Contract Management: Definition, Tasks and Best Practices

‍What is a Contract?

Contracts are an integral part of our economic coexistence. They are everywhere, wherever you look. From everyday employment contracts that regulate the working relationship between employee and employer to less common share purchase agreements that regulate the acquisition of shares in an acquisition.  

According to the definition on Wikipedia , a contract is an agreement declared by two or more contracting parties on the establishment or substantive change of an obligation (see also § 311 BGB). It is based on at least two corresponding declarations of intent.

A contract therefore only becomes effective if there are at least two corresponding declarations of intent, namely offer and acceptance, with regard to the essential content of the contract.

The definition alone is complex and a number of conditions must be met for a contract to be valid in its simplest form. If you add a few more conditions and qualifications, you quickly get a very complex document that can often only be fully understood by experienced people.

Contracts are used in every department and industry – by companies of all sizes. Here are some types of contracts that are used in companies:

• Employment contracts : These regulate the terms of employment between an employee and a company. This includes details such as salary, working hours, holiday entitlements, notice periods and specific job duties.
• Sales contracts : Sales contracts are used to establish the terms and conditions for the purchase and sale of goods or services. They specify quantities, prices, delivery terms and payment arrangements.
• Rental and leasing agreements: These agreements are used for the use of real estate, vehicles or other goods for a fee. Rental agreements usually cover short-term use, while leasing agreements are often long-term and often offer a purchase option at the end of the term.
• Service contracts : These regulate the provision of services. They define the scope of services, remuneration, responsibilities of the parties involved and expectations regarding the quality of the service.
• Work contracts: Work contracts refer to the creation of a specific work or result and not to an ongoing service. Payment is often made after completion of the work.
• Non-Disclosure Agreements (NDAs): These agreements are used to ensure that confidential information is not disclosed to outsiders. They are especially important in industries where confidential data and trade secrets are involved.
• License agreements : These agreements regulate the use of copyrighted materials such as software, trademarks or patents. They specify the conditions under which licensees may use these materials.

What is Contract Management?

”Contract management is the process of providing administrative support for contract preparation, negotiation, administration and signing. The task of contract management is to optimize each of these process steps so that they can run smoothly. A range of administrative measures are used for this purpose.”

In the simplest case, the process of contract management is just the administration and Filing contracts in a regulatory system with the aim of speeding up access to documents when necessary. In the simplest case, this would be a hanging folder. An analysis of the data contained in the contracts or support of the contract beyond the conclusion of the contract usually does not take place here.

At the other end of the spectrum of contract management is contract lifecycle management, or in short,”CLM”. In this case, contracts are managed administratively over the entire life cycle. At the beginning of the process, there is the preparation of a contract, which is part of a comprehensive CLM Systems is operated via coordinated templates. Unlike the simple contract management system, contracts continue to be supported even after they have been concluded.

Why is Contract Management Important?

Contract management is the lifeblood of many modern businesses. It provides a structured framework that sets out the terms and obligations between the parties. Effective contract management ensures that both parties know their rights and obligations, creates clarity and reduces the potential for disputes. Contracts are not just legal formalities; they are tools that protect interests, set boundaries and, when managed correctly, can significantly increase the operational efficiency of a business.

At its core, contract management is about risk management . A well-drafted and carefully managed contract can prevent misunderstandings, mitigate unforeseen problems, and provide clear recourse in the event of disagreements or breaches. On the other hand, poor contract management can lead to financial loss, strained relationships, and legal complications. At a time when business dynamics are constantly evolving and legal issues can be complex, it is of utmost importance that contracts are up to date, compliant, and aligned with business objectives.

With the increase in global trade and cross-border partnerships, the volume and complexity of contracts have increased exponentially. This makes contract monitoring even more important. Through effective contract management, companies can optimize their financial performance, maintain strong partner and supplier relationships, and protect their reputation in the market. Essentially, contract management is not just a protective measure, but a strategic tool that drives business success.

What are the tasks of contract management?

As stated above, contract management encompasses all aspects of managing contracts for clients, from initial negotiations to final payment. This includes reviewing contracts, negotiating terms, drafting contracts and ensuring compliance.

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The contract management tasks listed below can be fulfilled without the use of dedicated software , although the implementation of these functions can be made much more efficient with the help of specialized tools.

• Categorization of contracts and development of a filing system to quickly find contracts again
• filing and managing contracts
• If necessary, digitization of paper contracts
• Extracting metadata, key parameters and deadlines of concluded contracts
• If necessary, integration and provision of key contract data in selected software systems
• Regular risk assessment of the contract portfolio (evaluation of the contract portfolio according to cluster risks)
• Granting access rights to authorized persons
• Audit-proof filing of emails and correspondence that led to the negotiation outcome
• Reminders for responsible persons about important deadlines
• Creation of templates for important contract processes
• Annexes to guidelines and guidelines for the preparation of contract documents
• Creation and implementation of guidelines for the negotiation of contracts
• Defining approval processes for the release and dispatch of contracts
• Defining a signature process for selected contracts

The life cycle of contract management

1. Initiation and drafting : Every contract begins with the identification of a need, be it for goods, services or a partnership. Once this need is identified, the drafting process begins . This phase is crucial because the terms and clauses established will determine the relationship between the parties. It is important to ensure clarity, completeness and foresight at this stage. Standardized templates can be useful, but customization may be necessary depending on the specific needs of the parties involved.

2. The Negotiation: This is where both parties come together to discuss and agree on the terms of the contract. The negotiation ensures that the agreement is mutually beneficial. It is a delicate balance of give and take where open communication, transparency and a thorough understanding of both parties' priorities are crucial. This stage often involves several revisions until a consensus is reached.

3. Approval and Execution : After negotiations, the contract is reviewed internally to ensure it is consistent with company policies and objectives. Once approved, it is time for formal execution. With the advent of technology, electronic signatures are becoming increasingly popular, providing a quick and secure method of completing contracts.

4. Monitoring and Compliance : Once the contract is signed, it is important to ensure compliance with the agreed terms. This phase involves monitoring key performance indicators, deliverables, schedules and other obligations set out in the contract. This is not just about enforcement, but also about fostering a collaborative relationship where both parties work together to achieve the desired results.

5. Review and renewal : Contracts often have an expiration date. As this date approaches, it is important to review the performance of the contract. Was it beneficial to both parties? Were there any challenges? Based on this evaluation, a decision is made: renew the contract with possible modifications, renegotiate the terms, or terminate the relationship.

6. Termination or closure: All contracts, whether renewed or not, eventually come to a conclusion. This stage ensures that all contractual obligations have been met, any outstanding issues or disputes are resolved, and the contract is formally terminated. Proper documentation and archiving are critical here as they ensure that a record is kept for future reference or potential audits.

Contract Manager Responsibilities

A contract manager plays a vital role in an organization by professionally managing and monitoring the entire lifecycle of contracts. They are not only responsible for the legally compliant creation and review of contract drafts but also continuously monitor existing contracts. In doing so, they pay particular attention to important deadlines, termination dates, and compliance with agreed terms and conditions.

In day-to-day operations, the contract manager coordinates the alignment between different departments and serves as an interface between business units, the legal department, and executive management. They regularly analyze contract risks, optimize contract processes, and ensure that all legal and compliance-relevant requirements are met.

The main responsibilities of a contract manager include:

• Development and maintenance of contract templates and standard agreements
• Negotiation of contract terms with business partners
• Monitoring of contract deadlines and automatic notification of relevant stakeholders
• Conducting contract analyses and reporting to management
• Digital archiving and systematic documentation of all contract-related documents
• Optimization of contract processes and implementation of efficient workflows
• Training employees in handling contracts and contract management tools

Best Practices in Contract Management

Effective contract management through best practices is crucial to ensure that contracts are not just legal formalities but strategic tools that promote clear communication, minimize risks and increase business success.

Central to effective contract management is establishing a central contract repository . By keeping all contracts and related documents in a single, secure location, companies can ensure timely access, systematic organization, and consistent monitoring of all contractual agreements. This centralized approach facilitates seamless tracking, monitoring, and retrieval, which is essential in today's dynamic business environments.

Standardization is another cornerstone of effective contract management. By developing standardized contract templates and clauses tailored to different types of contracts, companies can promote consistency across all contracts while speeding up the drafting process. However, this standardization should be accompanied by the flexibility to make customizations when special situations require it. Beyond the drafting phase, it is crucial to establish clear performance metrics and key performance indicators (KPIs) for contracts. This will ensure that all deliverables and obligations are measurable, promoting accountability and transparency.

Regular reviews and audits of contracts are at least as important to ensure continuous alignment with business objectives and timely identification of potential issues. Coupled with automated reminders of critical dates and milestones, these reviews ensure that contract management remains proactive rather than reactive. In addition, encouraging open communication with stakeholders, continuously training staff, and incorporating legal expertise throughout the contract lifecycle are best practices that underscore the importance of contracts as strategic assets in today's business landscape.

What is Contract Management Software?

Contract management software (CMS) or contract lifecycle management software (CLM) is a type of business software that helps organizations manage and create their contracts in an organized manner. Contract management software can be used to manage, create, negotiate and sign all types of contracts, including service level agreements (SLAs) , vendor agreements, supply chain agreements and others.

By using software, the contract management tasks defined above are partially or completely taken over by specialized software. In the case of contract filing, the software manages all contracts and the access rights for authorized persons. This means that those responsible for the process can always access contracts without having to go on a long search, and contract data, deadlines and scope of services can be accessed effortlessly.  

Companies without contract management software often rely on tried-and-tested tools such as Microsoft Excel and network drives to manage the details of signed contracts and to file the contracts themselves.

This often makes working with the information contained in the contracts a lengthy process, as contracts and data are stored in at least two independent management systems. Authorizations must be available for both systems and the data must also have been carefully processed in order to be available when needed.

Both of these things are rarely the case in practice. The search for the data quickly becomes a real challenge.  

How can contract management software help with the preparation of contracts?

In addition to managing and archiving contracts, the automatic creation based on existing templates is one of the core tasks of contract management software. Data in other systems, such as CRM systems, can be managed in the customer and product data and will be taken into account when creating the contract.

This means that data does not have to be entered multiple times, which is often where errors can creep in. Employees can therefore save a lot of working time by using the contract management software when creating contracts for the same documents over and over again. It is also possible for sales or other specialist departments to create contracts using a software-based contract assistant without much prior knowledge.

The contract management software can also take into account various scenarios when drawing up a contract or negotiating it. Additional explanations and assistance in the form of videos support employees in selecting the right clauses. The creation of the documents can be completely controlled via dialog. The input controls the contract result.

Numbers, totals, dates and deadlines can be queried and used in a dialog-based manner to show or hide paragraphs. This means that contracts can be created with just a few entries that are suitable for the respective scenario. The author does not have to deal with complex contexts or legal issues when creating the contract, as this is controlled automatically and based on rules by the software.  

After the contract software has been used to create the documents, they are automatically saved and can be forwarded to other contracting parties for signature and negotiation via a secure link. If this is not desired, individualized Word documents or PDFs can be created in the layout and sent by email.  

From a legal perspective, the automated creation of contracts using contract management software offers the advantage that all contracts are created on the basis of legally reviewed and approved text modules, which can easily be kept up to date using a central editor for all templates. Alternative clauses and other text modules can usually be easily added using the editor.

This means that even complex documents can be easily created by non-legal experts, meaning that involving the legal department is no longer necessary for standard contracts.

Often, multiple templates can be reduced to one template for different scenarios using intelligent controls. This can also reduce the maintenance time for templates.

In combination, automatic contract creation results in fewer typos through the transfer of data from other systems, shorter response times when creating contracts and easier maintenance of templates.

Version management and negotiation of contracts

Following a contract negotiation, it can be important, even years after the contract has been signed, to determine who made comments on which part of the document and what the respective intention of each contracting party was at that time. This is particularly important in order to be able to determine how these arrangements came about and what was actually meant at that point in time in the event of any disputes.

Even in the current negotiation phase, it can be important to be able to determine what has been changed in the contract during negotiations. Contract management software currently takes two different approaches to negotiation and version control.

One approach is the software-based comparison of Word documents that arise during negotiations. The differences between two Word documents are identified and then approved by an authorized person. The prerequisite for this is that each version of the contract is saved separately and the contract software is uploaded. In practice, this requirement presents employees with major challenges, as comments and changes are received via email in large negotiation rounds and changes regularly overlap.

The other approach currently being pursued by younger generation software providers is the direct negotiation of contracts via the software. This does not require the creation of Word documents and contracts can be negotiated internally and then externally with other contracting parties.

The changes are always identified directly in the software (redline) and deviations do not have to be identified by laboriously comparing several documents. In addition, innovative software providers also offer a separation between internal and external negotiations to ensure that internal comments remain internal and are not passed on to the customer. In any case, even after the contract has been signed, all changes and comments by all parties can be traced at any time without major administrative effort.

Of course, these innovative software manufacturers also offer the option of downloading the contracts as an MS Word document at any time, should the customer want to go back to the old world (even if we wouldn't understand that).

Integrations into existing applications and why that makes sense

Software applications generally do not exist in isolation, but must communicate with other software suites. This begins with the integration of Excel tables into Word documents and continues with contract management.

Customer data is often already stored in CRM or SAP applications and must be taken into account when drawing up a contract. If there is no direct integration, the counterparty's address data must be laboriously entered.

The same applies to key parameters that have already been agreed upon. In an organization with a division of labor, terms and conditions for cooperation are already stored in the CRM systems for the sales people. The legal department and sales support departments must then incorporate these parameters into the contracts when drawing up the contract in order to be able to offer the customer the desired products or services under the agreed conditions. Missing integrations mean double entry in the contract editor.

Modern contract management software can use a dedicated API to collect data from other systems and process it when creating the contract. This means that data does not have to be entered multiple times, which significantly reduces the frequency of errors.

Once negotiations have been completed, the agreed conditions must be passed on to an accounting system or a merchandise management system. Here, too, without integration into existing software structures, there is a risk of tedious and inefficient duplication of entries. In any case, contract management must be able to access all contract data from a controlling and compliance perspective, with and without integration into other software applications.

Contract management with non-digitized contracts

Unfortunately, paper contracts are still a necessary evil in many places around the world. However, the number of companies that actually still work with physical contracts is steadily decreasing as a generation of new business leaders takes the helm and paper-based contracts burden companies with a number of disadvantages. The audit-proof storage of contracts alone presents companies with major challenges.

The first priority in contract management should therefore always be the digitization of contracts. With the increasing prevalence of cameras on work smartphones, the necessary infrastructure should also be at hand. As soon as the contracts are available in a digital format, the original and signed documents should only be kept as a backup in case of an emergency. Access to and work with the contracts should then always take place via the digital version.

By using OCR (Optical Character Recognition) software, contracts can even be converted from conventional PDF documents, which usually only display the document as a photo, into text documents that can be easily edited in a text editor.

The use of artificial intelligence also enables the search and evaluation of the documents processed in this way according to selected parameters down to selected text passages.

What is the role of GDPR for contract management?

With the introduction of the General Data Protection Regulation (GDPR), the rights of those affected with regard to the transparency of data processing were strengthened. Those affected have a right to information about the processing of their data. At the same time, rights to rectification, erasure and restriction of the data processed were created.

Contract management should therefore always be able to respond to requests from data subjects at short notice with an evaluation of all personal data processed within the framework of contracts that concern the person making the request. Correct and ongoing updating of the data by contract management is therefore necessary for compliance reasons alone.

Contract controlling - what is it and why is it important?

Controlling is a collective term that includes planning, coordination and control of the company. Contract controlling, as a sub-area of ​​group controlling, provides the necessary data that arises from the contract processes as a basis for further planning and control of the company. Contract controlling is therefore also the ongoing monitoring and risk management of concluded contracts.

A contract concluded with a customer usually results in a number of obligations that the company should comply with in order to avoid having to pay contractual penalties or face the reversal of the transaction. A company must therefore know at all times which products or services must be delivered to which customers, by what deadline, and which raw materials or employees it requires to do so.

The task of contract management is to support the company with the necessary data and analysis to assess the risk on the one hand and to plan the necessary resources on the other.

Many companies typically use traditional Excel tables to record master data, material data and deadlines. The disadvantages of this very static data processing are obvious. All changes, renegotiations and follow-on sales must be properly recorded in the database in order to be taken into account in the planning. Input errors and deviations can lead to high costs and insufficient risk provision.

Innovative systems can automatically read this data and forward it to the necessary departments in the company. Automatic data capture can help avoid errors when entering data. Even when renegotiating or changing contracts, the data is always available in the correct form. The company can therefore make important strategic decisions based on correct data.

Regardless of whether contract controlling is carried out with the help of contract management software or without it, the transparency from contract controlling offers those responsible and department heads valuable and necessary transparency for strategic planning.

What is the role of contract controlling in identifying and evaluating contract risks?

At the latest, with the Act on Control and Transparency in the Corporate Sector (KonTraG) of March 5, 1998, companies are obliged to introduce and operate early risk detection systems. Section 91, Paragraph 2 of the AktG explicitly states this, according to which the management board is obliged to "take suitable measures, in particular to set up a monitoring system so that developments that endanger the continued existence of the company are identified at an early stage." Such "developments that endanger the continued existence of the company" usually arise from the aggregation and combination of individual and, on their own, harmless risk positions. This fact obliges companies to regularly carry out risk analysis and risk aggregation. Contract controlling helps to identify large risk positions at an early stage and to take precautions by taking appropriate measures.

Contract controlling can efficiently support risk management in identifying, assessing, controlling and monitoring risks, provided that all contract processes are consolidated in one database or software.

Why good contract management is important for researching and evaluating contracts

The simplest use case for contract management is to find an existing contract with a customer. This is relatively straightforward if the customer contracts are filed alphabetically by organization name. If you want to find all contracts of a certain type, this filing system presents major challenges. In this case, you would have to go through all the folders and check the documents individually. This is very inefficient and time-consuming.

Filing systems that are suitable for risk evaluation offer not only an evaluation by counterparty but also the option of filtering contracts by key parameters and limit values. This makes it possible, for example, to create a very detailed picture of the contract risks that have been concluded without much effort. For contract extensions or changes, this function would also make it possible to display all customers whose contract includes a certain product.

A research based on paper-based contracts would clearly be the worst scenario for both simple searches and the evaluation of individual parameters. In both cases, a chronological review of all contracts would be necessary.

In addition to the ability to quickly find stored contracts, contract management software also offers various filters to limit the number of relevant contracts and display evaluations within a few seconds.

How to determine whether you need contract management or contract management software

As we have shown in this article, the need to set up contract management is already present when there are only a small number of contracts. In particular, the question of counterparty risks alone should be the deciding factor for medium-sized companies and of course larger companies to implement comprehensive contract management. The only question that remains is whether and where the use of contract management software is worthwhile.

To determine this, it is worth determining where in your company most contracts arise and how much time is spent on creating and managing contracts in this department.

In the following, we will look at departments or company functions whose processes often benefit from the use of contract management software.

• Sales: Contracts are the bread and butter of sales. Contracts bring deals to a close and regulate business relationships. The closing of deals is often linked to the receipt of money that keeps the company alive. Inefficient contract processes can cost up to 9.2% of annual sales. Professional and agile contract processes not only minimize costs and risk, but also increase sales and the customer experience.
• Legal department: Legal departments are regularly distracted from their actual business and more complex questions with trivial questions about standardized contracts. Legal departments also regularly complain about a lack of or inadequate compliance by sales. Modern contract management software can help here by answering recurring questions directly via the software and creating automated contract processes to provide alternative clauses and optional arrangements for the organization. Using an analysis module in the contract management software, the legal department can also easily determine at any time which legal risks exist in the organization.
• Purchasing : Purchasing is tasked with saving costs on purchasing and at the same time increasing the scope of services. At the same time, purchasing must be able to determine whether software is already being used in other parts of the organization and whether there is an over-coverage. Good contract management is necessary for this in order to be able to determine at any time which services have already been purchased in the company. In addition, the risks of service provider failure can be broken down precisely and precautions can be taken if necessary.
• Personnel : The human resources department is sometimes tasked with drawing up personnel contracts on a daily basis. In many cases, internal or external lawyers have to be called in for this. In addition, salaries and contract periods have to be evaluated regularly. Contract management software can help to create personnel contracts without having to resort to the resources of the legal department. The contract management software can also provide support when negotiating contracts with employees.

What points should you pay attention to when choosing contract management software?

There are currently a number of long-established providers on the contract management software market who are approaching the topic through document management, but a few innovative manufacturers, such as top.legal, have also ventured into this still very young market with their software.

Since the different providers have different priorities, it is worth finding software that meets your internal requirements. The following questions often serve as a guide through the software jungle:

• Which steps of contract management should be covered by the software?
• Are there coordination difficulties between the legal department and sales?
• Do you want to display charts and tables in contracts?
• Are your deals being delayed because your contracts have to be thoroughly reviewed by the other party’s legal department?
• Where in the process do you see bottlenecks in the contract creation process?
• How do you manage your contracts and how do departments access the contract parameters?
• Should employees in-house be able to draw up contracts independently?
• Should the software manage the templates?
• Do you need a granular rights system for editing templates and contracts?
• Do you create the contracts in sales or does your organization rely on the customer's contracts?
• Which contract processes should be automated?
• Are you already using a digital signature or would you like to introduce it for contract processes?
• Which systems should the contract management software be able to address?
• Which languages ​​must be able to be displayed via the software?