Effective Contract Management: Reducing Value Erosion
Introduction to Contract Management
Contract management is a critical aspect of business operations that ensures the value and terms of agreements are upheld throughout their lifecycle. Effective contract management can significantly impact an organization's financial health and operational efficiency.
This statistic, derived from an intensive survey and report by the World Commerce and Contracting Organization, highlights the substantial financial losses businesses face due to inadequate contract management practices. The report, initially conducted in 2014, indicated a slightly higher value erosion of 9.2%. Despite nearly a decade of advancements, the challenge of managing contracts effectively persists.
The range of value loss varies significantly, with the best-performing companies still experiencing a 3% loss, while others may see up to 20% of their contract value eroded. This video will explore the fundamentals of contract management, the contract lifecycle, and strategies to prevent value erosion through robust contract management practices.
Understanding the Contract Lifecycle
Contract management is a critical process that ensures organizations receive the goods, services, or software they have agreed upon with their vendors. It encompasses the entire lifecycle of a contract, from its inception to its conclusion.
The contract lifecycle is divided into two main phases: the pre-signature phase and the post-signature phase. Each phase involves specific activities and tasks that are essential for effective contract management.
Pre-Signature Phase
The pre-signature phase includes all activities leading up to the signing of the contract. This phase involves the identification of needs, selection of vendors, negotiation of terms, and drafting of the contract.
Post-Signature Phase
The post-signature phase begins once the contract is signed and includes the management and monitoring of the contract's execution. This phase ensures that all parties fulfill their contractual obligations and addresses any issues that arise during the contract's term.
Understanding and managing the contract lifecycle effectively is crucial for organizations to maximize the value of their contracts and maintain strong vendor relationships.
For more details on the specific activities involved in each phase, refer to the Pre-Signature Phase and Post-Signature Phase sections.
Pre-Signature Phase
The pre-signature phase encompasses all activities required to get a contract signed. This phase is crucial as it sets the foundation for effective contract management and helps mitigate potential value erosion.
Request or Intake Stage
The initial step in the pre-signature phase is the request or intake stage. This is where someone within the organization, such as a member of the procurement team or another business unit, initiates the need for a contract with a vendor. The primary objective during this stage is to gather as much relevant information as possible about the contract request.
Importance of Collecting Information
Collecting comprehensive information during the request stage is vital. It ensures that all necessary details are documented, reducing the likelihood of miscommunication and errors. Traditional methods, such as emails and in-person communications, often lead to fragmented information and a cumbersome back-and-forth process.
Challenges with Traditional Methods
Traditional methods of handling contract requests, such as through emails or informal communications, can be highly inefficient. These methods often result in incomplete information, missed details, and a prolonged back-and-forth communication process. This inefficiency can delay the contract signing process and lead to frustration among stakeholders.
Benefits of Digital Systems
Implementing a digital system, such as Gatekeeper, can significantly streamline the request and intake process. By using dynamic forms tailored to the type of request, vendor, and category, organizations can ensure that all necessary information is collected upfront. This digital workflow minimizes the need for repetitive communication and enhances the efficiency and accuracy of the pre-signature phase.
Post-Signature Phase
The post-signature phase is a critical part of contract management, ensuring that all signed agreements are properly stored, managed, and monitored for compliance and performance.
Digital Signature Phase
The digital signature phase involves obtaining the necessary approvals and signatures from authorized signatories. This process is streamlined in digital platforms like Gatekeeper, where the list of approved signatories is integrated into the system.
Storing Contracts
After the contract is signed, it needs to be securely stored. In manual systems, this might involve saving the signed document in Google Drive, SharePoint, or another storage solution. However, in a contract lifecycle management platform like Gatekeeper, the signed contract is automatically moved to the next phase and stored in the contract repository linked to the vendor record.
Performance Management
Performance management involves tracking and evaluating the performance of the contract. This can be done using scorecards and other performance metrics to ensure that all parties are meeting their obligations.
Obligation Management
Obligation management is crucial to ensure that all contractual obligations are met. Key obligations should be documented and tracked with events and reminders to avoid any missed deadlines or requirements.
Renewal Process
Renewals can be challenging, especially with auto-renewal clauses in many contracts. Automated contract management systems can help by setting up reminders and alerts well before the renewal date, ensuring that you have ample time to review and negotiate terms.
Benefits of a Centralized System
A centralized system for contract management offers numerous benefits that streamline and enhance the entire process. Here are the key advantages:
Restoring Visibility
Centralizing vendor and contract data is crucial for restoring visibility across the organization. This means that individuals outside of procurement and legal departments can participate in the day-to-day management of contracts. By having all necessary information in one place, employees are empowered to manage contracts effectively without needing to worry about locating or understanding them.
Taking Control
A centralized system standardizes the way an organization works with vendors. This ensures that all teams, regardless of their location or function, follow the same processes. This standardization helps avoid compliance issues and ensures that everyone adheres to the designated contracting policies. Digital processes guide users through each phase, reducing the risk of human error.
Safeguarding Compliance
Compliance with regulations such as GDPR and ESG is critical. A centralized system helps manage these requirements by ensuring that all clauses, dates, and processes are correctly documented. This reduces the risk of non-compliance and ensures that contractual obligations are met, thereby enhancing third-party risk management.
Empowering Employees
By having all contract-related data and processes in one place, employees are empowered to work with vendors and manage contracts confidently. This reduces the fear of making mistakes and allows for more efficient and effective contract management.
As we conclude, it's essential to recap the key points discussed. We explored the importance of effective contract management, delved into the contract lifecycle, and examined both the pre-signature and post-signature phases. We also highlighted the significant benefits of transitioning to a centralized system for managing contracts.
Moving to a VCLM platform can transform your contract management process, making it more efficient and less error-prone. If you're interested in discovering what Gatekeeper can do for you, there's a link in the description.
Additionally, for further insights, check out our related video on vendor onboarding. It complements this discussion perfectly.
