Contract Management

What is the purpose of Contract Management

Handling and managing contracts is often an overlooked discipline, even if you as a manager and leader handle facets of Contract Management on day to day basis.

This is exemplified when managers talk to employees about future salary and employee benefits. The aforementioned is often an unconscious sort of Contract Management, due to the fact that all agreements that must be executed subsequently must be maintained in the employee’s contract or added as a supplement to the agreement.

This is of course a very basic form of Contract Management, but it is an example that indicates how often companies actually and unknowingly work with Contract Management.

The basics of Contract Management

The baseline of a contract is that it is typically entered between 2 different parties, e.g. companies A and B.

A must provide a service to B.
B must pay for A’s service.

The contract governs all matters relating to:

• Who are the customers and suppliers, respectively?
• When does the delivery start?
• What does the delivery cost?
• Which terms of payment apply?
• What conditions apply to termination?
• What happens in case of default?

The aforementioned is a selection of points that the vast majority of contracts contain.

Contracts are usually written in a very specific way and use a well-considered choice of words. The wording of the contract is crucial to the delivery of the contract and the delivery cost at the buyers expense.

Therefore, contracts with poor wording, with vague wording or a lack of indication of conditions for delivery can have major consequences and entail a risk that often result in large financial losses. Likewise, this type of contract is also problematic in the event that the cooperation ends up in a legal dispute over the delivery, payment or other matters.

In regard to sizeable contracts, specialized lawyers who can write the contract in an appropriate way or eavesdrop possible pitfalls in the contract material received from other parties, are often used.

Contract Management as a process in the organization

Contract management can be broken down into many phases and furthermore be described as Contract Lifecycle Management.

Companies must first and foremost switch to a conscious management of contracts.

For this purpose, you must define a position in the company that is responsible for contract management. In addition, the responsibility for individual contracts must be anchored with the individual who is responsible for the agreement or e.g. the department responsible for the contract.

In short, contract management first and foremost require structure in the organization.

In addition, there is also a clear definition of processes that ensure that contracts are treated equally across the company.

Contract documents contain “dead information” such as the otherwise very crucial dates for renewal, expiry, notice of termination and information on index and price adjustments.

This data must be extracted from the agreement and operationalized with appropriate alarms for the individuals responsible, so that the company can respond in time.

A company that has not yet incooperated Contract Management has the following issues to contend with:

• The risk of the individual agreement is unknown.
• Payments to different vendors are unknown.
• Reduced opportunity to forecast expenditures.
• Difficulties regarding cost optimization in downturns.
• Large gaps in GDPR compliance due to lack of supervision of the data processor agreements (Yes, these are quite important contract documents.)
• Important dates for notice of termination, expiration, etc. are unknown.

In addition, experience shows that companies without contract management can usually not find more than 80% of the company’s total contract portfolio.