company. The automatic recording of the data means that input errors can be avoided. Even during renegotiation and changes to contracts, the data is always available in the correct form. The company can thus make strategic important decisions based on correct data.
Regardless of whether contract controlling is carried out with the help of contract management software or without its use, the transparency from contract controlling provides managers and department heads with valuable and necessary transparency for strategic planning.
What role does contract controlling play in identifying and assessing contract risks?
The German Act on Corporate Control and Transparency (KonTraG) of March 5, 1998, at the latest, requires companies to introduce and operate an early warning system for the detection of risks. This is explicitly stated in Section 91 (2) of the German Stock Corporation Act (AktG), which requires the Executive Board to "take appropriate measures, in particular to set up a monitoring system, to ensure that developments that pose a threat to the continued existence of the Company are identified at an early stage." Such "developments jeopardizing the company as a going concern" usually result from the aggregation and combination of individual risk positions that are not in themselves a cause for concern. This fact obliges companies to carry out a risk analysis and risk aggregation on a regular basis. In this context, contract controlling helps to identify major risk positions at an early stage and to take precautions via appropriate measures.
Contract controlling can efficiently support risk management in identifying, assessing, controlling and monitoring risks, provided that all contract processes are consolidated in one database or software.
Why good contract management is important for the research evaluation of contracts
The simplest use case for contract management is to retrieve an existing contract with a customer. This can be done relatively easily if the customer contracts are filed alphabetically by organization name. If one wants to find all contracts of a certain contract type, this filing system poses great challenges. In this case, one would have to go through all the folders and check the documents one by one. This is very inefficient and time-consuming.
Filing systems that are suitable for risk evaluation offer not only an evaluation by counterparty but also the possibility of filtering contracts by key parameters and limit values. This makes it possible, for example, to generate a very detailed picture of the concluded contract risks without much effort. For contract extensions or changes, it would also be possible with this function to display all customers whose contract has a specific product.
A search based on paper-based contracts would clearly be the worst scenario for a simple search as well as for the evaluation of individual parameters. For both cases, a chronological review of all contracts would be necessary.
Contract management software therefore offers not only fast retrieval of stored contracts, but also various filters to narrow down the number of relevant contracts and display evaluations within a few seconds.
What does a complete contract management process look like?
1. creation and management of the contract templates
In a first step, the legal department, together with the responsible specialist department, sets up the templates for the contract process and determines the responsible persons for the release of the created contracts and revision of the templates.
In some cases, a number of templates must also be defined at this point, which can only be issued to the customer together. This is the case, for example, with master agreements and individual service certificates.
Usually, this step also defines the data that must be optionally or mandatorily collected and processed as part of the contract creation process.
2. structuring of the contract creation process
In this step, it must be determined who may create contracts based on the contracts provided and who negotiates the completed contracts with the customers, if necessary.
In case a fixed sequence of contracts has to be negotiated with the customer, it is also necessary to determine the sequence of contracts to be concluded and, if necessary, the sequence of signatures (internal and external).
3. physical or electronic contract management
It is important in this step to determine how the data will be managed and categorized so that it can be easily located for post-processing or review. In a traditional paper-based system, the issue of location of custody is paramount. In electronic custody via a traditional file system, one is more concerned with the circumstance of organizing the electronic folders. This type of contract management is also called an electronic file.
Both systems, physical and electronic administration, are actually not suitable for a quick search or evaluation. The reason for this is that the desired contract can only be found via the category or index of the administration system, which is usually the name of the counterparty. However, a search via contract parameters does not lead to success in any case.
Further questions that need to be answered at this point: Where are the finalized, negotiated and signed contracts filed by contract management and in what form is this done? Who has access to the filed contracts and who is responsible for recording the key data required for further work in the organization and where are these recorded and managed?
Centralized management of contracts through contract management is worthwhile with or without the use of specialized software. It is important to check with the contract management whether all the predefined and related contract types are available and whether all the mandatory data has been collected or negotiated.
Contract management must also provide processes to bring the matter to closure in the event that data or contracts are not complete.
4.Deadline management, contract extensions and other changes
After preparation, negotiation and filing, deadlines for contract extension or fulfillment of owed services or product delivery must be observed. Deadlines and the resulting tasks must also be assigned to the responsible persons.
Clear processes must be established for the implementation, monitoring and fulfillment of tasks, and compliance with these processes must be continuously monitored by contract management.
Also for the very important case of contract renewal, work steps have to be defined and automatic reminders have to be created to inform the involved persons in time.
Since many organizations may regularly make adjustments to their product portfolio, contract management should also be involved in this case in good time. In this case, contract management should already have defined processes ex ante in order to initiate potential changes to existing contracts in good time. Responsibilities and tasks should also be well defined in the event of changes to an existing contract in order to avoid chaos.
By using contract management software, all deadlines can be managed through an efficient system and renewals and changes to the contract can be easily handled directly through the software at the appropriate time. Deadline monitoring and renewal tasks are easily and usually automatically created.
5. archiving and cancellation of contracts
In due course, it may be necessary from a legal perspective to delete contracts after the end of the retention period. This also requires a well-designed and defined process so that all responsible persons know what the next step is at the appropriate time and work steps can be carried out efficiently.
What points should you look out for when choosing contract management software?
Currently, the market for contract management software is dominated by a number of traditional providers who approach the issue via the topic of document management, but a few innovative manufacturers, such as top.legal, have also ventured into this still very young market with their software.
Since the different providers have different focuses, it is worthwhile to find a software that matches the internal requirements. The following questions often serve as a guide through the software jungle:
- Which steps of contract management should be covered by the software?
- Are there coordination difficulties between the legal department and sales?
- Do you want to map charts and tables in contracts?
- Are your deals delayed because your contracts have to be thoroughly reviewed by the legal department on the other side first?
- Where in the process do you see bottlenecks in contract creation?
- How do you manage your contracts and how does department access the contract parameters?
- Should in-house employees be able to create contracts on their own?
- Should the software manage the templates?
- Do you need a granular rights system for editing templates and contracts?
- Do you create the contracts in sales or does your organization rely on the customer's contracts?
- Which contract processes should be automated?
- Do you already use a digital signature or would you like to introduce it for contract processes?
- Which system should be able to be addressed by the contract management software?
- Which languages must be able to be displayed via the software?
How to tell if you need contract management or contract management software
As we have shown in this article, the need to set up a contract management system already applies to a small number of contracts. In particular, the question of counterparty risks alone should be a decisive factor for companies from the midmarket and naturally larger companies to implement comprehensive contract management. The only question is whether and where the use of contract management software is worthwhile.
To determine this, it is worthwhile to determine where in your company most contracts occur, and how much time is spent creating and managing contracts in that department.
In the following, we will address departments or business functions whose processes often benefit from the use of contract management software.
- Sales: Contracts are the daily bread of sales. Contracts conclude business transactions and regulate the business relationship. The conclusion of a contract is regularly associated with the receipt of money, which keeps the company afloat. Non-efficient contract processes can cost up to 9.2% of the annual turnover. Professional and agile contract processes not only minimize costs and risk, but also increase revenue and customer experience.
- Legal department: Legal departments are regularly distracted from actual business and more complex issues with trivial questions about standardized contracts. In addition, legal departments regularly complain about missing or insufficient compliance by sales. Modern contract management software can help at this point, answering recurring questions directly through the software and creating automated contract processes to provide alternative clauses and optional designs for the organization. Using an analysis module in the contract management software, the legal department can also easily determine which legal risks are located in the organization at any time.
- Purchasing: Purchasing has the task of saving costs in purchasing and at the same time increasing the scope of services. At the same time, purchasing must be able to determine whether software is already being used in other parts of the organization and whether there is any over-coverage. This requires good contract management in order to be able to determine at any time which services have already been purchased by the company. In addition, the risks in the event of service provider failure can be broken down precisely and precautions can be taken if necessary.
- Human Resources: The Human Resources department is involved in the drafting of personnel contracts on a daily basis. In many cases, internal or external lawyers have to be called in for this purpose. In addition, salaries and contract terms must be evaluated regularly. Contract management software can help to create personnel contracts in a guided manner without having to rely on the resources of the legal department. When negotiating contracts with employees, the contract management software can also provide support.