Last updated on February 3rd, 2020 at 02:47 am
Contract management: it’s an incredibly important element of any business. You want to be sure that you keep up with your contract at every stage through the process. That doesn’t mean just the negotiation or ‘pre-signature’ stages, either. Contract management extends throughout the life of service terms and, hopefully, into the renewal term that follows. This ensures that you do not allow those vital customers to fall away. Also, it improves your ability to create effective contracts with low risk for your business.
By carefully considering each piece of the contract management process, you can:
- Improve your interactions with your customers.
- Automate many of the pieces of your contract management cycle
- Ultimately, streamline your efforts to make your business more successful.
Start by learning more about each of the nine stages:
- The Request Phase
- The Draft Phase
- The Negotiation Phase
- The Approval Phase
- Completing Your Obligations
- Maintaining Compliance
This chart is a useful reminder of how cyclical the process is — as well as how important it is to have procedures in place for each stage so the contract process moves smoothly.
Why Should You Have a Clear Contract Management Process?
Scalable processes are the only way to grow. If your contract management process is too manual, too clunky, or based entirely on one person’s knowledge of the system’s ins and outs, your company is vulnerable. These nine stages form the basis of every strong contract management process. You can customize each phase to best fit your business by creating process documents. This makes your business more capable of growth, more attractive to your investors, and more streamlined during day-to-day operations. You can also quickly modify a standardized contract management process in an emergency, such as if an executive is leaving the company…
1. The Request Phase
During the request phase, you’re creating the basics of the contract. These are the details that you and your client need to include in order to create a successful business relationship. This phase of the contract is the first stage of the negotiation process and, in many cases, your first look at a client’s specific needs.
During the request phase, consider these key details:
1. What are you hoping to accomplish with the contract?
That is, what is your business’s goal? As your business develops, you may also develop more detailed requirements of what you hope to accomplish with your contract. You can also decide what clauses need to be included moving forward.
2. What is the customer hoping to accomplish?
Typically, your customer wants to hire you to complete a specific job: either to put together a one-time effort or to ask for your services on a long-term basis. Make sure you understand your customer’s goals during the request phase of the contract cycle. Then, you can create more effective contracts that better reflect customer needs. If your company has different product lines or recently acquired another company, you might even have multiple MSAs to choose from.
3. What expectations do you and your customer have for this process?
That is, do you have specific milestones that need to be met? Is it going to be your company’s paper or the customer’s? When during the process do you expect to be paid?
Setting out your expectations clearly during the request phase and making sure you understand your client’s expectations is important. Knowing both perspectives will make it easier to create a solid contract that benefits both parties.
2. The Draft Phase
During the draft phase, you’ll put together the basic outline of the contract.
To make this easier, your contract management software should have standard contracts on hand. These include basic templates for the terms of service and outlines that express the expected services as a whole. If your customer has unique expectations and requirements, this is the time to include them. On the other hand, you may find that many customers are content with the standard terms of your contract and need little negotiation or discussion.
During the draft phase, you want to keep up with each version of the contract while clearly displaying which version you’re currently using. While you might not begin negotiations during this period, you may need to make changes as you continue to communicate with your client. Make sure your contract management software or solution will allow you to easily store and refer back to previous incarnations of the contract if needed. This phase should focus on the statements of work, schedules, and other variables of the deliverables.
3. The Negotiation Phase
The negotiation phase is one of the most important phases of the contract cycle. It’s critical that you empower your negotiators to ensure that they have the right tools on hand to meet their objectives — and that they have all the information they need to negotiate on behalf of the company. Ideally, you want your negotiators to be able to create contracts that will move quickly through your company’s contract approval process without manual intervention. The more you standardize the process and the negotiation countermoves your team can make, the more independently (and quickly) they can act.
Consider these automations and easy process improvements:
1. Keep a standard contract on hand.
Many of your clients won’t need to make many — or, in some cases, any — modifications to your standard contracts. If you have a standard contract on hand and available to your contract negotiators during that process, you can often make the negotiation and requesting phase easier. In fact, start your “negotiation” by having the salesperson send the document for signature with the order form.
2. Make sure your negotiators know which points are not up for negotiation.
There are some areas of your contract that are hard and fast: the details that you’re not willing to give on. Make sure your negotiators know what those are. Then, they won’t accidentally make promises that the company can’t keep.
3. Create a document with a list of the concessions you’re willing to make.
Design a list that includes the places you’re willing to negotiate and what your standard range is. Start by reading our quick guide to the process so you can send out the document within the week. Making this list readily available to your negotiators gives them the power to act with confidence. They don’t have to display it to the clients — and, in fact, they shouldn’t. But they should always have an idea of what your range looks like so that they can meet it effectively.
4. Work milestones into the contract.
Make sure you understand what your clients’ milestones are, and include them as part of the early stages of the contract. Start this step during the draft process so that when the time comes to create the contract, you can easily piece it together.
4. The Approval Phase
During the approval phase, your business (and your client’s business) have a chance to look over the contract and decide whether to approve it. Some businesses have multiple steps to the approval process. Your company may require the contract to pass through multiple hands before you can let clients know that it has been approved. Keep these things in mind during the approval phase of your contract cycle:
1. Streamline the approval phase as much as possible.
In this case, many hands do not make light work! The more hands your contract has to move through before approval, the longer it takes — and the greater the likelihood the client will grow frustrated with the process. Instead, try to streamline your contract approval: remove unnecessary steps, automate what you can, and keep client needs in mind.
2. Set deadlines.
It’s all too easy for contracts to fall through the cracks during the approval process. Set clear deadlines so that each member of the team knows what they need to accomplish and when in order to meet both your goals and your client’s. If you’re using an automated contract management tool, you can set a clock that starts whenever the document moves from one tier of approval to the next.
3. Keep track of who has the contract throughout the entire approval process.
You should be able to easily track each contract through the approval process. Ideally, you should set your contract management software to issue notifications if something goes wrong. This can include if the contract does not continue to move through the approval process or if it’s taken too long to get the contract set in place. Tracking the owners of different processes doesn’t just let you keep an eye on moving documents; it lets you adjust the process whenever people move in and out of the company. Spend a little time strengthening your approval phase by reading what steps you should take so in-progress contracts don’t fall through the cracks.
Once you’ve approved the contract, it’s time to execute it! First and foremost, both parties must sign the contract. Only once the contract has been signed can you begin work on the client’s job.
Depending on your contract and your business, there may also be other steps that need to be taken during the contract execution phase: connecting with other partners or finding a supplier for specific materials, for example. In some cases, you may need to obtain signatures for more than one party before you can begin working on the contract.
Use your contract management software to highlight anything that needs to take place during the execution stage of the contract. This software may also be used to note when those items have been taken care of, allowing you to track the contract’s execution more effectively.
6. Completing Your Obligations
You’ve approved and executed the contract. Now, you must complete your obligations to your customers — and your customers will complete their obligations, including payment, to you. During this stage of the contract lifecycle, it’s important to consider how your interactions with your customers play out.
Are you meeting your customer’s expectations?
As you meet your obligations, consider these key factors:
1. Are you meeting the customer’s needs?
During the obligation phase of the contract lifecycle, you have the chance to show your customers why they hired you — and why they should hire you again in the future. Keep in mind that the best customers last for far more than one contract lifecycle. They have a much higher lifetime value if they return to your business for their future industry needs.
2. Is the customer meeting their end of the contract?
A customer who, for example, fails to pay their invoices on time could prove detrimental to your company overall. If a large customer isn’t paying, that can quickly interfere with your business’s cash flow. If a customer routinely fails to meet their end of the contract, it may change the way you bargain with them in the future. You may need to create steeper penalties for late payment, take smaller jobs at a time, or choose not to work with the customer in the future.
3. Does the contract effectively meet your company’s needs?
You probably have an effective contract scoring system that helps determine the risk associated with your contracts early in the process. Still, risks can show up unexpectedly or seemingly little negotiation points can fall through the cracks. Use the obligation phase to carefully monitor how your current contracts are meeting your company’s needs. If you’re not sure how to start measuring these impacts, read our guide about identifying and evaluating KPIs, or Key Performance Indicators, for your business contracts.
7. Maintaining Compliance
In addition to meeting your customers’ needs, your business must maintain certain minimum compliance standards. In many cases, those compliance standards are built into your contracts from the beginning. Other times, you may need to revisit them as you move through the obligation phase of the contract. Customers should never ask you to step outside of industry compliance standards. They may, however, require you to go above and beyond those standards. It’s increasingly important to offer better security, for example.
You must also be sure, as you’re meeting your obligations, that you comply with every area of the contract. Your contract management software may include the option to pull out that important information, ensuring that you are not falling short of any of your obligations or failing to meet industry compliance standards. Start automating the process and make potential violations more transparent by reading our quick guide.
After you have met your obligations, you will want to look back over your contract to ensure that everything went according to plan. Regular contract auditing shouldn’t be something that occurs only at the end of the year or if you suspect that there’s a problem. Instead, you should include contract auditing as a regular part of your contract lifestyle. Implement these internal audit initiatives so your contracts — and your contract repository — stay healthy all year long. Evaluate:
1. Did the customer get exactly what they asked for?
Did you deliver the product the customer requested in a timely and effective manner? If you deliver the value the customer expected, the customer is more likely to pay on time and renew the contract.
2. Did you issue the right charges to the customer?
Pay careful attention to any invoices sent to your customers. Failing to invoice a customer properly could cause cash flow issues for your business, but accidentally sending a too-high invoice could cause even more problems. During your audit, make sure that the customer was charged the right amount at the right time.
3. What could you do better in the future?
This is a great time to look over your contract and ensure that it performed, in execution, the way you imagined during the drafting and approval phase. What looks great on paper may not always work as well in reality — so during the auditing phase, take a hard look at what worked for your company and what didn’t so that you can make changes to your contract in the future.
The renewal phase allows you to reconnect with your customers, inviting them to join with you for future business transactions. Your contract management software is vital during this period! It should:
1. Flag customers as they come up for renewal.
Ideally, you want to see that customers are about to come up for renewal well in advance, rather than seeing a notification pop up just as a customer’s contract expires. You want plenty of time to look over the contract before discussing renewal options with the customer. Design a plan to help your renewals teamwork backward from every renewal date so you never lose a customer due to lag time.
2. Offer a clear risk assessment score.
While the contract might not have posed an issue for your business this time around, it might pose issues in the future. Take a close look at those risk scores before renewing the contract, and take the time to reduce risk where possible.
3. Highlight any problems noted with past contracts.
This is a great time to look over anything that came up during the audit so that you can create better, stronger contracts in the future.
Your contract lifecycle is an ongoing process. Ideally, you want to move customers smoothly through the process, from the earliest drafts of the contract laid out during the request phase to the renewal — and the right contract management software can make that happen. Contact us today to learn more about how our solutions can help or sign up for a free trial to give your contract management plan the foundation it needs.