Often the perception is that once you have “signed on the dotted line” the contract can be stored and need only be consulted when trouble arises. This is revealing of how contract management is still not recognised as an important management tool for most businesses. It is seen generally as a discipline belonging only to the largest of companies and of small relevance to other businesses. Accordingly, most businesses have limited capacity to manage the ever-burgeoning volume of contracts being concluded by them. This in turn implies that organisations struggle to understand the legal implications of their contracts and improve the risks being assumed by them therein, posing significant risks for organisations only able to manage contractual issues reactively.
Poor contract management further leads to a lack of awareness of the contingent obligations being assumed by your business, a lack of understanding of contractor performance and in general an inability to evaluate the effectiveness of contracts concluded. Management decisions are unsupported by data which allows comparison, often resulting in weak contracting positions, monetary losses or even reputational damage.
But what can a business do to start managing its contracts more effectively?
The first step is to recognise that a contract is not done once it’s signed. In reality, that is only the start of the management process in what is often termed the life-cycle of a contract. This inevitably includes signing, implementation, monitoring, amendment, renewal and termination. Each step is important and a business must know at what phase of the life-cycle each of its contracts are in order to manage the different risks relating to each phase.
The second step is to ensure that certain core tasks are executed in respect of each contract. These tasks are:
- Identify your important/high risk contracts and ensure that these are managed and reported on to management.
- Assign responsibility for these contracts to a person(s).
- Identify the most important or high risk items in each contract and focus on managing those.
- Identify important dates or milestones arising from a contract and diarize them.
- Look at the key performance requirements (yours or those of the other party) and monitor them through feedback from staff or other performance assessment tools.
- Be careful of contracts automatically expiring or renewing. Manage these important dates by timeously reviewing the contracts before they terminate or renew.
- Record changes or amendments to contracts in writing and ensure that these changes are properly negotiated.
- Review your standard contracts periodically to determine whether they are still appropriate and up to date with legislation.
How can I ensure that my contract management remains effective?
In order to ensure that a contract is managed effectively and that the core tasks are performed a system must be put in place. In most organisations, contract management tends to be paper based with contracts organised into hard copy files and with important details frequently living only in the memory of an individual or saved on a personal spread sheet. Loss of the person usually means loss of this knowledge, with potentially disastrous consequences for an organisation.
With the development of IT technology more and more businesses are realising the benefits of having at least a central storage depository for their contracts or for the more advanced, exploring the use of automated contract management systems which can be used to store important contract data. If used correctly these systems can add great value to an organisation and can bring order to the ‘chaos’ which often surrounds a paper based system. These systems also allow executives to gain an overview of all of their contractual obligations and commitments, enabling more effective planning and risk assessment.
One of the main advantages of an automated contract management system is the assistance it can provide with the administration of the contract. These systems can be used to store all the documentation necessary in order to create a clear audit trail throughout the life-cycle of the contract. They can also store a copy of the contract which can then be accessed by multiple parties authorised to do so and required to be involved in the management of the contract. These systems can also keep track of important dates and milestones and remind parties of upcoming deadlines.
Whether or not your organisation is using an IT tool or merely using your own paper based system to manage contracts, the critical element to contract management remains the allocation of responsibility to individuals. Each contract must have an ‘owner’ who assumes responsibility and keeps management informed of events relating to the contract. Without this assignment of responsibility, even the best contract management system will eventually lead to failure.
So, whether your procedure is sophisticated or rudimentary, make sure that the core tasks mentioned above are implemented and ensure that the importance of managing your contracts receives the necessary appreciation within the organisation. Discuss with your attorney or contract specialist ways of refining your current system and implementing management protocols and systems that will allow you to remain on top of your contracts.