Contract management
Encyclopedia
Contract management or contract administration is the management of contract
s 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.
Common commercial contracts include employment letters, sales invoice
s, purchase order
s, and utility contract
s. 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."
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.
, typically exercises purview over the following business disciplines:
(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.".
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.
A change may be based on:
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s 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.
Common commercial contracts include employment letters, sales invoice
Invoice
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms...
s, purchase order
Purchase order
A purchase order is a commercial document issued by a buyer to a seller, indicating types, quantities, and agreed prices for products or services the seller will provide to the buyer. Sending a purchase order to a supplier constitutes a legal offer to buy products or services...
s, and utility contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s. Complex contracts are often necessary for construction
Construction
In the fields of architecture and civil engineering, construction is a process that consists of the building or assembling of infrastructure. Far from being a single activity, large scale construction is a feat of human multitasking...
projects, goods or services that are highly regulated
Compliance (regulation)
In general, compliance means conforming to a rule, such as a specification, policy, standard or law. Regulatory compliance describes the goal that corporations or public agencies aspire to in their efforts to ensure that personnel are aware of and take steps to comply with relevant laws and...
, goods or services with detailed technical specifications, intellectual property
Intellectual property
Intellectual property is a term referring to a number of distinct types of creations of the mind for which a set of exclusive rights are recognized—and the corresponding fields of law...
(IP) agreements, and international trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...
.
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."
Contracts
A contractContract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
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.
- A sales contract is a contract between a company (the seller) and a customerCustomerA customer is usually used to refer to a current or potential buyer or user of the products of an individual or organization, called the supplier, seller, or vendor. This is typically through purchasing or renting goods or services...
that where the company agrees to sell products and/or services. The customer in return is obligated to pay for the product/services bought. - A purchasing contract is a contract between a company (the buyer) and a supplier who is promising to sell products and/or services within agreed terms and conditions. The company (buyer) in return is obligated to acknowledge the goods / or service and pay for liability created.
- A partnership agreement may be a contract which formally establishes the terms of a partnership between two legal entities such that they regard each other as 'partners' in a commercial arrangement. However, such expressions may also be merely a means to reflect the desire of the contracting parties to act 'as if' both are in a partnership with common goals. Therefore, it might not be the common lawCommon lawCommon law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
arrangement of a partnership which by definition creates fiduciary duties and which also has 'joint and several' liabilities.
Areas of Contract Management
The business-standard contract management model, as employed by many organizations in the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, typically exercises purview over the following business disciplines:
- Authoring and negotiation
- Baseline management
- Commitment management
- Communication management
- Contract visibility and awareness
- Document management
- Growth (for Sales-side contracts)
Contract management software
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 ManagementService lifecycle management
Service lifecycle management is defined by industry analyst firm AMR Research and described as a holistic approach which helps service organizations better understand the revenue potential by looking at service opportunities proactively as a lifecycle rather than a single event or series of...
(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.".
Contract management in business
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.Inadequate efforts
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!ACT!
Sage ACT! is a customer relationship management software application which is used to keep track of client and prospect details in a single database that can be shared by multiple users...
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 implementation
Contract management software is used to manage the contract life-cycle, from identification of a need, through negotiation, agreement, monitoring, and close-out.Change management
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:
- A mutual agreement of both parties to vary the contract, outside the framework of the existing contract. This would be an independent basis for changing the contract.
- A unilateral decision to vary the contract, contemplated and allowed for by the existing contract. This would normally have notice periods for fairness and often the right of the other, especially in consumer contracts, to cease the contractual relationship. Be careful that any one-way imposition of change is contractually justified, otherwise it may be interpreted as a repudiation of the original contract, enabling the other party to terminate the contract and seek damages.
- A bilateral decision to vary the contract, within the variation or change control process outlined in the existing contract. These are often called change control provisions.
See also
- Document automationDocument automationDocument automation is the design of systems and workflow that assist in the creation of electronic documents. These include logic based systems that use segments of pre-existing text and/or data to assemble a new document. This process is increasingly used within certain industries to assemble...
- United Nations Convention on Contracts for the International Sale of GoodsUnited Nations Convention on Contracts for the International Sale of GoodsThe United Nations Convention on Contracts for the International Sale of Goods is a treaty offering a uniform international sales law that, as of August 2010, has been ratified by 77 countries that account for a significant proportion of world trade, making it one of the most successful...
- Uniform Commercial CodeUniform Commercial CodeThe Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
- United States - Office of Federal Contract Compliance ProgramsOffice of Federal Contract Compliance ProgramsThe Office of Federal Contract Compliance Programs is part of the U.S. Department of Labor. OFCCP is responsible for ensuring that employers doing business with the Federal government comply with the laws and regulations requiring nondiscrimination...
- for contracts with the United States government - Government contract
- Group purchasing organizationGroup purchasing organizationIn the United States, a group purchasing organization is an entity that is created to leverage the purchasing power of a group of businesses to obtain discounts from vendors based on the collective buying power of the GPO members....
External links
- National Contract Management Association (NCMA)
- IACCM, International Association for Contract and Commercial Management
- ISM, Institute for Supply ManagementInstitute for Supply ManagementFounded in 1915, the Institute for Supply Management is the first supply management institute in the world.ISM is a not-for-profit educational association that serves professionals and organizations with an interest in supply management in more than 80 countries...