Latest update: Sept. 25, 2021
The goal of this text is to clearly explain the importance of contract management throughout a contract’s lifetime, the different methods that can be used for contract management and the importance of administrative ownership for contracts in order to ensure ease of acting under contracts that have been entered.
When referring to contract management, we are considering the management of entering contracts, securing that contracts are followed and documentation of eventual changes to contracts. Contract management involves systematically and effectively creating, reading through and analyzing contracts to ensure that the best financial and operational result as well as to minimize risks.
Many companies struggle with effective contract management, including management such as storage of contracts, ownership of contracts, ownership of the content of contracts and similar. It always feels positive when a contract is signed, delivery is secured, a purchase of goods completed, a service obtained. However, if routines for contract management or ownership of contracts are uncertain, problems can arise going forward. This is especially prevalent where a company works with many different contracts. For the continuation of this text we will focus primarily on contracts between companies. When it comes to contracts between companies and consumers, there are many obligatory legal requirements, even in the absence of a contract, which won’t be described herein.
Before signing a contract
The need to create a contract arises when two or more parties are of an agreement which they wish to document. A binding contract can arise even without documenting the agreement, however, it is more difficult in such a case to remember the details of the agreement and there are greater risks for disagreements to arise. This is why it is always recommended to document all contracts and deals in writing. For the purpose of this text, contract management, we will only refer to deals and understandings that have been documented in a written contract.
It is common that before a contract is signed, the person who is operationally responsible for reaching an agreement takes contact and input from different specialists to ensure that the content of the contract is correct and as needed. Depending on the type of contract and the size of the company, the stakeholders who are asked to give input can include, finance experts, tax specialists, lawyers and more.
These experts are often very experienced in their area and can provide a service to the person operationally responsible for the contract to ensure that the contract puts the company in as predictable and positive a position as possible regarding risks, payment, delivery security, responsibility splits and more.
After signing a contract
Having signed a contract, the parties are often happy and ready to start working under the contract. The contract might be stored in a cabinet, digitally or in another structured manner.
All contracts contain practical elements that the parties need to keep on top of, both parties have entered the contract to do something. One party may pay the other once or reoccurringly for their performance under the contract. What is to be paid, when it is to be paid and how it is to be paid is often set out in the contract. What the other party in this case performs is also often set out, such as, for example, reoccurring deliveries. The contract should, in this example, also set out who is responsible to purchase insurance for the deliveries and if the seller or buyer should load and unload the goods being delivered. In addition, the contract should set out who bears the responsibility should something unexpected occur and not least, how the parties can terminate their contractual relationship.
Many running points, such as those mentioned above, should be kept on top of once a contract has been signed. There are different solutions available to do this. These are often seen by organisations as expensive and as a result organisations can miss digital support for their contract management. Contract management can also be done manually but managing contracts in this way naturally more difficult given that it is more difficult to maintain a close eye over all the important points.
There are many different ways to work with contract management and each company is free to decide on the best manner for them. We have seen many different ways of doing so – many of which are poor. Two key questions are important to consider,
- Who has ownership of the contract?
- How can one manage the important parts of a contract in a simple manner?
Who has ownership of the contract?
A company should make clear and active decisions on contract ownership.
Where decisions on ownership are not taken, large companies often place this responsibility with a legal department. Where a company does not have this function, ownership is often placed with a finance department or administrator. None of these are the ideal solution as these, as mentioned before, are service organizations to the operational part of the company. As a result, there is little natural interest in the operational work required under a contract. If ownership is placed with such a service department it is of great importance that support organisations are put in place to ensure important elements of the contract are not missed. Even this however is not optimal as these resources are doing to be required to chase the operationally responsible parts of the organization to ensure that operational parts of a contract are maintained.
How can one manage important parts of a contract in a simple manner?
Regardless of where ownership for contracts is placed, the content of a contract must be readily available. Even those with good memories struggle to remember all details of a contract. What is important then is how a company is structured and works. Some companies work with a large data system as a support function, even sometimes using a contract management system under license. Others work so that each time a contract is signed important dates are manually logged by the responsible person in a digital or manual calendar.
Our experience shows that contract management works best when responsibility and ownership rests with the operational side part of the business. This often occurs naturally in smaller companies where personnel and operations are closer to the purse strings, more cost conscious and the impact of different contracts more known. It can then be easier and clearer as to who is responsible and such responsibility and ownership is demanded. In larger companies, it is however more common that personnel swap roles, managers leave and as a result uncertainty arises as to who is or was responsible and the impact of poor contract management less clear.
Many companies undervalue the importance of contract management. Lack of order over contracts can result in important and sometimes costly agreements within a contract being overlooked. In addition, company productivity is reduced when employees need to search for things such as contracts. This reduced productivity can be measured in a company’s finances and can be easily avoided.
We have experience of various methods of effectively working contract management within companies. Different companies choose to do this in different ways. What is important however is to understand how the company operates in order to manage contracts in the most relevant manner - something we can support with.
Published: Sept. 25, 2021