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Written by Marijn Overvest | Reviewed by Sjoerd Goedhart | Fact Checked by Ruud Emonds | Our editorial policy

Contract Management Process — Everything You Should Know

Key take-aways

  • Contract management is crucial for organizational performance, often overlooked compared to supply chain management.
  • Effective contract management optimizes processes, reducing costs, enhancing relationships, ensuring compliance, and mitigating risks.
  • Automation offers benefits like faster contract creation, improved visibility, enhanced compliance, and efficient risk mitigation in contract management.

The contract management process is an essential part of the organization to handle contracts with its third parties. However, it is sometimes overlooked and usually done through a manual process. 

For this article, we will talk about what the contract management process is. We will also discuss its importance and the stages of the contract management process. Additionally, we will check the benefits if you will automate your contract management process. 

After reading this article, you will have an insight into why contract management is needed in an organization. Also, you will be able to utilize all the learnings you gain from what you have read in your profession. So without further ado, let’s start uncovering contract management. 

What is Contract Management?

Contract management, also known as contract lifecycle management, in the field of procurement refers to the handling of end-to-end contracting with the suppliers and other third parties of an organization. 

It is the process of handling contract creation, execution, and assessment to maximize financial and operational performance in an organization. 

The contract management process involves contract request, authoring, negotiation, approval stages, execution, and signature. Also, it has the obligation to monitor, renew, and amend the contracts.

    Why does it Matter?

    The contract management process does not get enough attention as much as supply chain management and process automation. However, it is an essential factor for effective business process management. 

    An effective contract management process is connected to the overall performance and health of the organization. Additionally, it plays a huge role in the relationship of the organization with everyone in its supply chain and market. 

    Effective contact management can help the organization in:

    • Establishing a framework to streamline and standardize contract preparation, negotiations, and renewals. 
    • Decreasing expenses and greater profit through optimizing the contract process. 
    • Enhancing strategic sourcing through data analysis
    • Improving supplier relationship management through data transparency. 
    • Ensuring to meet all the contractual obligations of the organization and its third parties. 
    • Reducing exposure to existing procurement, financial, and legal risks. 
    • Creating policies and contingencies easily to mitigate risks. 
    • Speeding and improving the overall process optimization. 
    • Establishing centralized contract management to connect contract data to other essential workings of the organization. 
    • Reducing the need for legal department oversight and intervention during the creation of a contract. 

    The Contract Management Process

    1. Preparation

    A contract is a legally binding document which is why it needs to be well-researched and properly prepared. Failing to prepare a contract will affect your relationship with third parties and the worse part is that they might file a lawsuit against you. 

    It is important to ensure that the parties in the contract will mutually benefit. It is essential that all the expectations of the parties are met. 

    When drafting a contract with the legal department of the organization, the contract  manager must lay out the following:

    • Complete and accurate information of all the parties involved. 
    • The needs and expected outcome of all the parties. 
    • Possible methods to use to eliminate risks
    • Financial and other protections to preserve profitability, production, and relationship. 

    2. Creation

    Legal oversight is essential in the contracting process. Working with the legal team of the organization will ensure that every agreement complies with local and international laws. 

    There are pre-approved templates that are created by legal professionals. This will smoothen the contract creation process and ensure that the contract is compliant with the law. 

    3. Negotiation

    Contract negotiations are the right time where parties can resolve any disagreements and misunderstandings before anyone signs. 

    This is also where parties can make desired changes to mutually benefit and strengthen collaboration. 

    4. Approval

    Once all the parties have reached an agreement, the contract needs to be approved by all the appropriate stakeholders. 

    Contracts will move through final review to ensure that it is legally correct, compliant, and consistent with the standards and policies of an organization. 

    5. Execution

    After it has been reviewed, all the parties involved can now sign the contract. Whether it is an e-signature or the old-fashioned use of ink, the signature will execute the contract to take effect. 

    6. Amendments and revisions

    We all know that many things are now happening in the world. From a global pandemic to war between countries, everything now is uncertain. These events can disrupt the supply chain which makes it necessary to amend contracts. 

    Of course, when amending the contract, the other party must be involved to ensure that everything is transparent and fair for all parties. 

    Benefits of Contract Management Automation

    We all know that automation can do wonders for many organizations which are also true for contract management. Contract management solution enables digitization and automation of the critical parts of contract management. 

    Contract management solutions can help improve contract efficiency, and allow better supply chain visibility and management of obligations. Furthermore, it enhances contract compliance and reduces exposure to supplier risks

    Contract management solutions can give also give you the following benefits:

    1. Faster contract creation

    Software solutions allow users to begin the contract creation process with some level of guidance. The usage of approved templates and language helps to speed up approvals. 

    Additionally, automated review, collaboration, and tracked changes can help speed up negotiation and review. 

    2. Enhanced contract visibility

    Having a centralized system for contracts is priceless. The suppliers and employees of the organization can easily access the contract data they will need. Additionally, the entire history of a contract is visible which can give you insights for the benefit of the organization. 

    3. Improve compliance with contracts

    Tracking and monitoring compliance to contract conditions, obligations, and terms are easier with contract management tools. You can link your supplier contract to the procure-to-pay process to ensure that transactions are compliant. 

    4. Mitigate risks

    Contract management software helps reduce exposure to risks by monitoring key obligations. It can also help identify contracts that need amendments due to regulations. 

    Conclusion

    In conclusion, the contract management process is a crucial facet of organizational operations often overshadowed by supply chain management and process automation. This article delves into the significance of contract management, outlining its stages and advocating for the automation of this essential process. Understanding the intricacies of contract management is pivotal for effective business process management, as it directly influences the overall performance and health of an organization. From preparation to execution and amendments, each stage plays a vital role in establishing transparent, mutually beneficial relationships, reducing risks, and enhancing the efficiency of the procurement process.

    Embracing automation brings forth numerous advantages, including faster contract creation, enhanced visibility, improved compliance, and effective risk mitigation, ultimately contributing to the overall success of an organization.

    Frequentlyasked questions

    What is contract management?

    Contract management is the process of managing contracts with suppliers and other third parties of an organization.

    Why is it important?

    It is important because contracts are the foundation of business relationships. Without it, you will not be able to create value when negotiating with your potential suppliers.

    What is contract management automation?

    It is a software solution used to create, negotiate, sign, renew, and gather data on business contracts.

    About the author

    My name is Marijn Overvest, I’m the founder of Procurement Tactics. I have a deep passion for procurement, and I’ve upskilled over 200 procurement teams from all over the world. When I’m not working, I love running and cycling.

    Marijn Overvest Procurement Tactics