contract management - an overview

Contracts are an essential part of a well-functioning business, regardless of its size. An increasing number of regulations, such as the GDPR, are leading to even more contracts that need to be managed. A well-organized contract management can contribute to a company’s value creation and, in extreme cases, determine the success or failure of an organization. The following article describes what makes for a good contract management and how software can be used to manage contracts effectively. 

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1. What is contract management?

The contract management Contract Lifecycle Management (CLM) refers to the process that ensures a contract’s legal compliance. Accordingly, it encompasses all steps and actions involved in managing contracts within an organization, as well as the tools used to implement them. 

Contracts are an essential part of any business, whether it is an SME or a large corporation. Examples of the most common contracts in contract management include: 

• Orders
• Purchase contracts
• Software license agreements
• Commercial leases
• Leasing agreements
• NDA/confidentiality agreements
• Maintenance contracts
• Consulting contracts
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The focus here is less on the storage of the documents themselves and more on monitoring their content and deadlinesin order to fulfill obligations and liabilities arising from the contracts and to safeguard one’s own rights.  

Many companies still manage contracts using analog filing systems and a manually maintained Excel spreadsheet. This system is not only very time-consuming, but also prone to errors. In addition, reporting or analyses are difficult to perform. 

A good " contract management " is essential for businesses: Errors in monitoring due dates or missed cancellation deadlines pose significant financial risks to companies. 

To avoid these errors—and, not least, to save time and resources—the following help contract management software systems help you maintain an overview. This allows contracts to be managed digitally, and automated processes ensure that deadlines and deadlines are met. In addition, anyone can access the software solution from any location. 

Optimizing contract management with the help of software leads to more transparency. The overall risk is reduced and standardized processes reduce errors and help the organization increase efficiency. 

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1.1 Delimitation contract management 

Pure contract management, which is considered a sub-area of contract management, is traditionally concerned with the administration and filing of contracts, as well as the archiving expired documents. However, contract management is also responsible for contract fulfillment. The more structured the work here is, the easier it is for organizations and companies to maintain an overview. 

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1.2 Contract controlling as a component of contract management 

In addition to contract management, contract controlling is an essential component of contract management. 

In contract controlling, risks are monitored and reports are created, for example, to investigate which contracts contribute to a company's sales growth. The statistics and reports produced by contract controlling can serve as a basis for further corporate decisions and clarify the following questions: 

• Do new contracts make sense, and if so, with which contractors? 
• What is the ratio of existing customers to new customers?
• What are the opportunities and risks of the individual contracts?
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2. contract management - Assignments 

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2.1 Preparation of draft contracts 

The sometimes very time-consuming creation of contracts can be quickly facilitated by automated processes and good templates. In most cases, existing templates are taken and supplemented with the necessary data, information and conditions. 

In principle, Germany is governed by the principle of freedom of contractwhich means that the contract can be freely determined both with regard to the contract partners and the subject matter of the contract, provided that it does not violate the law or morality. 

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2.2 Contract negotiations

The negotiation phase encompasses all the work processes involved in drafting a contract. This is arguably the most time-consuming step, especially when managed manually. Revised contract versions can get lost in emails, or changes made to documents may no longer be traceable. contract management-Tools can minimize both the effort involved and the resulting error rate.  

According to PwC, an automated " contract management " can speed up negotiations by 50%. 

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2.3 Binding signature 

The legally binding signature —even though it is only a small part of the contract management —is arguably the most important, since its validity depends on it. Today, most contracts can be signed electronically, even across national borders.

Electronic signatures facilitate this step immensely, so that a contract can become legally effective within a very short time. 

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Perhaps also interesting: Digital signature or Drawing up a contract.

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2.4 Monitoring of deadlines and Schedules 

To avoid financial and legal consequences, all deadlines and deadlines in a contract must be continuously monitored and kept under close watch. 

These can be: 

• Notice periods 
• Delivery times
• Statute of limitations 
• Completion dates 
• Installment dates 
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Ideally, the reminders are automated. 

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2.5 Search and analysis

The entire contract portfolio should be stored in a well-organized location that is accessible to all relevant departments and teams. To be able to quickly adapt contracts to any necessary changes, it is essential to store them in searchable files (free-text search). Modern contract management software typically provides the right platform for this—including AI-powered document analysisthat automatically identifies, structures, and makes relevant content usable.

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2.6 Filing and archiving 

Ideally, the contracts are stored directly in the digital contract file, so that they can be accessed at any time via a free-text search, regardless of location. 

Archiving refers not only to expired contracts, but all documents and emails. 

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2.7 Evaluation and reporting 

Valuations and the creation of reports fall under the purview of contract management. With a well-organized contract management system or software, reports and valuations can be generated at the click of a button, which can then serve as the basis for further business transactions and decisions. 

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2.8 Risk management 

Contractual risks (see also point 3. What contractual risks are there?) must be identified, monitored and evaluated in order to avoid financial and legal consequences. 

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2.9 Integration with in-house systems 

Many companies use interfaces to integrate the contract management system with internal systems in order to avoid manual input. 

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2.10 Implementation of data protection according to DSGVO

Last but not least, contract management is also responsible for protecting all data in accordance with the GDPR. Good contract management software providers offer very high standards with regard to data security and data protection. 

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3. what are the contract risks and how can they be identified? 

By entering into a contract, the business partners always assume a risk at the same time. Risks can arise, for example, from: 

• Missed contract renewals
• Missed notice periods
• Liability claims due to failure to deliver the subject of the contract on time
• Misunderstandings due to incorrect legal formulations
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In general, risks can be divided into the following groups: 

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Often, the risks arise because organizations do not have sufficient visibility into their contracts. In order to ensure efficient business through contracts, organizations should be aware of all risks arising from the obligations of the contracts. Not least because breaches of contract can result in high financial losses. 

To identify and assess contract risks, the four phases of general risk management are applied to the “ contract management .” These are: 

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Software for contract management helps you quickly get an overview of the individual phases of contract risks and generate the corresponding reports. The software's features make it much easier to manage risk.

In this way Automatic deadline reminders can promptly warn of expiring contracts or notice periods, which can save unnecessary costs. 

Reporting and export functions help to identify future liabilities and thus avoid liquidity risks. 

Manual processing of these risks is hardly feasible for some companies with up to 1,000 contracts and, above all, very time-consuming, considering that the contracts are all filed manually and the key data must be laboriously transferred to an Excel spreadsheet. 

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4. How can a company effectively manage contracts? contract management software

In order to manage contracts in a legally compliant and effective manner, a well-designed system is required that provides the relevant teams and departments with transparency and clarity regarding the inventory of contracts. 

In many companies, these systems are still analog, or partly created with Microsoft Excel itself, which entails many manual and error-prone process steps. 

To avoid these issues, there are also standardized products from software providers that offer a comprehensive solution for the contract management . Reputable providers place a high priority on data security in accordance with the GDPR and store data on servers located in Germany. 

When choosing the right contract management system, it’s important to consider whether it meets a company’s specific needs. For example, a self-created Excel spreadsheet may be sufficient for very small business owners at first. However, once the number of contracts reaches about 30, it becomes a bit of a challenge to keep track of everything. 

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5. Selection Criteria for " contract management " Software

The selection of contract management software solutions is not only extensive but also meets a variety of expectations and needs. Before an organization decides on a solution, it should ask itself the following questions: 

• How many contracts are to be managed in the system? How many new contracts are added each year? 
• Which departments should work with it? How many access rights do you need? 
• Should other systems be integrated with it? For example, an ERP? 
• What goals should be pursued in the " contract management ": digitization, fast access, reporting, data security? 
• Where should the data be located? On-premise or in the cloud? 
• What monthly budget is available, what software prices could be considered?