What is contract management?
Contract management is the process of managing commercial contracts for vendors, partners, customers, and employees throughout every stage of the contracting process. Companies manage their agreements through a process called contract lifecycle management (CLM) and by hiring contract managers to expedite their contracting workflow.
The type of contracts that need to be managed vary by company, but might include any of the following:
- Sales contracts
- Purchasing agreements
- Employment agreements
- Outsourcing contracts
- Registration rights agreements
- Underwriting agreements
- Leasing contracts
- Consulting agreements
- Distribution contracts
- Intellectual property agreements
- Stock option agreements
- Underwriting agreements
- Software licenses
Because contracts define the nature of a business relationship from an operational and legal perspective, contract management is essential for organizations across every sector and discipline.
Failing to manage contracts correctly is also a costly oversight. According to the IACCM, the global contract management association, poor contracting practices lead to an average value leakage of around 9.2% of company revenue.
Every business runs on paperwork, and it doesn’t take long before effective contract management becomes critical to operational success.
Here, we’ll cover everything you need to know about contract management, how it works, who should use it, and why it matters.
Let’s get started!
1. Contract management: The basics
Contracts help an organization codify its business relationships and processes into a legally-enforceable framework that can be used to acquire the resources it needs to operate.
At a high level, business operations may seem similar from one company to another, but every organization requires different assets in order to produce an effective product or service.
This means that both the contract type and the contract terms will vary based on what your business needs. Every business must coordinate with different suppliers and vendors, hire specific employees, and enter into various partnerships in order to stay successful.
To make matters more complicated, each contract requires some form of action by the issuing business at each stage of its life cycle in order to remain actionable.
Considering that even a small organization might issue dozens or hundreds of contracts in a week, it’s easy to see how these essential documents can become disorganized without constant, consistent oversight.
There are two essential solutions for businesses trying to solve these problems:
- Hire a contract manager
- Adopt a contract lifecycle management (CLM) process
One of these solutions doesn’t exclude the other. In fact, many successful businesses utilize both CLM and contract managers to maintain their contracts and agreements.
Below, we’ll cover each solution in detail, as well as the benefits of a successful implementation.
A contract manager or a contract administrator manages all contracts made with customers, vendors, partners, and employees.
This individual is responsible for liaising between multiple departments and serves as a primary point of contact for external vendors and suppliers.
Contract managers may also be responsible for issuing invoices, resolving disputes, and providing information to both internal and external teams in order to ensure contract success.
Behind the scenes, a contract manager assists in assuring that contracts are organized, well-maintained, and stored in accordance with company policy and government regulations.
Education & certification requirements
Contract management roles often require a bachelor’s degree, usually in the fields of finance or business management. This position may also require a master’s degree, depending on the size and scale of the organization.
According to PayScale.com, contract managers can expect to earn between $53,000 and $119,000 per year based on location, experience, and qualifications.
Contract lifecycle management (CLM)?
Contract lifecycle management is a process that companies use to monitor and maintain their business contracts from creation through award, execution, and renewal. Using CLM allows businesses to save time and money by standardizing their contracting workflow.
By mapping the challenges that a contract will face at each step in the process, it’s easier to understand what needs to take place in order for that contract to remain active and valid.
Contract lifecycle management breaks down messy contract workflows into logical stages so that it’s easier for users, contract administrators, and legal teams to quickly resolve outstanding issues and move the entire contract further down the operational pipeline.
The 9 stages of contract lifecycle management
The exact stages of CLM vary from company to company, depending on their internal process and the number of departments that need to be involved at each step.
Here is an example of a contract cycle that contains the most common steps within the contract management process.
The request for a new contract usually arrives from the sales team, a hiring manager, or a project stakeholder who is close to reaching a tentative agreement with a client, vendor, or potential hire.
When the request is received by the contract manager or designated contracting authority within the organization, this individual notifies all relevant parties — including the legal department and financial team — and oversees the contract throughout its lifecycle.
Your contract manager may also provide a checklist to project stakeholders or request additional documentation in order to proceed with the procurement or expenditure.
2. Creation & review
During this stage, the contract agreement is both written and reviewed internally by your project stakeholders, legal experts, and the financial team.
For complex contracts with specific requests that go beyond a standard boilerplate, this process can take several rounds of negotiation before all teams sign off or approve the document.
At this stage of the process, a contract manager will liaise with each department and work to resolve outstanding issues that stop the contract from moving forward.
When sign-offs from all major departments are complete, the contract is ready to be sent from your company to the vendor, client, or employee.
At this stage, the contracting manager* sends the contract on behalf of the organization.
This is a minor but critical step in CLM because it introduces external partners to the contracting process and positions the contract manager as the primary point of contact to an outside source.
*Note: For hiring agreements and employment-related issues, human resources or hiring managers may take control of this process.
4. Negotiation & redlining
During this phase of the contract lifecycle, the business and the customer negotiate the terms of the agreement and finalize the details of the contract.
The contract may change hands multiple times, which is one reason that using a cloud-based central repository like PandaDoc improves the user experience for everyone involved.
During this process, a contract manager may act as a primary point of contact for each side of the negotiation, ensuring that both sides have the documentation that they need to finalize the deal.
5. Signing & capture
This stage of contract management signals that all involved parties are satisfied with the original contract and any negotiated changes.
All parties sign the contract — either physically or via electronic signature — and copies of the contract are captured by all parties.
The signing process can be challenging, especially if one side becomes unresponsive during the negotiation process or if new customer stakeholders get involved before the signing process is complete. Based on our internal data, 4 out of 5 changes to a contract is related to the signing process.
Your contract managers and project stakeholders can try to jumpstart negotiations and get their contracts signed more quickly by staying on top of this process and setting firm deadlines.
6. Execution, management & maintenance
When all sign-offs are completed, the contract gets underway.
External suppliers follow the letter of the contract to deliver goods and services to the organization, and the organization works to satisfy and maintain that vendor relationship.
During this stage, contract managers may act as the primary point of contact for any contracting-related issues that need clarification. They will also issue invoices, approve milestone payments, and ensure that the contract is maintained by both parties.
7. Storage & compliance and retention
All of your business contracts should be stored and maintained in accordance with company policy and government regulations.
During this stage of contract management, the original contract (along with any addendums or modifications) must be stored or retained based on government compliance and industry guidelines.
A contract manager may be responsible for organizing and maintaining all contract data in a searchable format so that all contracts are accessible in the event of an audit, renegotiation, or vendor conflict.
8. Performance & renegotiation
As contracts age, they may need to be renegotiated based on expected performance or upcoming expiry.
This requires pulling contracts out of storage or connecting with internal and external partners in order to maintain existing terms or set up a new agreement.
If either company has experienced a change in leadership, direction, or personnel, this process may spark the creation of an entirely new contract or result in the discontinuation of goods or services from the external party.
9. Analysis & optimization
The final step in contract lifecycle management is the most important process for ensuring organizational streamlining.
When your company amasses a sizable number of similar contracts, those contracts should be analyzed and optimized based on their goals and similarity. Multiple vendor agreements may be consolidated into a single company boilerplate that requires minimal modification.
This is also an opportunity to manage risk and ensure that contracts contain all necessary clauses to protect the organization. For example, one McKinsey study found that eight out of ten contracts failed to contain a benchmarking clause to mandate a period review of pricing against industry standards.
Optimizations around contracts an expedite all stages of CLM while making it easier or contracting managers or administrators to maintain agreements at every stage of completion.
The contract is analyzed along with other contracts for better opportunities around performance and negotiation, and templates are created to expedite the process in the future.
Signs of successful contract management
Businesses without an effective contract management system in place may jeopardize themselves by falling out of legal compliance and misplacing key components of their business infrastructure.
Unmanaged contracts can complicate internal processes and expose a company to risk. Without a clear process, it becomes difficult for vendors to resolve outstanding issues and for employees to track the quality of the products or services they receive.
Lacking an effective system or failing to follow standard CLM practices makes contracts more difficult to manage and much harder to track, especially over a longer period. When a contract must be enforced, something that can take nearly 370 days in New York City, the company may need to preserve that contract and all relevant documents for an extended amount of time.
Successful contract management solutions help your business alleviate these problems, lower costs, and optimize contract creation time.
Here are just a few benefits that organizations who maintain an effective contract management strategy enjoy:
- Estimate costs and expenditure on every contract with greater accuracy.
- Seamlessly set up and track new contracts.
- Ensure compliance with industry-specific regulations early.
- Stay on top of contract renewals.
- Standardized management of contracts.
- Boilerplate and template agreements.
- Easily keep track of contract revisions during redlining.
- Enhanced visibility on spending.
- Reductions in rogue expenditures.
- Performance analysis based on contract data.
2. Contract management software
So far, we’ve talked about contract management and the essential role that contract lifecycle management and a contract manager can play within your organization.
This setup works well for businesses with enough capital to hire a dedicated contracting specialist, but what about smaller businesses who may need to manage contracts but lack the funding to hire a contract manager?
In those cases, contract management software may serve a similar solution for small business use. It can also help larger organizations with dedicated specialists maintain their contracts more effectively. This is key, considering that a standard contract costs an average of $6,900 with mid- and high-complexity contracts ranging into the tens and hundreds of thousands.
Let’s take a look at how you can use software and automation to streamline your contract administration process.
Who should use contract management software?
Right now, about 65% of businesses currently use a contract management software solution, according to the Corporate Legal Operations Consortium. You can find a use case at all stages of business.
Here are a few examples of candidates who would benefit from a software solution:
- Small businesses who regularly issue contracts but lack the budget to hire a dedicated contract manager.
- Large businesses with a contracting specialist that want to optimize their contracting workflow.
- Organizations looking to transition to a cloud-based environment to handle contract management, e-signatures, and safe, dedicated storage.
Contract management software might not be a great fit for everyone, especially freelancers and ultra-small businesses might only maintain a small number of contracts at a given time.
However, the majority of businesses — especially service-based businesses — need a contract management solution in order to stay on top of their agreements and ensure and understanding between the services they provide and the deliverables that the customer receives.
What does contract management software do?
In short, contract management software helps your team digitize their contracting workflow and manage documents more effectively across every stage of contract lifecycle management.
That could mean different things for your business, depending on how you operate.
A digital solution can help your business stay more organized while reducing inefficiencies during your negotiation and signing processes. This helps you keep overhead low and protect your business from legal disputes and compliance penalties.
Let’s take a look at some of the most useful features that contract software provides at the various stages of contract lifecycle management.
Request, creation, and review
In the early stages of CLM, formal contract creation requests might be made via email or word of mouth in the office. As soon as your contract manager is notified, the contract creation process begins.
In most cases, a contract will be created in a word processor like Microsoft Word or Google Docs before being sent around the office for input and feedback from various teams.
Advanced contract management software solutions like PandaDoc actually have built-in contract creation — including word processing, template formatting, and document variables — so that you can create and store all contracts in one place!
Negotiation, signing, and execution
Once a contract is finalized internally, the contract manager loads it into the management software.
Most contract management software converts the document to a PDF and allows users to manually create fields for e-signatures, initialing, and sign-offs.
If your software is connected with a CRM like Salesforce, you might also be able to retrieve contact information or link the contract to the CRM profile for the business. Many software options provide analytics so that you can see who has viewed the contract and how long they spent reviewing each page.
In cases where drastic changes need to be made due to renegotiation, the offline version of the contract might need to be altered and re-uploaded before the signing process can take place.
Some advanced software solutions allow your contract manager and internal team to collaborate with customers inside the document and make changes on the fly.
These approval workflows make it possible to update the document in real time and save the tedium involved in revising offline. This is important, especially considering that 1 in 4 contracts experience changes to the document content after the initial agreement is sent to a customer.
PandaDoc even allows you to integrate with a payment gateway so that you can accept payments to a contract without needing to send a separate invoice.
Management, storage, and compliance
In most cases, this is where contract management solutions shine. Because everything is digitized through the software, contract managers have a much easier time keeping track of essential documentation.
Most effective contract management solutions have a way to tag contracts or link them to company profiles (through integration or an onboard CRM) so that your entire contract database is well-organized and searchable.
The best software options ensure that your data is secured both in transit and at rest. With cloud-based services, you should also consider companies that fully secure and protect your documents with security protocols that are trusted around the world.
Renegotiation and optimization
When your contracts are appropriately stored and tagged, it’s easy to recover old contracts during the renegotiation phase.
Many software solutions will notify your team when a contract is nearing its expiry so that you can begin the renegotiation process before time runs out.
Properly-managed contracts are also easy to examine in sets and groups. If you’ve tagged your contracts correctly, your team can easily review a specific contract type and use that contract data to create a template or boilerplate for future contracts.
With PandaDoc, you can even upload that contract template to your personal template library or use a pre-built template to start fresh in order to streamline your creation process even further.
Essential tools for modern business
While contract management software can help you keep contracts organized, it also gives your team the ability to work digitally — something that is critical to success for many businesses today.
As Reuben Yonatan, CEO of GetVoIP, points out:
“Customers aren’t always going to be able to meet in the office to discuss contracts. Users aren’t always going to have a contract on-hand if they convert a lead.
Being able to send sales contracts that are scalable for phones and tablets can help improve the overall experience by letting customers view the contract on their way to work or whenever they have downtime. This can help users who are looking to seal a deal quickly without losing momentum.”
One of the biggest benefits of contracting software is that you can communicate and collaborate with customers over digital mediums.
While it’s true that you can offload some physical limitations by sending email attachments, contract management software provides essential tools like e-signing and workflow automation that makes effective contract management easier than ever.
The bottom line
Contract management is essential for most businesses, but it can be difficult to stay on top of all the paperwork if you do it all yourself.
Fortunately, there are tools and resources to help you along the way. Effective contract lifecycle management, a contract manager, and contract management software are three major ways that companies keep contracts organized and up to date.
Whether you’re a small business entrepreneur or a contract manager looking for an effective software solution for your business, PandaDoc can help!
Streamline your contract management workflows and more with PandaDoc.