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.