Every business, no matter its size or domain, deals with contracts. They are the backbone of any professional relationship, be it between partners, employers-employees, vendors-suppliers, etc.
The management of contracts is the management of business relationships, which is the cornerstone of any successful company.
According to World Commerce and Contracting, poor contract management practices are costing businesses an average of 9% of revenues each year.
Having a comprehensive contract management process helps with business functioning, improves functional efficiency, increases visibility, monitors and improves compliance, and mitigates risk.
Need for a contract management system
As the number of contracts in business transactions grows, it is increasingly important to figure out a system that helps in managing them efficiently.
Thus, an effective contract life cycle management system, if implemented, provides long-term value for the business.
The most fundamental step for contract management is to identify the stages involved in setting up a contract management system. Depending on the organizations and how they work, contract management stages will differ; however, we can design a basic framework for it.
The 7 stages are:
Preparation
Drafting
Approval
Negotiation
Signature
Updates and execution
Termination and renewals
Let us go through all the stages one by one.
1. Preparation
Just like every other process, the first step in the contract management life cycle is defining the goals and objectives, setting expectations, outlining risks and bottlenecks, identifying the resources required, and organizing them.
Establishing clear expectations for both parties contributes to a more accurate assessment of whether the contract will meet the organization's needs.
Similarly, it is important to understand and determine the risk tolerance of the stakeholders in order to set realistic performance expectations and mitigate the risk potential during the life cycle of the contract. No matter how deep the business relationship is, every stakeholder should know the contents of the contract before the draft is started.
2. Drafting
The drafting process for a contract begins once everything is defined and communicated correctly with the concerned parties.
The contract drafting team is provided with the agreed-upon content as a brief for the contract.
It is crucial to use specific language while drafting the contract. Make sure there is no inconsistency that leaves the contract open to interpretation. If different geographic locations are involved, the laws associated with those areas should be considered.
Prepare all supporting documents and information required for the contract. In business, any unclarity in a contract can cause business loss.
To improve turnaround time, legal teams generally maintain a repository of pre-approved contract templates to incorporate all the relevant clauses and terms according to the company playbook. These templates save huge time and effort both in drafting and reviewing.
Drafting is a critical part of managing contracts. It sets the stage for what will follow. By keeping it efficient, a smooth process is ensured while potential risks are minimized.
3. Approval
The following step is typically the internal approval of the contract by the management or internal stakeholders.
A contract management platform can help simplify the process by setting up the approval workflow. Notifications can be sent to the people responsible for approving the contract and the central repository will allow them to edit and comment on it in real-time.
To ensure that approvals don't delay the contract cycle, a proper approval workflow process for various types of contracts is essential for an organization.
The contract is now semi-finalized. After this, it will be shared with the stakeholders for further/ remaining negotiations and reviews.
4. Negotiation
After the contract has been drawn up, the parties negotiate. The process involves defining what each party expects from the contract regarding costs, clauses, and provisions, responsibilities, and liabilities, warranty terms, extensions, and expiration, and cases of a potential breach, etc. All proposed changes in the negotiation process need to be tracked to ensure they are properly incorporated.
Negotiations should be conducted in a transparent and mutually trusting manner, in which all parties concerned communicate. It also offers an opportunity to build sustainable and mutually beneficial relationships and boost performance by leveraging the value generated.
The most efficient way to redline is to use a contract review platform so both parties can collaborate in real-time.
Documents sent via email or offline can confuse and result in unnecessary oversights. With the use of a central repository, the contract process will be transparent for both sides, making negotiations streamlined.
5. Signature
Now that final negotiations have been completed and stakeholder approvals have been received, it is time for the next step - Signature.
Even though it is the most straightforward step in the process, it can be challenging to obtain physical signatures quickly from signatories who might be in different geographies. Even if the signatories are in nearby locations, it is generally time-consuming to get everyone to sign the contract. Through InkPaper's e-signature technology, you can sign a contract from anywhere, anytime conveniently.
Following the signatures, all stakeholders execute the contract in accordance with its specifications.
6. Tracking updates and monitoring execution
A contract's life cycle involves revisions and amendments. Unfortunately, it's challenging to track changes and their effects on each party.
Staying on top of the changes is essential. A contract lifecycle management platform makes it easy to track edits and amendments. Ensure all revisions are discussed and agreed upon by both parties.
It is crucial to regularly audit all contracts to evaluate performance and identify potential risks. By regularly auditing all contracts, you'll be able to identify and develop mechanisms to mitigate risk.
7. Managing termination and renewals
The closer the contract cycle gets to its expiration date, the more important it becomes to keep track of all renewals and terminations.
It is possible for organizations to incur significant losses because of failure to renew contracts, such as lost opportunities for revenue maximization and strategic alliances.
A well-designed contract management process requires staying on top of important dates and deadlines. It requires organizations to implement a new process to renew the same contract terms and therefore need to be alerted well in advance.
After the contracts have been renewed, they should be signed, handed over, and monitored. In the event of termination of a contract, the contract must be completed, archived, and logged. All contracts should be stored in a central repository. They should be readily retrievable when necessary.
Conclusion
By planning and implementing a strategic contract management process both the parties can better manage their obligations. It will help in saving time and money, and also improve business models and procedures. Missing these obligations can lead to lost savings, major fines, costly litigation, and damaged relationships.
Using a contract workflow platform like InkPaper, one can easily handle all seven stages of contract management. As a result, many legal teams are increasingly turning to InkPaper in order to increase their productivity and profitability.
About InkPaper
InkPaper is a contract workflow and e-signature platform that enables you to have an efficient contract management system.
From authoring the contract to the execution and storing the contract securely on the cloud, InkPaper helps you manage the workflow efficiently.
Get started with InkPaper today! Contact Us | InkPaper.ai
