Contract Management: Definition, Benefits, and Applications

No matter whether you find new business premises for your company, hire new employees, or take out a company insurance, you come across contracts of all kinds on a daily basis. With all the different contracts, you can quickly lose track and there is a threat of drowning in a chaos of paperwork.

But rescue is at hand: With the help of contract management, you manage your contracts centrally and identify potential contract risks at an early stage. This means you don't have to contact the responsible employees first. Here you can see at a glance which contracts need to be processed, adjusted or renewed. Your employees can work efficiently on their projects and you save time and reduce costs.

What does contract management actually look like? What does a contract manager do? And what are the advantages of using contract management software, e.g.,ContractHero Vertragsmanagement? We answer all these and many more questions in this article.

What are contracts?

Contracts are usually written agreements between two or more parties. These parties can be customers, employees, or other companies, for example. Contracts between the parties are made on a voluntary basis and vary in content. As a rule, contracts stipulate what a party should or should not do within a certain period of time and what the corresponding party gets for it. The following points are part of a contract:

• Contract partners
• Duration
• Performance
• Conditions
• Consequences of non-performance

Depending on the type of contract, the components of a contract vary. Companies mainly deal with the following types of contracts: 

• Sales and purchase contracts
• Rental and lease contracts
• Employment contracts
• Service contracts
• Confidentiality agreements (also known as NDAs or Non-Disclosure Agreements)
• Delivery contracts
• Trade contracts
• Leasing contracts
• Insurance contracts
• Maintenance contracts
• Service contracts

Both legal foundations and hierarchies and economic backgrounds shape contracts. Therefore, correct contract design can already be a challenge. But with a little bit of skill and good contract management, there is nothing standing in the way of the success of your contracts.

Definition: What is contract management?

Contract management cycle

The term "contract management", or in English Contract Management or Contract Lifecycle Management (short CLM), includes the handling of contract negotiation, the implementation of contracts, and any changes to contracts. It forms the basis for the business management of your company and is part of project management. The agreements resulting from the different projects are recorded in contracts. The contract management takes care of the correct preparation of these contracts. The tasks of contract management are diverse and range from pure administration of the contracts to the analysis and evaluation of the contracts to contract controlling.

Contract management is often confused with contract administration. However, contract administration only deals with the sorted filing of concluded contracts. Contract management, on the other hand, includes many more tasks. It serves to monitor all contract negotiations, the preparation and conclusion of any contracts, and the collection of information for risk assessment. Contract administration is thus only a part of contract management.

The contract management tasks can be divided into two areas:

• Contract administration
• Contract controlling

Contract administration

Contract administration mainly consists of contract execution and contract stock. All departments of your company that deal with contracts should have access to this stock. As a sub-discipline of contract management, contract administration ensures that the latest versions of the contract templates are always available. In addition, contract administration should be structured and uniform. This makes access to the contract templates easier. Your employees can then simply use the contracts they need. At the same time, contract administration takes care of the control of all contract information and their verification for completeness. The archiving of contracts is also part of contract administration.

In order for contracts to be concluded, a series of other documents is usually required first. The digitization or scanning of all relevant documents that only exist in paper form is also part of contract administration. This is the only way for contract management to work with the documents and subsequent contracts.

In summary, the following tasks belong to contract administration:

• Creation of contract drafts based on previous contract negotiations
• Updating contract templates
• Checking all contracts for completeness
• Control of contract information
• Digitization of contract-relevant documents
• Monitoring of deadlines and appointments
• Archiving of contracts
• Correct creation of invoices

Contract controlling

Contract controlling mainly refers to risk assessment of contracts. The focus is on the analysis and evaluation of different contacts and contract partners. Using contract controlling, it can be determined which contracts are profitable and which contract partners contribute to a good company turnover. Statistics regarding these questions serve this area of contract management as a guide. This way, the responsible parties can identify potential risks in time and steer them. They also know which new contracts should be concluded, which type of contract is ideal, and with which contract parties contracts can still be made.

In addition, contract controlling deals with invoicing and financial planning. The control of payments and services is also part of contract controlling.

In general, contract controlling includes the following points:

• Analysis of contract partners and the annual sales potential
• Ratio of new customers to existing customers
• Assessment and evaluation of existing contracts
• Potential of new contract negotiations
• Opportunity and risk assessment
• Minimization of possible problem factors

Why is contract management important?

Contract management serves the optimization of contract processes, the increase of transparency, and the cost savings of your company. With the help of structured contract management, you can minimize risks and achieve economic profit. By using uniform processes, you also increase transparency in the filing of documents and recognize risks and economic potentials of your contractual relationships faster. Uniform contract processing also helps you to increase efficiency.

As part of management risk controlling, short MRC, contract management additionally makes a significant contribution to the security measures of your company. Both legal and business management principles are ensured through the MRC, and in turn, through contract management. Contract management is thus part of the company's internal control system. This allows information to be structured and financial risks minimized.

What are contract management softwares and how do they work? 

The best contract management toolslike among others ContractHero Vertragsmanagement, support you both in the legally compliant contract administration and in the economically sensible contract controlling. They also enable you to create, manage and archive all contracts digitally.

Instead of running from one department to another and collecting contracts in paper format, you have all the relevant documents in one program using contract management software. And you don't even have to leave your desk for that. Your employees will also appreciate a centralized contract management system. They can access the needed contracts at any time and from any computer.

To cover the tasks of contract controlling, contract management softwares also have sufficient analysis and reporting capabilities. At the same time, you can easily and quickly integrate all recorded master data from your ERP system into the contract management program. This increases transparency for your employees and gives you access to supplier data, material data, etc.

What should a contract management software be able to do?

The contract management of your company is always only as good as the software behind it. When choosing your contract management tool, you should therefore ensure that it covers all tasks of contract administration and contract controlling.

In addition, as with all software, user-friendliness is top priority. Ideally, your contract management tool is intuitive and understandable for all employees. Although a contract management system should have interfaces to Word and Excel, complex spreadsheet skills should not be required for operation. The software should be self-explanatory and easy to handle.

A good contract database forms the basis for your contract management. It is important that you can scan and manage all relevant documents using the contract management solution. An integrated text recognition software can be helpful. In addition, the contract management tool of your choice should be easily integrated into existing systems of your company.

The simultaneous processing capability by several employees is a major plus of contract management tools. So that your employees can understand all changes in the contracts, the contract management software should have a clear contract history. The possibility to return to previous versions can also be an advantage.

What are the advantages of contract management software?

Using the appropriate contract management tool, not only you but also your employees experience many different benefits. The various softwares stand out in particular because of the following points:

• Access to contracts independent of time and place
• Simultaneous editing of contracts by several employees
• Saving time and costs
• Uniform structure of all contracts
• Higher transparency
• Better assessment of economic risks and potentials
• Increased reaction speed
• Efficiency increase
• Linking with other systems (e.g., SAP)
• Easier control of deadlines and costs

What are the tasks of contract management?

Contract Management Software

Contract management includes the following processes around the internal and external contracts of your company:

• Granting of rights and controlled access to the contracts
• Drafting of contracts
• Creation of contract templates
• Categorization of contracts
• Contract modification
• Contract archiving
• Contract termination
• Destruction of contracts no longer needed

Apart from contract administration, contract management also takes care of your company's contract controlling. This includes the following tasks:

• Monitoring of deadlines and appointments
• Risk management and assessment
• Evaluation of contract partners
• Care of events
• Financial planning

How does a contract management process work?

Contract management phases

We have already talked about the many different points of contract management. But when are these now used? Essentially, a contract management process always runs the same way. It consists of six steps that can be adapted to company processes as needed:

1. Negotiation and creation phase

As soon as the contract partners are ready to reach an agreement, the negotiation phase begins. In this phase, the conditions and terms of the contract are discussed and recorded in writing. Afterwards, the contract managers create a first draft for contract management. In addition, notes are taken on the contract type, potential risks, required resources, and the necessary contract standards.

2. Review phase

If the contract parties agree, there is a final review of the contract. It is ensured that the new contract does not collide with already established contracts. This phase of contract management also includes the legal review of the contract. The legal departments of both parties check all clauses in the contract. Possible contract changes may still be made.

3. Closure phase

If to approve the contract draft, it comes to the contract closure phase. In this phase, the contract is signed by both parties. In particular, if the other contract party is not physically present, the digital signature is a good way to sign the contract. Various contract management software allows you to digitally sign contracts.

4. Filing phase

After successful contract conclusion, the filing phase follows. All contract parties receive a copy of the signed contract and archive it. Using a contract management tool, you can store contracts centrally and easily accessible for all involved.

5. Control phase

The fifth phase is for regular control of the contract conditions. The contract managers ensure that everything is on the right track. It is their task to recognize problems early and take countermeasures. As the contract term approaches the end, the responsible parties have to check whether the contract should be renewed or extended.

6. Post-contract phase

If the contract parties decide to terminate the contract, it comes to the post-contract phase and thus the end of the contract. Contract managers are responsible for the placement or payment of any final invoices. Then, the contract is archived.

An analysis of the contract and the contract partners may be useful for future contract management. This can help identify potential risks or potentials even faster in the future.

How do I identify and assess contract risks?

+ Both the risk assessment and risk management play an important role, not only in the context of contract management. Many companies already have their own risk managers. According to the Law on Control and Transparency in Business (KonTraG), entrepreneurs are encouraged to document their risk management annually. The aim is to avoid and eliminate potential risks.

The following tips will help you identify and assess contract risks:

• Inform yourself not only about operational, but also contractual risks and raise awareness for risk management.
• Always have the complete life cycle of your contracts in mind. Contract risks can arise at any of the previously mentioned contract phases. A contract risk is, for example, the possible failure of the contract before the closing phase or the endangering of the ongoing confidentiality regulation after contract end.
• Divide the contract risks according to their content: legal, performance-related, economic, etc. This way, you can identify and manage them more easily.
• Consider which contracts need to be classified as critical and should be subjected to a risk analysis.
• Report regularly on already identified contract risks.
• Use appropriate contract management software. These help you with the analysis and evaluation of contracts.

Conclusion: The answer to the chaos of papers is contract management

Cost savings, efficiency increase and the absolute overview in the contract chaos - Contract management offers you all this and much more. With the right contract management, you can not only manage all your contracts, but also contribute to risk minimization and financial planning of your company. To make full use of all the advantages of contract management, we recommend using contract management software. This makes contract administration easier for your employees and supports you in contract controlling.

Depending on the size and type of your company, your contract management tools need to meet different functions. So, when choosing the contract management system, make sure it covers all your needs. Once you have implemented the right contract management, you can concentrate on the really important things of being an entrepreneur. So, what are you waiting for? Get the right contract management solution and say goodbye to the chaos of papers forever.