The primary purpose of a contract is to link all business arrangements together, to mitigate all risks in these agreements, and to create strategic relationships. In this way, contracts generally go through 7 stages of contract management.
Contract management has now taken on a larger role in the daily tasks of a company. This happens because companies are working towards working more efficiently, i.e. increasing productivity, without necessarily having to increase their number of employees. As the number of contracts in business transactions is increasing, it is urgently necessary to save time in contract administration and not take up even more.
A comprehensive understanding of the contract management process minimizes time and effort spent on administrative tasks and enables the goal of speeding up the search for new contracts and automating existing contracts.
Here are the 7 essential phases of contract management:
Stage 1: Preparation — Identify needs, set goals, define expectations and risks
In the first phase of contract management, it is particularly important 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 organized and prepared with the right resources.
If you correctly identify the needs, reasons, and goals that make a contract necessary, all further decisions immediately become much easier.
Contract management should:
- Try to define and mitigate risks in a relationship
- Anticipate potential scenarios that may arise during the life of the document
- Consider different results in the contract
For example, the terms of the contract within a contract should spell out what happens if the customer 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 aim here is to financially secure the company in every scenario and to ensure payment as soon as the tasks specified in an agreement have been completed.
In this initial phase, it should always be noted that good contract management should ensure strong business relationships by bringing together mutual interests in a contract in an efficient and transparent way
Once the reasons for drawing up 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 highly advisable to consult a lawyer, especially if there are ambiguities.
It is even better if you provide your non-legal users with a contract playbook that has been configured by your corporate lawyers. This ensures that all business scenarios comply with current standards and that all required clauses and conditions are automatically included.
When writing the terms of the contract, it is important to ensure precise wording. Any ambiguity leaves contracts open for 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 located at different locations.
Stage 3: Obtain approval before concluding a contract
In contract management, this phase is quite self-evident: In companies that require approval from the manager or have audit procedures in place, all approval requirements must be met before the contract is concluded.
For example, a company must comply with procurement guidelines before contract approval. Using contract management software, this process is as easy 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 start with transparency and trust. Anticipating and researching the other party's needs before the interview simplifies the process and creates a strong basis for a lasting relationship.
Once redlining starts, it's also 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 expensive mistakes, but a single “source of truth” for conversations and contracts results in faster negotiations and a contract that is transparent to both parties.
Stage 5: Signing the contract
Signing should actually be the simplest phase of the contract life cycle. Both parties agree that the wording is accurate, and the next step is simply to make it official.
However, the situation is usually different in practice: Many companies do not conclude contracts locally, but across the entire country or even worldwide, and getting signatures is not as easy as a personal meeting. Especially if deadlines are tight or time zones are not appropriate for both parties, sending mail overnight or even by email may not be the best way to get signatures faster.
A contract software that is legally binding electronic signatures (e-signature) supports, can solve all these problems and allows you to move faster, get signatures and increase sales.
Stage 6: Keep pace with changes and revisions
Contracts are rarely stagnant. Revisions and changes are a common part of the contract life cycle. Tracking changes and their impact on 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 the changes and ensure that both parties are aware of and agree to all revisions. The appropriate contract management software can also help here through complete automation.
Stage 7: Manage contracts after signing
Contract management doesn't stop with the signing of a contract. The last essential phase of contract management involves the actual administration of contracts. This is because once contract documents have been signed, they must be archived and managed clearly. Carrying out regular audits from time to time ensures that all parties fulfill their obligations and realize the value.
For Deadlines and extensions reminders should be set. Missed extensions mean missed opportunities to continue a business relationship. This clearly has consequences that are perhaps the most important for a company: lost income.
Awareness and contact long before the extension date provides reliability and the valuable maintenance of business relationships. In addition, this effort continues to build trust and loyalty.