Contract Management Best Practices


Contract Management Best Practices










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Contract Management

Best Practices

by Betsy Walli

Copyright 2018, Faulkner Information Services. All
Rights Reserved.

Docid: 00018946

Publication Date: 1801

Report Type: TUTORIAL

Preview

After carefully managing the development, negotiation, and approval of contracts,
many companies leave them essentially unattended once they are signed. For the contract process to achieve its desired outcome, there must also be
efficient management of the contract post-signing. This report outlines best practices for proper contract management
from development and approval through monitoring and close-out, including the use of contract management software.
These practices can help an organization save time, cost, and effort, and even
help it avoid arbitration or litigation.

Report Contents:

Executive
Summary

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The Aberdeen Group estimates that about 80
percent of business-to-business transactions are governed by contractual
agreements.

 

Related Faulkner
Reports

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Tutorial

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Tutorial

Contracts are used to govern business
relationships of all types, including technical support services,
subcontracting, selling goods, leasing equipment, and procuring
telecommunications services.

Contract management includes all of the
processes involved in developing and securing approval for formal business
agreements, monitoring them for compliance, and achieving formal closure. Among the discipline’s best practices, the most important are developing
contractual documents with measurable, objective metrics and enforcing rigid
policies for approving contract changes and closure.

Each contract type has
different terms and conditions and requires a different approach to monitoring
compliance. New business models in telecommunications and software licensing
are increasing the complexity of contract management, forcing contract
administrators to deal with flexible pricing and service schemes that are
difficult to control. Contract management is sometimes considered part of
project management; in other cases it is considered a separate discipline on
the same level.

Enterprise software packages are emerging to
help automate many contract management practices. They can also assist in
building contracts from templates, monitoring performance, and maintaining an
organized record system. This breed of software has grown in capabilities and
reliability.

Description

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Contracts are ubiquitous in the business
world. The Aberdeen Group estimates that about 80 percent of
business-to-business transactions are governed by contractual agreements, and
the average Fortune 500 firm manages between 20,000 and 40,000 contracts at any
given time.1 Contract management is therefore a critical enterprise
business function.

There are two sides to
contract management, the buyer’s and the seller’s. In most business relationships,
there will be a contract administrator for each party. On the buyer’s side, the
contract administrator verifies that the seller meets all of its obligations.
On the seller’s side, the contract administrator ensures that all obligations
are met, obtains formal confirmation from the buyer that the obligations have been met, and ensures that
payment is made. With the increased use of outsourcing and subcontracting, it
is common for multiple parties to be involved in a project. The same
organization can thus have the role of a buyer with respect to some parties to
the project, and the role of a seller with respect to other parties.

The role of the contract
administrator varies from organization to organization. Contract administrators
should have at least a paralegal level of training, since in many organizations
they serve as the main liaison with external legal representatives. In some
cases, the contract administrator handles only the legal aspects of preparing
contract documents; in other cases, the administrator is a full member of the
project team, working at each step to monitor compliance to the project’s terms
and obligations. If not a member of the project team, the contract
administrator needs to work closely with that team to ensure that the
contract’s terms meet the customer’s needs and that they are within the
capabilities of the performing organization.

Contract management includes overseeing the
core processes of contract development and approval, compliance
monitoring, and achieving formal closure.

Contract Development and Approval

Developing a contract that protects an organization’s interests requires
clarity of language
and objective as well as measurable contract terms. Contract
administrators are responsible for ensuring that all written agreements meet
these criteria. Administrators should use a structured process to secure
approvals for the contract from the project team, senior management, external
parties, and, if required, the corporate legal team. Additional documents, such
as scopes of work, may be created as supporting material for the contract.

Procurement. Sometimes called "sourcing", procurement is the
process of acquiring the goods and services needed to complete a project.
Contract administrators often control this function. A key element in procuring
goods and services is generating and managing requests for proposals (RFPs). An RFP notifies potential sellers that a company is
interested in procuring goods or services, describes the specifications those
goods or services must meet, and identifies the terms and conditions of the
agreement that the seller and buyer would form. There may be several RFPs for an individual project, as many types of goods and
services may need to be acquired.

Writing an RFP
is a long and arduous process. All elements of a buying agreement must be
thoroughly explicated. It is also important that all bidders be treated
equally. To avoid even the appearance of bias, additional information
should not be provided informally to individual
bidders. Questions submitted by phone or through e-mail should not be
answered individually. Instead, questions from bidders
and the buyer’s subsequent answers are typically made public to all bidders
through a written document.

After bidders submit their responses to the RFP, organizations apply a formal process to
evaluate them. Contract administrators often facilitate, support, and
manage the proposal evaluation process, although senior management and project
teams are given greater decision-making authority. Contract administrators sometimes
maintain lists of approved vendors from whom corporate policies authorize the
company to buy goods and services. This information is considered as part of
the RFP evaluation process.

Compliance Monitoring

Compliance monitoring entails reviewing the project’s progress to ensure that all terms
are being met. The review process is broad, encompassing considerations as
diverse as the following:

  • Pricing and Procurement Standards – e.g., acquiring
    equipment through approved vendors and at the best available price
  • Labor Requirements – e.g., using unionized labor when
    required
  • Regulatory Requirements – e.g., properly disposing of
    dangerous chemicals or ensuring worker safety
  • Scope of Work – e.g., completing the project to
    specifications
  • Time Commitments – e.g., meeting scheduling milestones

Ensuring
compliance might be the most difficult task for contract administrators because
they often have limited access to the project and its stakeholders. Contract
administration is typically a back-office function, while project teams are on
the front lines. Communication gaps between these two areas can spawn severe
problems.

Closure

Contract closure
is the confirmation that all of a project’s deliverables, tangible and
otherwise, have been completed and accepted by the customer. Closing out a
contract requires formal documentation from the customer
acknowledging acceptance of completion. Contracts usually contain a
detailed scope of work (SOW) document that defines the exact work to be
performed and includes a work breakdown structure (WBS) specifying the
deliverables to be provided. Each element in an SOW is treated as a checklist
item. The parties involved will sign off on each item to verify their
acceptance.

Achieving
closure requires approval from the appropriate people. Contract closure is
distinct from project closure. A project team may consider its work completed,
but the customer may balk at signing final contract documentation. Likewise, an
IT department might be satisfied by an implementation performed by a
third party, but only senior management can officially acknowledge that the
installation is completed.

Termination.
Termination, a special type of closure, is an end to a contract before it has
been fulfilled. A contract should define precisely when an agreement can be
terminated, and what steps should be taken after such termination. There are
four primary types of terminations:

  • Unilateral
    Terminations     – A unilateral termination involves one party deciding to end a
    contract because it is unable or unwilling to continue. Most contracts specify
    a penalty for unilateral terminations.
  • Opt-Out
    Terminations     – Once in effect, an agreement may result in unforeseen consequences.
    Opt-out clauses allow parties to re-evaluate and terminate a contract within a
    given period of signing the contract, typically 30, 60, or 90 days. Penalties
    are typically not assessed when a party exercises an opt-out clause.
  • Mutual
    Terminations     – Any contract can be mutually terminated, even if it does not have a
    specific clause describing the terms of such actions. A mutual termination is,
    in essence, a new agreement that replaces the previous one, and penalties are
    generally not assigned.
  • Default
    Terminations     – A contract may specify terms under which the contract is
    automatically terminated. These terminations are based on a party failing to
    meet its obligations, and penalties are usually assessed. Default terminations
    can be problematic, particularly if one party (the provider) is supplying
    essential services to the other party (the client). In such cases, the client
    should engage a replacement provider before terminating the original contract,
    thus avoiding – or at least minimizing – any service disruptions. It is
    important for the original contract to specify a transition process, allowing
    an orderly and expeditious transfer of responsibilities from the original to
    the replacement provider. The transition itself should be closely monitored
    since the original provider, still smarting from losing the client’s business,
    may be less than motivated to effect a smooth transfer
    of operations. 

Current
View

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report]

Many
organizations do not implement sufficient contract control. According to some studies:

  • 81 percent of organizations cannot find all of their
    contracts.
  • Most organizations leak 1-2 percent of top-line revenue due
    to contract inefficiencies.
  • Up to 30 percent of sourcing cycle time is unnecessary.
  • 44 percent of transactions are not compliant with existing
    contracts, costing millions of dollars every year.
  • 18 percent of the sales cycle is spent processing the
    contract.
  • 9 percent of spend has potential savings that are leaked
    away.2

Statistics like
these have prompted interest in contract lifecycle management, which promises improved
visibility from contract origination to contract termination. Today effective enterprise
leaders view contract management as an essential business service, not just a
perfunctory "back office" operation. 

Contract Lifecycle
Management

As a discipline, contract lifecycle management (CLM) is increasingly replacing manual processes
with automated ones, through the use of commercial software. Software to help with contract management can
go by
several names, including:

  • Contract Management Software
  • Contract Manager Software
  • Contract Management System
  • Contract Compliance Software
  • Online Contract Management
  • Enterprise Contract Management
  • Contract Lifecycle Management Software

Several resources are available to help businesses research and select CLM software. For example,
Capterra maintains a list of contract management software packages, including reviews. And Forrester Research recently produced a report that researched, analyzed, and scored
its selection of the 14 most significant CLM software vendors.3 Providers of CLM systems include:

  • Agiloft
  • Apttus
  • Asentex
  • CLM Matrix
  • Cobblestone Systems
  • Conga Novatus
  • Contract Assistant (BlueRidge Software)
  • Contract Logix
  • Coupa Software
  • Determine (formerly Selectica)
  • Easy Software
  • Exari Systems
  • GEP
  • Gimmal
  • IBM Emptoris
  • Icertis
  • Jaggaer
  • Mitratech
  • Model N
  • Onit
  • Oracle
  • SAP Ariba
  • SpringCM
  • Symfact
  • Zycus

While contract management is a mature discipline, CLM software is still evolving. Features
included in current products include:

  • Automated
    Creation of Contracts     – Software can maintain repositories of contract templates
    and pre-written clauses, which users can piece together selectively as needed
    to form finished contracts. Organizations can build their own repositories of
    template-based text and store the information in the contract management
    system. Some products also come with a library of existing templates that form
    an initial repository.
  • Automated
    Approval Processes     – Once a contract is drafted, software can route the
    electronic file to the team appointed to approve the contract. Routing that combines
    sequential, parallel, and conditional approvals can be automated. The routing will
    follow custom-defined approval chains, so that each document will be delivered
    in order to the appropriate people. Those people can either approve the
    document (in which case it will be automatically passed on to the next person
    in the approval chain) or demand changes (in which case the document will be
    routed back to those responsible for making modifications).
  • Real-Time Document Collaboration – Cloud-based software, such as that available from Coupa Software,
    offers real-time document collaboration that eliminates the need to email
    contracts back and forth during contract authoring, review, and editing, which can help streamline
    contract lifecycle management, reduce human error, and increase efficiency.
  • Compliance
    Tracking and Reporting     – Compliance features measure actual activities performed
    as part of the contract and compare them with the terms of the contract. For
    instance, the software can record the details of equipment purchases and then
    compare them to pricing guidelines built into the contract’s terms. The
    software can also assist in tracking milestones toward project completion.
    Compliance efforts apply not only to relationships between buyers and sellers,
    but also within an organization. Organizations can use CLM software to ensure
    that they adhere to their own commitments, such as verifying that they purchase
    equipment in accordance with their own policies and within the terms of the
    contract.
  • Record
    Keeping
    – Software tools allow users to associate scanned files with contract records,
    although third-party scanning software and hardware will typically be
    needed. The system can generate
    and track purchase orders, and associate them with
    particular contracts. Integrated calendars can track the durations of
    contracts, plotting expiration dates and providing alerts in advance to enable
    agreements to be renewed before they accidentally lapse.

The potential benefits of automating contract lifecycle management lie in several areas.
Prodagio Software, for example, claims that companies that implement its software improve
contract compliance by 55 percent, increase rebate and discount usage by 25-30 percent, and improve
contract renewal rates by 25 percent. Both Ariba and Easy Software claim that their software helps companies achieve 50 percent
faster contract cycles due to more efficient negotiation, with up to 30 percent lower administrative
and legal costs. Ariba also claims that its software can help increase total revenues one to
two percent by identifying revenue opportunities and preventing leakage. Easy Software claims that their
software can help reduce erroneous payments by 75 to 90 percent. SpringCM surveyed 822 business professionals from various industries about their contract process.
Almost 40 percent said that implementing contract management software had reduced the time spen on contract
management.

Figure 1 below shows a screen from Apttus’s Contract Lifecycle Management software.

Figure 1. Contract Lifecycle Management Software

Figure 1. Electronic RFP

Outlook

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Contract
management is a mature, well-established business practice, particularly in
government agencies and other public organizations, but it is also capable of
growth and change. As new types of technology and new professional services
models emerge, contract management practices are adapting to them.

In particular,
the contract management community is accommodating to the still-evolving
"cloud computing" paradigm. According to the US National Institute of
Standards and Technology (NIST), cloud computing is a model for enabling
convenient, on-demand network access to a shared pool of configurable computing
resources (e.g., networks, servers, storage, applications, and services) that
can be rapidly provisioned and released with minimal management effort or
service provider interaction.

Cloud Computing Service
Models

Cloud computing
services are delivered via three prominent service models:

  1. Software as a Service (SaaS) – The consumer uses the provider’s
    applications running on a cloud infrastructure. The applications are accessible
    from various client devices through a thin client interface such as a web
    browser (e.g., web-based email).
  2. Platform
    as a Service (PaaS)     – The consumer deploys onto the cloud
    infrastructure consumer-created or -acquired applications that are created using
    programming languages and tools supported by the provider.
  3. Infrastructure as a Service (IaaS) – The consumer is provisioned
    processing, storage, networks, and other fundamental computing resources where
    the consumer is able to deploy and run arbitrary software, which can include
    operating systems and applications.

Cloud Computing Deployment
Models

Cloud computing
services are deployed via four prominent deployment models:

  1. Private cloud – The cloud
    infrastructure is operated solely for an organization. It
    may be managed by the organization or a third party, and it may exist
    on-premise or off-premise.
  2. Community cloud – The
    cloud infrastructure is shared by several organizations and supports a specific
    community that has shared concerns (e.g., mission, security requirements,
    policy, and compliance considerations). It may be
    managed by the organizations or a third party, and it may exist
    on or off the premises.
  3. Public cloud – The cloud
    infrastructure is made available to the general public or a large industry
    group and is owned by an organization selling cloud services.
  4. Hybrid cloud – The cloud
    infrastructure is a composition of two or more clouds (private, community, or
    public) that remain unique entities but are bound together by standardized or
    proprietary technology that enables data and application portability (e.g.,
    cloud bursting for load-balancing between clouds).

Since
cloud computing platforms often exist off-premise, data security and privacy are
likely to figure prominently in any cloud computing contract, as is regulatory
compliance, e.g., Sarbanes-Oxley (SOX), the Health Insurance Portability and
Accountability Act (HIPAA), and the European Union (EU) Data Protection
Directive.

Recommendations

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Following are several steps an organization can take to help ensure efficient
and effective contract management and promote continuous contract management
improvement.

1. Acquire a CLM Solution

To help automate
contracting processes, an organization should invest in a contract lifecycle
management (CLM) solution featuring a wide range of contract templates.
Generating contracts from scratch increases labor time and raises the chance of
errors, as template-based text will have been vetted numerous times, which
newly-produced text will not have been. Even with the use of templates, an
organization should thoroughly review contracts before distributing them to
customers.

2. Include Interpretive
Statements

Most contracts
contain legal language that ensures compliance with contract law. While
essential, this "legalese" is generally not accessible to the average
layperson. To ensure that everyone in the organization understands the
essence of an enterprise contract, the contract manager should oversee the
crafting of an "interpretive statement" specifying in plain language
the intent of the contract, and the rights and responsibilities of all affected
parties.

3. Implement a
Change-Control Mechanism

Contracts are
not static. They almost always go through several revisions before being
approved, and often undergo modifications after they are put into effect.
Defining and enforcing strict change control policies for how changes are made
will help to prevent "scope creep" and other problems that may
imperil a project. Change control policies should define how requests for
changes are made, who has authority to approve or reject a proposed change, and
what criteria will be used to evaluate it.

Maintaining
version control is an important element of the change control process.
Significant problems emerge when stakeholders in a project use different
versions of a contract, scope of work, or other key document. To minimize the
risk of version conflicts, the contract administrator should use a clear naming
scheme for documents and ensure that all parties understand the naming system,
and also distribute document updates to all members of a project team, even for
very small changes to documents.

4. Standardize and
Collaborate

Implementing a
standard workflow for contract authoring, change, and approval can streamline
the contract creation process and eliminate ambiguity and bottlenecks. The
standardized workflow should include well-defined protocols and procedures and
clearly specified approval hierarchies. To ensure stakeholder involvement and
buy-in, it is important that the contract authoring and amendment process include
continued input from all necessary stakeholders.4 By keeping communication
open between contract administrators and project teams, a company
can ensure that the contract administrators have the information they need to monitor contract compliance.

5. Don’t Leave Contracts on Autopilot

When any
contract comes up for renewal, always look for opportunities to negotiate more
advantageous terms and conditions. "Companies lose nearly 3 to 5 percent
of savings opportunities because of auto-renewing evergreen contracts."5 

6. Assess Contract
Management Maturity

Leading
organizations conduct an assessment of their contract management maturity
through the use of the Contract Management Maturity Model (CMMM). CMMM
assessment provides an organization with insight into which contract management
processes require improvement, and where additional training of personnel is
needed.6 The CMMM consists of five levels of maturity:

  • Level 1 – An ad hoc contract management practice.
  • Level 2 – A basic, disciplined contract management practice.
  • Level 3 – A fully established and institutionalized
    contract management practice.
  • Level 4 – Integration of contract management with other
    organizational disciplines, resulting in synergistic organizational governance.
  • Level 5 – Contract management focused on continuous
    improvement, and adoption of lessons learned and best practices.7

Successful Contracts Reflect a Successful Acquisition
Process

In the end,
successful contracts are often the fruit of a successful acquisition
process. The US Government Accountability Office (GAO) has identified
nine critical factors underlying a successful acquisition, especially an
information technology (IT) acquisition.

  1. Program officials actively engage with stakeholders.
  2. Program staff have the necessary
    knowledge and skills.
  3. Senior department and agency executives support the
    program.
  4. End users and stakeholders are involved in requirements
    development.
  5. End users help test system functionality prior to formal end
    user acceptance testing.
  6. Government and contractor staff are
    stable and consistent.
  7. Program staff prioritize
    requirements.
  8. Program officials maintain regular communication with the
    prime contractor.
  9. Programs receive sufficient funding.8

The parties to the acquisition – and the parties to any resultant contracts –
should be fully engaged in the acquisition/contract process. Such
visibility offers the clearest path to developing sound, manageable, and
enforceable enterprise contracts.

References

1 J. David Montgomery. "Making Sense of Contract Management."
Enterprise Systems Journal. January 18, 2011.

2 Alison Clarke. "Building the Business Case for Strategic
Contract Management." OpenText Corporation. June
17, 2011.

3 “The 14 CLM Vendors That Matter Most and How They Stack Up.” The
Forrester Wave: Contract Life-Cycle Management, Q3 2016. July 25, 2016.

4 James Thomas. "Five Best Practices Toward Contract
Compliance." IndustryWeek. September 21, 2009.

5 Ibid.

6 Dr. Rene G. Rendon.
"Best Practices in Contract Management." 92nd Annual
International Supply Management Conference. May 2007:4.

7 Ibid.

8 Highlights of GAO-12-17: "Information
Technology: Critical Factors Underlying Successful Major Acquisitions." US Government Accountability Office.
October 2011.

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About
the Author

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Betsy Walli is a licensed marriage and family therapist and an independent writer and editor
with experience in academic, technical, and marketing topics. Dr. Walli holds a masters degree in counseling
from California State University, Fullerton, and a Ph.D. in linguistics from the Massachusetts Institute of Technology..

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