Contract management goes beyond simple contract administration. Below you will find out everything you need to know about contract management, the processes involved, the benefits it offers and how software can help you.

Definition of contract management:

Contract management is the holistic support and organization of all aspects of contracts between client and contractor. This includes the planning and execution of contract negotiations, the implementation of contracts and the adaptation and amendment of contracts for technical, scheduling, financial or personnel reasons.

Contract management at a glance

What is a contract?

A contract is an agreement between at least two parties who enter into a mutual obligation through concurring declarations of intent. This requires at least one offer and one acceptance of the content of the contract. The contract is the legal basis for the provision of services and regulates the cooperation between the two parties. In the course of a project, changes to the contract, e.g. with regard to the scope of services, costs and deadlines, can be agreed by means of an addendum.

In companies, contracts are used in every sector and department. They define the relationships, rights and obligations between partners, suppliers and customers. The following is a list of contract types that are frequently used in companies:

  • Employment contract
  • Non-disclosure agreement (NDA)
  • Service contract
  • Supply contract
  • Rental agreement
  • License agreement
  • Distribution agreement

What does the contract management do?

Contract management covers not only the creation of contracts, but also their processing and administration throughout the entire contract life cycle.

What tasks are part of contract management?

Contract management comprises various tasks that together ensure smooth contract processing. These include contract controlling, contract administration and contract archiving. The latter deals with the systematic recording and storage of contract documents in order to ensure orderly and accessible filing.

What is contract controlling?

Contract controlling is a central component of contract management and includes risk monitoring, contract fulfillment and spend analysis. The day-to-day business of contract controlling involves a variety of activities, such as:

  • Ensuring compliance with contractual obligations
  • Evaluation of sales potential per contractual partner
  • Assessment of new and existing customers
  • Monitoring contract extensions and project progress
  • Budgeting and cost control in contracts
  • Evaluation of opportunities and contract risks
  • Support in the preparation of reports for the annual financial statements, auditors and management

What is contract management?

Contract management is a key component of contract management. It includes the generation of contract-relevant information, such as metadata on contracts and contracting parties, as well as the structuring of this information. Effective contract management enables responsibilities (both internal and external) to be clearly recorded and defined.

Why is contract management important?

Efficient contract management can make a significant contribution to increasing a company's turnover. It helps to reduce costs and risks, comply with laws and regulations, make informed decisions and increase efficiency within the company. Poorly managed contracts, on the other hand, can lead to significant financial losses, legal disputes and reputational damage.

5 advantages of contract management

  1. Risk mitigation: Thorough contract management enables the company to monitor contracts, identify and mitigate potential risks by ensuring that contracts are legally binding and enforceable. Risk assessment ensures that contractual terms are fair and appropriate.
  2. Compliance with laws and regulations: In contract management, contracts should be continually reviewed and adapted to current legal requirements to ensure that all contracts comply with applicable laws and regulations. This is crucial in avoiding penalties and fines.
  3. Cost savings: By proactively monitoring contract performance and agreed milestones, companies can identify opportunities to reduce costs, such as standardizing contracts or identifying underutilized services.
  4. Increased efficiency: Contract management makes it easier to monitor and manage the performance and obligations of all contractual partners. It reduces the administrative burden, increases efficiency and promotes better collaboration.
  5. Improved transparency & decision-making: By analyzing contract data, companies gain valuable insights into trends, risks and opportunities. This information forms the basis for well-founded decisions, be it in the detection of performance problems, the optimization of supplier relationships or the identification of opportunities for process improvement.

Which departments deal with the contracts?

The responsibility for contract management varies from company to company. In many companies, the legal department is primarily responsible for drafting, reviewing and negotiating contracts. This applies in particular to legally complex agreements. In addition, depending on the type of contract and the business processes involved, other departments such as sales, HR, purchasing or financial management may also be involved in contract management. In some cases, there may also be specialized teams or a separate department for contract management that deals exclusively with the administration and optimization of contracts.

What is a contract manager?

A contract manager is responsible for negotiating and managing contracts within the company. He or she supports, formulates, reviews and manages the content of contracts in accordance with company regulations.

What should contract management include?

Efficient contract management should take into account all phases in the life cycle of a contract. This not only includes pure document storage, but also support for all contract processes. Typically, this begins with the digitization and recording of documents, continues with the use and control of contracts, such as contract creation or negotiation, and finally ends with archiving or destruction. A contract management system is often used here. This ensures that contracts and accompanying documents are optimally managed.

The functions of such a contract management system include:

  • Digitization of paper-based contracts and filing in the digital contract file, including text and OCR recognition
  • Deadline and deadline monitoring with automated reminders
  • Search and find contracts according to a wide range of criteria, metadata and a full-text search, also known as free-text search
  • Automatic contract and document creation
  • Version management and document comparison
  • Approvals and authorizations
  • Legally compliant electronic signatures using signature software
  • Implementation of all data protection regulations, e.g. in accordance with the European General Data Protection Regulation (GDPR)
  • Risk management of contracts and contractual relationships

8 steps of contract management

A contract goes through different steps in a so-called

contract life cycle.

  1. Contract review & risk analysis: Contracting parties whose contracts are drawn up by the contractual partner must review and analyze these external contracts for internal company framework conditions and possible risks, using AI technologies if necessary.
  2. Contract drafting: In this step, the essential framework conditions and details are defined, whereby text modules can be used for more efficient creation.
  3. Negotiating the contract: This is where the contracting parties agree on a contract text, whereby changes and adjustments must be taken into account. Contract management software facilitates this process by avoiding the sending of emails back and forth and enabling versioning for clear tracking.
  4. Contract approval: Once a contract has been drafted and revised, it must be approved and released by affected parties before it becomes legally binding. This step ensures that all parties agree to the terms of the contract and allows for possible changes or clarifications before the document is signed.
  5. Sign contracts (digitally): After negotiation and approval, contracts must be signed. Digital signing has the advantage of fast and efficient processing as well as improved traceability of the signing processes.
  6. Saving and archiving contracts: Completed and signed contracts are securely archived, ensuring security and correct filing. Contract management software enables authorized employees to quickly access digital contracts.
  7. Contract and clause management: The effective management of contracts and clauses is crucial for the smooth operation of a company. Regular revision and updating of clauses allows adaptation to changing legal requirements and terms and conditions.
  8. Deadline monitoring and control: This step involves monitoring deadlines and dates to ensure that they are not missed or exceeded, thus avoiding unnecessary costs. Contract management software can help here with integrated reminder functions.

What is contract management software?

Contract management software, also known as contract management software (CMS) or contract lifecycle management (CLM), helps companies to manage and organize contracts efficiently. The software can enable the management, creation, negotiation, review and signing of different types of contracts and documents. Contract management software takes over the various contract management tasks either partially or, at best, completely.

Companies that do not use contract management software often rely on traditional tools such as Microsoft Word or Excel and network drives to manage contract details and file contracts. However, this can lead to lengthy processes as it is confusing and information has to be managed in different independent systems.

What should contract management software be able to do?

As with all modern software, user-friendliness is the most important aspect. Extensive IT knowledge should not be a prerequisite for using contract management software. It should have all interfaces and be able to be implemented with important systems. Contract management software should no longer be able to simply store contracts. All functions such as cloud-based filing, smart document management with automated text recognition, as well as functions that automate the monitoring, creation, negotiation, review and signing of contracts, in some cases using artificial intelligence, are already available in the most modern CLMs.

That's how holistic contract management works

How to recognize whether you need contract management software

Even with a small number of contracts, contract management software can be worthwhile. Companies should consider where most contracts are generated and how much time is spent creating, managing and monitoring contracts in each department. Some solutions offer suitable licenses depending on the user (department). In addition to the legal department, such software is particularly useful in sales, HR and purchasing.

How long does it take to implement contract management?

The implementation of contract management is individual and depends on the software and the company, but should not take longer than two to six weeks from introduction to automated use.

Guide to selecting contract management software

There is a wide range of contract management software available, and the range of functions can vary greatly. When selecting a suitable contract software solution for your company or organization, you can ask yourself the following questions, among others:

  • Which departments should use the system and what are their specific requirements?
  • What type of files and contracts should be managed and how large are they?
  • What criteria are particularly important to you for digital contract management (user-friendliness, degree of automation, data security, latest technologies (AI))?
  • Are there any special requirements such as barrier-free operation or multilingualism of the software that need to be taken into account?
  • Which other systems should be integrated with digital contract management?

Integrations in contract management

All integrations with contract management systems can be realized, including HubSpot, Salesforce, Microsoft Azure AD, Outlook, Microsoft Teams, Microsoft Dynamics 365, Google Workspace, SharePoint, etc.

It is also easy to integrate SAP with contract management software. The integration of SAP significantly simplifies the creation of contracts and documents. Employees can automatically use individual templates and data from the SAP system to create contracts, cover letters, forms and draft contracts. This saves employees manual tasks such as searching for data in the SAP system and sending documents. The generated documents can be created in various formats and stored in the digital contract file.

Artificial intelligence in contract management

The digitalization of the legal profession is increasingly focusing on the integration of artificial intelligence (AI) into contract management, particularly in corporate legal departments. The use of AI has a significant impact on the day-to-day work of lawyers, as they are relieved of repetitive work and thus have more time for value-adding tasks. The integration of artificial intelligence into contract management enables companies and law firms to review and manage contracts faster, minimize risks and make informed business decisions based on contract data.

Conclusion: A lot has happened in contract management in recent years

Digitalization is advancing rapidly and is also having a significant impact on legal processes. Contract management is changing with the times. In particular, advances in the field of artificial intelligence in recent years have made it possible to significantly automate contract management. Many companies have already looked for modern and efficient contract management solutions or have already successfully implemented them. If you are also looking for such software and would like to find out more, click here.

Are you looking for contract management software? With PACTA, you can automate your entire contract lifecycle from review, drafting, negotiation to approval & signature in just one platform. More about PACTA.