Contract management or contract administration is the management of contracts made with customers, vendors, partners, or employees. Contract management includes negotiating the terms and conditions in contracts and ensuring compliance with the terms and conditions, as well as documenting and agreeing on any changes or amendments that may arise during its implementation or execution. It can be summarized as the process of systematically and efficiently managing contract creation, execution, and analysis for the purpose of maximizing financial and operational performance and minimizing risk.[1]
Common commercial contracts include employment letters, sales invoices, purchase orders, and utility contracts. Complex contracts are often necessary for construction projects, goods or services that are highly regulated, goods or services with detailed technical specifications, intellectual property (IP) agreements, and international trade.
A study has found that for "42% of enterprises...the top driver for improvements in the management of contracts is the pressure to better assess and mitigate risks" and additionally,"nearly 65% of enterprises report that contract lifecycle management (CLM) has improved exposure to financial and legal risk."[2]
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A contract is a written or oral legally-binding agreement between the parties identified in the agreement to fulfill the terms and conditions outlined in the agreement. A prerequisite requirement for the enforcement of a contract, amongst other things, is the condition that the parties to the contract accept the terms of the claimed contract. Historically, this was most commonly achieved through signature or performance, but in many jurisdictions - especially with the advance of electronic commerce - the forms of acceptance have expanded to include various forms of electronic signature.
Contracts can be of many types, e.g. sales contracts (including leases), purchasing contracts, partnership agreements, trade agreements, and intellectual property agreements.
The business-standard contract management model, as employed by many organizations in the United States, typically exercises purview over the following business disciplines:
The average Global 1000 corporation maintains over 40,000 active contracts, most of which are still managed in a traditional manual method. However, approximately 25% of Global 2000 companies have implemented some form of contract management software to help manage corporate contracts. Contract management software automates the contracting process from contract creation and negotiation through monitoring, compliance and renewal. The solutions typically maintain a warehouse of corporate contracts improving a company's access, visibility and control over contacts. Most solutions also offer the ability to warehouse standard contract and business terms and conditions and template contracts. Other solutions, which utilize Service Lifecycle Management (SLM), bundle contract management with all other forms of management concerning service-based operations geared specifically towards offering better customer retention. Research has demonstrated that contract management software allow companies to better realize savings achieved during procurement negotiations and procurement spending, improve sales effectiveness, and increase compliance by allowing contracts to drive day-to-day operations.
According to Forrester Research in its report titled The Forrester Wave™: Contract Life-Cycle Management, Q2 2011, "Contract life-cycle management (CLM) products are more than merely document repositories; they streamline the authoring process, aid compliance tracking, and reduce overall contract administration costs. Forrester predicts the CLM market will grow at 17% in 2011, driven by strong demand from sourcing professionals and legal departments. This report will summarize Forrester's 113-criteria evaluation of contract life-cycle management vendors, in which Upside Software led the pack because of advanced functionality across the board and extremely positive reference results, just ahead of ePurchasing suites Ariba and Emptoris, enterprise resource planning (ERP) giants Oracle E-Business Suite and SAP, and sell-side CLM specialist Selectica.". [3]
Using information across key areas of the organization can increase contract compliance rates, reduce revenue leakage, and improve overall CLM performance by reducing cycle times.[4]
To date, most organizations continue to use inefficient, labor intensive contract processes. The typical company takes 20 to 30 days, on average to create, negotiate, and finalize a contract. Many organizations use Microsoft Word, and Excel to author and manage their contracts, however, these tools and solutions do little to automate and activate the agreements. Other businesses attempt "home-grown" solutions using rudimentary web tools such as ACT! which does not provide contract compliance monitoring and hence cannot reduce or eliminate maverick spending. Such solutions also do not provide critical pricing variance monitoring and are unable to track pricing rebates, or compare contract obligations against changing policy and regulatory non-compliance. Introducing contract management into an enterprise using these tools introduces greater risk of error and loss into the enterprise.
Contract management software is used to manage the contract life-cycle, from identification of a need, through negotiation, agreement, monitoring, and close-out.
There may be occasions where what is agreed in a contract needs to be changed later on. A number of bases may be used to support a subsequent change, so that the whole contract remains enforceable under the new arrangement.
A change may be based on: