Article: What Is Contract Management?

Nov. 9, 2011

Following the “what is”-series regarding different business areas is here an article about what Contract Management is. The idea of the “what is”-series is to write the articles in a way that people who have never been in contact with the area will understand.

Contract Management is the management of contracts a company has with vendors and customers, but also includes employee contracts or any other contracts that may be needed to keep track of.
Contract Management is sometimes also known as Contract Administration.

Managing contracts is the whole process from creating the contract and negotiating the terms in the contract to documenting all changes made from the original contract. This is why most contract management software also have very good functionality for document management, keeping track of different revisions in the contracts.

So, what is really a contract?

A contract is a legal bond between two or more parties, identified in the contract, to fulfill what is agreed on in the contract. A contract usually has quite a lot of terms and conditions included to make sure that everyone understands the whole commitment. It is very common that a contract includes what will happen if a contract is not fulfilled according to the agreements.
One thing to understand, that is not very uncommon, is that companies enter agreements and then sometimes choose to bankrupt the company if they are not able to fulfill the contract. Since the contract is signed between two companies there is not very much to do in these cases. This is most likely to happen with smaller companies or larger organizations that need to be reconstructed, as is common during financial crises.

Contracts are stored in a contract management software and a common term for the whole lifecycle of contracts is Contract Lifecycle Management (CLM). The contract lifecycle management is the management of the contract from the beginning to the end, including renewals of the contract.

One benefit of contract management software is to keep track of when contracts are about to run out and therefore need to be renegotiated. This is especially necessary when the terms and conditions includes automatic extension of the contract.

In my early years as manager I bumped into this problem when purchasing a software. We split the software cost over 3 years and the contract stated that if we don’t cancel the contract 6 months ahead of the end of the 3 years the contract was automatically extended, with the current terms and conditions, for another 3 years. We installed the software but after a while we chose to use another solution instead. Since we did not use the software nobody thought about 6 months notice of cancellation. After 3 years we received another invoice that we had to pay. We tried to renegotiate the contract but failed doing so since the terms and conditions were clear and the software vendor was not in the flexible mood.

This cost us unnecessary $20000 and a lot of man-time to try to renegotiate that had been totally saved by having a contract management software to remind us before we needed to cancel.

Having contract management software not only helps in reminding when different dates are about to occur that is of interest for the contract. It also helps in tracking all the changes and negotiations made during the contract lifecycle. This is good for more than just tracking but also for future negotiations since negotiations are always about give and take. If you gave a bit more during the last negotiation you can bring that up as an advantage for you for the next negotiation.
Since you are also able to add notes about the conversations made, you can bring up what was promised by the counterpart. Sales people sometimes tend to promise too much to close a deal and by saving this information you will be able to use that to your advantage as well.

Having employment contracts in the contract management software is also very beneficial. This will help you in keeping the agreements with the employees in one place and also give you opportunity to add the notes from the one-to-one discussions that are made during the year. These discussions are usually very good as base for negotiating the next year’s salary and benefits.