Managing a contract with a supplier or customer is a lot easier in theory than in practice – unless you manage contracts effectively.
Good contract lifecycle management (CLM) creates stronger relationships with suppliers and paves the way for better long-term profitability. Contracts are not just weighty behemoths prepared by lawyers. They may be a simple purchase order placement; an oral instruction; or just doing something through custom and practice.
On a high-level view, any contract process has three phases:
- Pre-award phase – including all the preparatory work prior to a contract being awarded including the consideration of the reason for establishing the contract and whether a prospective counterparty can fulfil the terms of the agreement.
- Award phase – including all the paperwork to make the agreement final.
- Post-award phase – where the majority of contract management and maintenance comes in.
Across these phases, there are essentially five aspects:
1 – Creation;
2 – Collaboration;
3 – Signing;
4 – Tracking; and
5 – Renewal
Let’s look at our recommended considerations for each in turn:
- Authoring – writing a contract by hand is a time-consuming activity requiring specialist know how, and has the potential for risks associated with human error, but through the use of document automation, the process can be streamlined and consistent. Modern CLM systems allow for the minimizing of data entry and have the additional benefits of time and financial savings due to decreased paper handling, document loading, storage, distribution, postage/shipping, telephone, labour and waste.
- The correct structure and format – consider the most appropriate structure, format and content of the contracting mechanism. Good contract planning formalises relations between parties within a robust legal framework, but is also an opportunity to define arrangements that encompass every aspect of what outcomes we want from an associate and how we want the relationship to work.
- Consider KPIs – establish the handful of performance indicators that will best show performance and convert them into contractual obligations, perhaps listing them within a service level agreement. Such a process can often reveal how truly committed an accomplice is to service delivery.
- Consider the best duration – short or long-term contract? Consider market conditions; how many other companies could do what is needed and how easy it is to switch; how much leverage your business has; what sort of relationship is wanted; etc.
- How to exit – It may seem premature but considering how your business may exit is an important aspect of the contract creation process. Even good relationships may sour. Parties should know at the outset how each can exit if they need to.
- Negotiating the contract –contract negotiation is the discussion between two or more interested parties who agree upon legally contracted terms. These terms can include legal, operational, or financial elements such as payment amount and schedule, project outline and deliverables, and personnel. The purpose of negotiating a contract is to agree on these terms for the benefit of both parties. Once a draft contract has been produced, preferably using document automation the process of negotiation can begin. This is where discussions between the parties identify clauses that need to be adjusted and aims to ensure that both parties walk away with something equal in value to what they give. Identifying the terms and agreeing to their perceived value is the most significant element of all contract negotiations. CLM managers should collaborate closely both with their legal personnel or external team; and the key personnel who will engage with the practical operation of the contract once in place, to reduce discrepancies and negotiation time. Contracts are typically digital, and you will want to make sure you have the most recent version of the draft as you negotiate for the items you wish to include or change. It is essential to keep track of all communications and drafting changes as you negotiate a contract. The goal is for both parties to agree to a beneficial partnership.
- Approving the contract – getting management approval can create bottlenecks. CLM managers can pre-emptively combat this by creating tailored approval workflows, including parallel and serial approvals to keep decisions moving at pace.
- Execution of the contract – the use of electronic signatures is now universally the norm and speeds up the process.
- Obligation management – regular supplier reviews keep the focus on the relationship and will help keep the supplier’s full attention. These should be more than a ‘friendly catch-up’. They should include a review of performance; compliance; and action planning to agree where things need to change or improve, to avoid the value of the contract deteriorating in its early phases of growth.
- Revisions and amendments – including every single aspect pertinent to a contract’s initial drafting can be a challenging task and as the contract progresses it may become clear that additions or revisions are needed. Ensure you have a system in place for any amendments required.
- Auditing and reporting – contracts should not be drafted and metaphorically (or indeed literally) pushed into a filing cabinet without another thought. Contract audits and monitoring are important in determining each party’s compliance with the terms of the agreement and any possible problems that might be foreseeable. Businesses should monitor any potential changes or breaches of contract. Counterparty performance and risk management are important considerations. For example, if a supplier fails to meet their contractual obligations, you may need to rework the contract or enforce some penalty measure. Any issues should be dealt with and managed through to resolution with the supplier, with the appropriate corrective or preventative action is put in place or perhaps, ultimately exiting the contract.
- Avoid ‘expiry surprise’ – if you are trying to renegotiate a new contract, being up against a tight timeframe may dilute your leverage and limit options. Instigate a system to flag expiry in good time so that appropriate steps can be taken.
- Automation – Manual CLM methods can result in missed renewal opportunities and lost business revenue. Automating the process allows your business to identify renewal opportunities and create new contracts.
Mattersmith are experienced commercial contract lawyers equipped with technology, ready to take on as little or as much as you like. We add value to your everyday processes in negotiation and contract management. Our bespoke technology ensures you can save time and money on commercial contracts and by utilising our easy to use tools to accelerate the drafting, review, and management of contracts we provide peace of mind. Please contact us to discuss how we can help you: Contact Us | Expert Legal Firm | Mattersmith