#standardizedcontracts

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Your Ultimate Guide to the Contract Management Process

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 cycleUltimately, streamline your efforts to make your business more successful. Start by learning more about each of the nine stages: The Request PhaseThe Draft PhaseThe Negotiation PhaseThe Approval PhaseExecutionCompleting Your ObligationsMaintaining ComplianceAuditingRenewal 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. 

5. Execution

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.

8. Auditing

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. 

9. Renewal

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. Read the full article

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How to Develop and Standardize a Contract Scoring Plan

To effectively determine what risk is associated with your contracts, you don't just need a contract scoring plan. You need to automate it! Your contract scoring plan helps standardize your contracts and ensure that your business isn't taking on more risk than anticipated. This step will also give your negotiators more effective guidelines that can help them set terms in each contract that benefit your business. Once you know what KPIs matter most to your business — our comprehensive guide to contract management KPIs can help — and what metrics you’re aiming for, it’s time to develop a contract scoring plan.

Step One: Set Your Risks

Each contract has some potential for risk for your business. If a customer doesn't pay or if you fail to deliver on your customer's expectations within the stated time frame, you may face significant consequences. The goal of your contract scoring plan, however, is to minimize those risks as much as possible. As you create your contract scoring plan, start by establishing what risks your company wants to evaluate. These may include: Cash flowBusiness liabilityLegal accountability, including breach of contractPotential warranty problemsTermination concernsInstabilityLoss of business integrityFailure to maintain goodwillAutomatic rollover clauses (which can be both risky and beneficial)Intellectual property concernsAlleged confidentiality disclosures Some risks cause more serious concern for your business than others. In some cases, risks that appear in a contract, especially clauses demanded by a customer, may not be worth taking. In other cases, you may be able to alleviate the risk in another way. Carefully define the risks that you want to score in your contracts before beginning your contract scoring system. Depending on your industry, your risks may look different — or you might not be worried about certain risks that another business might need to consider. 

Step Two: Assign a Number to Those Risks

Each risk should be assigned a "point value." Using analytics and hard numbers sets the stage for good decision-making. It makes it easier to compare contracts and describe risk in an easy-to-understand format so everyone’s on the same page. Generally, contract risks are scored on a 1-5 scale, with 1 being little to no risk and 5 being a substantial risk to the business. Once you add them up, you'll get an average contract score. A high-risk contract needs to be revisited or avoided for your business altogether, while a low-risk contract could help point you toward success. For example, an SLA in which your company pays penalties for downtime might drop the whole contract score. Once you've given a number to your risks, take the time to score some of your current contracts to get a better idea of what your average risk looks like. For example, if you have 20 data points, you should expect a risk score of 20 for a contract with no risk at all. However, the odds chances are that your business averages around 25-30 even if you take on little to no risk in your contracts. If your business is still in the startup stage, when you must build credibility, or you're interested in pursuing innovation and opportunity, you might take on higher risks than an established business with a comfortable niche in your industry. Knowing the expected risks for your total business can also help inform your contract administration plan. In order for your contract scores to be effective, you need to know what your risk actually looks like and what risk the company is really willing to take.  High risk scores aren’t an automatic sign of failure; not knowing your risk score is the real danger. 

Step Three: Use Your Contract Management Software Effectively

Your contract management software is your key to automating the contract scoring process. As soon as a contract enters your system, the contract management system has the potential to score it. Consider when you want your contract management system to create and highlight scores for your contracts.  Remember: You don't just need a score when a contract is completed.  Ideally, you want your contract scored at several points throughout the negotiation process. This simple step can help identify potential risks and keep negotiations from getting bogged down, which could prevent your contract from being approved by the client.  Make sure your system flags the appropriate individuals at the right time.  A contract risk score does no good for your company if the right people don't see it at the right time. Consider at what points the contract needs to be scored and when employees throughout the business need to be notified of that score.  For example, your negotiators might need to see contract risk scores at every stage of the negotiation process so that they can make needed changes before they present the next draft of the contract to the customers. Set the contract management software to automatically notify the team any time a contract risk rises over a certain score. The approval team may need to see the contract's risk score before signing the final paperwork, especially if the contract has a high level of risk.  Take a look at your entire process and make sure that notifications are automatic. Your team shouldn't have to go digging to find a contract risk assessment, especially once you make contract scoring an automated process. Automation frees your team up for negotiations and creative projects. Contract risk management and assessment can change the shape of your business, allowing you to more effectively create contracts that minimize risk and maximize the benefit of each contract. By utilizing your contract management software effectively and prioritizing contract scoring through these methods, you can create a better system that will ultimately help your business better meet its goals.  Read the full article

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How To Use KPI's To Score Your Commercial Contracts

Early in your business's lifespan, you likely began a contract management system, whether electronically (for new, modern tech companies) or using an old-fashioned filing system. Thanks to modern technology, however, you have more opportunities than ever to make the most of your contract management efforts. That includes scoring your commercial contracts to better understand their risks and help prevent risks in the future. Everyone has heard horror stories of companies that went under — or came close to it — due to a bad contract. Are you using the right KPIs to score your commercial contracts and reduce your risk? 

What are KPIs for Commercial Contracts?

KPIs, or key performance indicators, are measurable values — either qualitative or quantitative — that define how effectively your contracts are meeting your business's goals. Without the right KPIs, you leave many aspects of your contracts, and therefore your business's performance, up to chance. Not only that, an inefficient contract management process can leave you missing out on many of the opportunities your business might experience.  By measuring the right KPIs and using them effectively, you can improve your contracts and better manage your business. KPIs help you control risk and choose the contracts that are right for your business.

The Most Important KPIs for Commercial Contract Management

In order to effectively manage the effectiveness of your contract management, you must isolate the most important KPIs. By narrowing them down, you can better understand which metrics will ultimately benefit your contracts and contract management most.  1. What is the length of your contract cycle? Your contract cycle determines how long it takes, from contact to signature, to execute a contract. Often, the contract process becomes long, drawn-out, and inefficient. All too many negotiations fall through — or become bogged down by excessive features or information that isn't necessary to the contract.  How long does it take your business, on average, to create and sign a contract?  You want to know the average length of your contract cycle, as well as how long it takes to complete specific types of contract cycles within your company. You may also want to break down the contract cycle and determine where the longest delays are — and, therefore, where you can institute changes to decrease those delays.  Separately, you may want to consider how long it takes for clients to renew their contracts with your company. Are companies spending an excessive amount of time looking back over the contract or considering loopholes, or do they generally renew automatically?  2. What is the average value of your corporate contracts? Your company may have a handful of big corporate contracts, or you might prioritize corporate contracts and have only a handful of smaller contracts at your company. You need to know the average value of your contracts as a whole, as well as the average value of your big contracts. Make sure to carefully examine any outliers that could impact the averages. Bigger contracts often take longer than smaller, more automatic deals. Measuring their value against the time taken to close them can let you know more about how valuable a bigger deal really is. 3. What is the average risk of your contracts? When you take a look at your contracts, what's the average value of the risk associated with them? Contracts generally have two types of risks: contract-related risks, or the risks that could occur within the lines or wording of the contract itself; and supplier-related risks.  What could happen, for example, if your suppliers fail to deliver the necessary materials for you to fulfill the contract?  What happens if you face financial difficulties during the process?  Could the contract itself create financial difficulty for your business — trying to take on too much when you lack the resources to fulfill the contract, for example?  Carefully evaluate the risks associated with each contract and assign them a value.  4. What degree of deviation exists in your contracts? Your business probably has a standardized contract that allows you to easily sign new clients up without having to negotiate a new contract each time. When you work on a contract specifically for a new client, however, that client's specific needs may cause you to deviate from your standard contract.  As you evaluate your contracts, consider how each one deviates from your standard contract, including what those deviations will mean for your company. Some minor deviations, like shortening a few deadlines for a rush order, can be easy to handle. More serious deviations, including a lower allowance for overhead and profit, could spell disaster for your business. Being forced to add termination for convenience clauses can be even more detrimental. 5. How many of your contracts expire and are not renewed? Contract renewal is an important aspect of any business. Returning customers — those who will continue to use the services provided by your business — have a greater value for your business than brand new customers who may use you for only a single contract period. If you have a high customer churn rate, it’s time to investigate. You may find that something your business is doing does not fit the needs of your customers or that your current contract model fails to adequately reflect your customers' needs. A solid contract does not just benefit your business. It also offers enough benefits for your customers that they come back for the services you provide. You may find that something your business is doing does not fit the needs of your customers or that your current contract model fails to adequately reflect your customers' needs. A solid contract does not just benefit your business. It also offers enough benefits for your customers that they come back for the services you provide. Many of these KPIs will already be reflected in your contract administration plan, so implementing contract scoring won’t be as challenging as it may seem at the start. If you want to learn more about contract administration plans, read our recommendations for best practices.

The Benefits of Standardizing KPIs for Contract Scoring and Contract Creation

When you standardize your KPIs both for contract scoring and for contract creation, you develop a better understanding of exactly what makes an effective contract. Also, you can develop a strategy for making both your contracts themselves and the contract creation process more efficient in the future.  1. Understand what risks you're taking with your contracts. Do you have a high-dollar contract that represents a high level of risk for your company — a client, for example, who struggles to pay on time, or a job that has a high chance of failure? When you standardize your KPIs, you'll be able to quickly determine where those risks are and how they could impact your business in the future. Effective contract scoring can also help you prevent those risks in the future, along with these five contract management practices. It can even help you eliminate or pass on potential contracts that might not benefit your business.  2. Streamline your contract creation process. If you find that your contracts take an excessive amount of time to create, you can isolate the problems that cause those delays. If some aspects of your contract creation process are consistently slowing down the whole, you can then take steps to streamline your content creation process. Scoring your boilerplate contract — and removing these hidden risks — can also improve your process. When you understand where the potential challenges are along the way, you can break them down — and get them out of the way. Not only does that speed up your contract cycle, but it also makes your contracts’ scores healthier. 3. Avoid contracts that pose too high a risk for your business. In the client acquisition process, especially when it comes to corporate clients, it's easy to let your excitement get ahead of you. You're eager to sign a new client or to expand your business, so you might not take the time to clearly understand the risks involved. Your sales team may also be eager to close a deal without seeing the long-term ramifications. By creating standardized KPIs to score your contracts, however, you can more effectively evaluate the risk posed by a potential client — and avoid contracts that might pose too high a risk for your business. Standardized scores also clearly communicate to other departments when potential contracts are good or bad.  You may even choose not to renew current contracts that don't offer as much potential gain for your business as you initially thought. For example, you may discover that you have a long-term client whose contract no longer delivers the value it did in that client's early days with your business. In that case, you may want to reevaluate your contract with that customer or choose not to renew it. 4. Increase customer retention. Customers who stick with your business have a much higher lifetime value than those that remain with your business for only a single contract term. When you score your contracts using the right key performance indicators, you can discover what elements your customers really need in their contracts — and, as a result, you can significantly increase your customer retention rates.  

How to Use Your KPIs to Score Corporate Contracts

Once you have established your KPIs and started collecting the data you need to score your contracts, it's time to get started. With these steps, you can score your corporate contracts. Not only can your team get a better idea of what risks your company might face as a result of existing contracts, but you can also determine how your company can more effectively acquire bigger contracts in the future. Follow these steps to start scoring your contracts: 1. Evaluate the financial risk assigned to each contract compared to your average risk. If an individual contract has a particularly high risk compared to your overall risk level, you may be better off letting that particular contract pass you by. It’s hard to skip an opportunity — the chance to expand to bigger and better corporations, for example. But if you have a corporate contract that will demand too much from your business, you may decide that the risk is not worth the potential gain. Your company’s finance department can weigh in to create standard evaluation metrics. 2. Take a look at the potential value of the contract compared to your averages. In some cases, you may find that high value creates more potential risk. For example, taking on bigger jobs means a potentially bigger fallout if the contract falls through or your team is unable to deliver. If you discover that a contract fails to yield the appropriate value for your business in comparison to the risk, you can either reevaluate your terms or choose not to move forward with the contract.  Scoring all of your contracts across the board also allows your executive team to decide how many high-risk contracts your company can hold at once without either skipping too many growth opportunities or compromising the company. 3. Consider how long your business will bear risk as a result of the contract.  If you discover that a client drags their feet when the time comes to agree to the contract, you may have equal trouble trying to get them to uphold their end of the deal — including payment. Consider how long your business will bear risk as a result of the contract. A short-term risk, for example, might be reasonable, depending on what you stand to gain from it. A long-term risk, on the other hand, could hang over the head of your business, making it difficult for you to continue functioning normally. 4. Look at whether the contract is a new contract or a renewal. Returning customers may be worth more than customers who are new to your business (even if their ACV — or annual contract value — is lower). As you evaluate your contract, consider the lifetime benefits of that customer to your business. A customer who is interested in expanding their use of your services, for example, maybe worth taking that extra risk, especially if you know the customer has been reliable in the past.  On the other hand, a customer who has failed to deliver on your expectations in the past might not be worth renewing the contract with. Don't simply assign an automatic score based on whether or not the customer has worked with your company in the past; instead, take the time to consider the customer's past behaviors and how they may impact your business in the future.  You may also want to consider customer longevity: for example, a customer who has been with your business for a long time may be worth maintaining or resigning a legacy contract. Other factors related to contract terms, such as automatic renewals or termination for convenience clauses, can raise or lower the total score. 5. Consider how and why customers are falling away from your business.  Have you noticed any trends in customers who are choosing not to renew your contracts?  You might, for example, have noticed that customers no longer need certain services, or that customers within a certain price point are less likely to stick with your business. If so, you may want to more carefully evaluate contracts that fit those criteria to determine the likelihood of keeping those customers in the future. By evaluating the contract ahead of time, you can avoid potential clauses that could be a problem for either you or your customers — and improve your overall customer retention rates as a result.  As you learn to more effectively score your contracts, you'll find that it's much easier to determine what contracts are worth keeping and which ones will fail to offer the benefits you need for your business. Even better, all of this qualitative data can be easily measured and automatically scored with the right contract management software. An effective scoring system and careful attention to the right KPIs will allow you to create better contracts, evaluate risk, and choose clients that genuinely fit the needs of your business.  Read the full article