Effective contract management can save a company time and money and mitigate risk. Even so, often after companies painstakingly negotiate agreements, they frequently file them away and move on to the next business negotiation without giving them much further thought. Getting control of contracts then can become a fire drill after deadlines are forgotten or when a potential strategic partner or acquirer wants to look at a company’s contracts.

Contract management is often ignored or relegated to the backburner due to more pressing daily demands or delegated to someone without the time or ability. Plus, for some companies without relevant expertise or time, it can be daunting to select a contract management solution and integrate the company’s contracts into the management tool. The earlier a company develops discipline in managing its contracts, the earlier it will reap the powerful rewards, including the ability to quickly and easily do the following:

• anticipate expiration and renewal dates
• manage its own deliverables
• monitor third party performance
• monitor and understand trends within recurring contracts
• produce custom reports based on unique search criteria

Having a good contract management system may also speed the due diligence process of a significant business transaction, as the contracts will have already been reviewed for completeness, summarized for searching and reporting purposes, and scanned for ready delivery. With more sophisticated contract management systems, not only are executed contracts managed better, but the contracting process on the front end can become more streamlined and efficient and yield higher quality and consistency among contract terms.

Variables to Consider when Selecting the Appropriate Contract Management System

When selecting a contract management system for an organization, it is important to consider both the complexity of the organization’s contracts as well as current and anticipated future needs of the organization. Here are some considerations:

• How many people are involved in contract administration, and how many people need to have read-only access?
• Do the users need to have electronic access to the agreements?
• Do the users need to have access to agreement summaries?
• Is it desirable for the agreement text to be searchable as well as the summary?
• Are there certain controls the organization would like to have in limiting access by some people to only certain types of contracts?
• How comfortable are the users with spreadsheets, databases and vendors’ applications?
• How many contracts, what types of contracts, and what variations in those contracts does the organization have?
• What key elements of a contract does the business want to monitor?
• Are email reminders of key dates needed?
• How important is it to have a turnkey solution that provides customer relationship management and full contract lifecycle management, including a contracting approval process?
• Is it desirable to use a hosted solution as a document repository to free up space on the company’s network?
• What is the budget?

Depending on the company’s current and anticipated needs and desires, the solution may be a simple spreadsheet, a homegrown database, a licensed software application, or a web-based hosted service. Ideally, the solution should be scalable so it can grow with the business, or at least the data should be easily exportable, in case a different contract management system is more appropriate as the business evolves.

Using Spreadsheets for Contract Management

A simple spreadsheet is better than nothing and may suffice if the business has relatively few contracts or many of a similar, simple standard form. The advantages of a spreadsheet are that it is inexpensive and easy to use. A spreadsheet can also be supplemented by scanning the agreements as text searchable PDFs. However, a spreadsheet has limited or no functionality to provide email reminders, tailored permissions by document or category, multiple non-standard contract elements, advanced searches, and various reports.

Using Databases for Contract Management

If the business has an employee or advisor experienced with creating databases, that person could create a tailored database for the business, with specialized contract clause fields, a user-friendly form interface, and customized searches and reports. Vendors’ database products frequently offer greater functionality, such as the following:

• email reminders
• tailored permissions
• customizable fields
• ability to upload agreements and make them searchable
• auto extraction of key data
• sophisticated searches and reports
• an unlimited hosted document repository
• customer support
• military-grade security

Pricing can be surprisingly reasonable. It depends on the sophistication of the software, the number of users, and whether it is a software license with one-time license fee and annual maintenance fees, or a hosted solution with ongoing subscription fees that include customer support.

Designating a Contract Administrator

Equally important as choosing an appropriate contract management tool is designating one or more qualified administrators to assume the contract administration function. The administrator(s) should (1) be able to interpret and summarize legalese, (2) be comfortable with the contract management system selected, and (3) have the time to dedicate to contract administration. Consistency of data entry wording is also important for helping retrieve data through searches of summaries. As the adage goes: Garbage In-Garbage Out! If the business does not have a qualified contract administrator in-house, a corporate paralegal at a law firm can fulfill that role or train someone within the organization to serve in that role.

While implementing effective contract management takes some planning and resources, for most businesses the benefits are well worth it. The earlier a business commits to contract management, the sooner it will begin reaping the rewards.

An increasing number of traditional software and hardware companies are accepting the idea that software as a service (SaaS) is here to stay for some time. In September, Oracle announced that it was significantly increasing its on-line, subscription-based software tools available for middle market companies. Salesforce.com and Cisco announced last week a partnership that brings together Salesforce.com’s online customer service software with Cisco’s IP telephony. The service, called “Customer Interaction Cloud,” is designed to provide a complete, cloud-based customer service offering for small to medium sized businesses. Even Dell, with its recent acquisition of Perot Systems, has signaled an interest in expanding its presence in the SaaS space. From a customer’s standpoint, SaaS generally offers quick deployment, low upfront cost, easy management and scalability.

Legal Difference Between Traditional Software Licenses and SaaS Agreements

Before delving into the SaaS market, it is important for traditional software companies (whether that be off-the-shelf product companies or customized software developers) to understand the differences between a typical software license or software development agreement and a SaaS agreement. At a fundamental level, what is being conveyed in a software license or software development agreement is different than a SaaS agreement. A software license or development agreement typically grants either a limited or exclusive right to use the software. In some cases, they include an assignment or transfer of the actual code from the developer to the purchaser of the software. A SaaS agreement, on the other hand, typically grants only a limited right to use a “service,” with no rights to the underlying software.

Key elements of a SaaS Agreement

With the legal difference between the two business models in mind, as well as the practical differences (web based offering versus an on-site thick client or server-based offering), below are some highlights of the provisions of a typical SaaS agreement:

Subscription for a Service.

Typically, SaaS agreements provide for a subscription to a service for a specified period of time. Many states give this structure more favorable sales tax treatment over traditional shrink-wrap software license agreements.

Performance and Up-Time Guaranties.

Most SaaS agreements address at least a base level of performance and functionality requirements of the service. For more sophisticated SaaS offerings, it is common to see Service Level Agreements (SLAs). The SLAs typically address issues like site and application downtime limits, support response times, and system response times.

Privacy and Security.

SaaS agreements usually address privacy and security issues as the SaaS provider typically holds its customers’ sensitive data. SaaS vendors generally provide some base level of assurances of privacy and security, even in low price SaaS offerings. For the large and more sophisticated offerings or where there are unique confidentiality concerns, the privacy and security provisions in the SaaS agreement can be very detailed. For example, many public companies require that a SaaS vendor’s systems and offerings be compliant with Statement on Auditing Standards No. 70 (SAS 70), which is a rigorous audit standard for controls on accuracy and security.

Data Backups and Data Porting.

In most sophisticated SaaS offerings, the SaaS agreement should address data backup, redundancy, and disaster recovery. Similarly, many customers of sophisticated SaaS offerings will want assurances on the ability to move the customer’s data either to an internal system or another vendor.

Renewals, Termination, Fees and Payment Terms.

Having a continuing relationship requires that the SaaS agreement address items like automatic renewals, termination (who has the ability to terminate upon how much notice), fees (when and how often charged and for what and the ability to change), and payment terms.

Obviously, there are other provisions as well, such as warranty disclaimers, indemnification, limitation on liabilities, export laws, etc. How much these terms vary from traditional software licenses or development agreements are dependent upon the particular SaaS offerings.