Contract Management

What is Contract Management?

Contract management is the systematic process of creating, negotiating, executing, and overseeing legally binding agreements to ensure all parties fulfill their contractual obligations. It encompasses a wide range of activities, from drafting and negotiating contracts to monitoring compliance, handling disputes, and making modifications.

You’ll have specific contract management procedures for every contract within your organization.

• Vendor/supplier contracts
• Partnership agreements
• Sales contracts
• Service-level agreements
• Non-disclosure agreements

This could include varying levels of scrutiny and approval, as well as different review cycles, depending on the type of contract you’re dealing with.

With effective contract management, you’ll maintain strong business relationships, comply with legal regulations, minimize disagreements, and ensure everyone follows through with their end of the deal. And with contract management software, you can streamline much of the process while creating an accessible central repository for all your legal agreements.

Synonyms

• Contract lifecycle management
• CLM
• Contract administration
• Contract governance

Understanding Contract Management

The contract lifecycle follows six fundamental stages, which are essential for any organization, regardless of its size or industry.

1. Request and creation

In the first phase of the contract management process, a prospect or customer asks one of your reps to provide a formal proposal that outlines the terms and conditions of your legal agreement. This is the first draft, and it normally happens after the quoting process, where a sales rep finalizes a deal with a customer.

At this point, your team has a few critical responsibilities:

• Identifying all the stakeholders the contract concerns
• Gathering requirements across the business
• Mapping out the contract’s details
• Assigning owners and approvers in the approval chain
• Initial screening for potential risks, red flags, or opportunities

It’s important to record this info accurately, and with enough detail to paint a clear picture of the contract’s purpose, scope, and requirements. Doing so will make the rest of the process a lot more straightforward.

Once you have all the information required to draft the agreement, you can move on to the next phase.

2. Authoring and negotiation

When you’re ready to start writing the contract, you don’t need to do it from scratch. Here, you’ll add in standard language from a library of pre-approved clauses and agreements (within your contract creation platform). This way, you avoid errors and have consistency across all your contracts.

Chances are good you’ll have some of the following standard clauses ready to go:

• Payment terms and conditions
• Confidentiality
• Delivery details
• Renewal options
• Termination rights
• Governing law and jurisdiction
• Representations and warranties
• Service level agreements (SLAs)
• Non-disclosure agreements (NDAs)

If you’re dealing with enterprise customers or selling a highly configurable product, there’ll be custom details that you need to add to each contract. You can either create these from scratch, or use templates your organization has already created and approved. For example, you may agree to special pricing and guaranteed service levels for a high-value account.

For milestone-based contracts (e.g., in construction or software development services), you’ll also figure out the details about deliverables and acceptance criteria.

Once you’ve shared the initial draft with the customer, you’ll go back and forth on what’s required until you reach a mutual agreement. If you’re using a digital sales room, the negotiation process can happen within the microsite.

3. Approval and contract execution

After you’ve reached an agreement, you’ll need to get final sign-off from everyone involved.

• Your finance team approves the payment terms, discounts, and payment schedule.
• Your sales team confirms that all the customer’s requirements are met.
• Your legal team reviews the contract language.
• Your fulfillment team checks they can actually deliver everything promised.
• Your customer’s buying group verifies everything works according to their internal requirements.

From there, an executed contract is one that is officially signed off by everyone who needs to sign it. At this point, all parties are legally bound to follow the terms and conditions outlined in the contract.

You can carry out the execution process electronically through e-signatures or physically with paper signatures. Practically every company these days prefers the former to the latter.

4. Compliance and monitoring

Once the contract period has begun, the main task is managing the obligations of both parties.

This includes:

• Tracking compliance with agreed-upon terms and conditions
• Keeping records of contract modifications
• Monitoring payment schedules and the timeliness of payments
• Addressing issues and disputes if they arise
• Reviewing the performance of both parties on a regular basis
• Paying attention for important dates and milestones

Some of this (like payment processing and milestone tracking) happens automatically through your contracting and billing platforms, but you need human involvement for the more complex areas, like resolving disputes and performance reviews.

As with the rest of the contract management process, clear communication is key here. Both parties need a designated point of contact for contract-related issues and concerns.

5. Renewal or termination

Your customer or partner will decide whether they want to renew, renegotiate, or terminate the contract upon its expiration. In the initial contract, you’ve given them options going forward, which you’ll use as the basis for these next contractual decisions.

Retention and expansion are two of your greatest sources of new revenue because they don’t incur the regular customer acquisition costs. Plus, you have a 60-70% chance of closing an existing customer on additional products and services, while you only have a 5-20% chance of converting a new customer through your typical sales process.

So, this is where your customer success team can come in and upsell additional services or products, or push for an expansion within the account.

6. Close-out and completion

You might be tempted to skip this stage and move on because of competing priorities, especially when it comes to a contracted party you’re no longer working with. Don’t.

Compliance requirements change all the time, legal issues can happen long after the contract ends, and you never know what kinds of records you’ll need available in the future. Maybe you initially thought something was irrelevant, but in an audit, it becomes vitally important.

You need a procedure for officially closing out your contracts. Period.

• Recording performance vs. KPIs
• Checking the record for gaps, and adding any missing documents or information.
• Moving your contract to the archive for retention purposes.

If you don’t cover all the bases, you might run into issues in the future, such as not being able to prove a certain level of performance or not having the necessary documentation to defend against a legal claim.

The Role of Contract Management in the Quote-to-Cash Process

Quote-to-cash describes the process from when your sales rep delivers the initial quote to when the customer makes their first payment, and beyond. An efficient quote-to-cash process translates to faster sales cycles, lower delinquency rates, more predictable cash flow, and increased visibility into your business metrics.

Since contracting is the biggest step between quoting and payment, contract management plays a pivotal role in whether or not the process runs smoothly.

Quote creation

Before you begin to draft the contract, you and your buyer have to agree on the price. Within your quoting software, you’ll add products/services and their corresponding prices, include special terms (e.g., discounts), and then generate a quote for your prospect.

Writing the actual agreement

Pricing terms and payment requirements have to be aligned with your company’s policies and the contract’s guidelines. By creating these in the quoting software and getting sign-off on the quote, you can automatically transfer these details to the contract via software integration.

Negotiating the terms of the deal

Effective contract management streamlines collaboration between each department involved in the deal (i.e., your deal desk). Generally, that’s sales and legal, but it could also involve your finance, product, and/or fulfillment teams.

Part of mastering the deal desk function within your business is creating this alignment through centralized, shared access and automated approval routing for the appropriate stakeholder in each aspect of the deal.

Contract execution

Beyond approvals, each person who needs to sign the contract should be able to do so in less than a minute. Reviewing the terms and clicking to sign should be as easy as posting a story on Instagram.

Contract management software enables e-signatures and clickwrap agreements, which eliminates the need for physical paperwork and faxing and holds everyone accountable for their signature responsibility.

Fulfillment and billing

Once everyone’s signed the contract, you have to make sure your customer actually pays you on-time. The predictability of your cash flow depends on it. A huge part of contract management is bridging the gap between execution and billing by automating the invoicing, revenue recognition, and reconciliation processes via integration with billing/accounting tools.

You can guarantee accuracy by generating invoices from the details in the contract. Your billing system should be able to adapt to each customer’s payment terms and billing schedules. And it should notify you (and them) every time a customer is X number of days overdue.

Monitoring the contract lifecycle

Contract expiration, renewals, and amendments are just a few aspects that will likely require your attention throughout the contract lifecycle.

You’ll need:

• Periodic reviews of each customer account
• Formal procedures for dispute resolution, escalation, and contract modifications
• Automated tracking for obligations and entitlements (e.g. SLAs, warranties)
• Alerts for key dates and milestones (e.g. renewal deadlines)

Through contract monitoring, your customer success team should also be on the lookout for renewal and upsell opportunities. Take note of each customer’s usage patterns, specific needs, and feedback to identify areas where you can provide even more value. Come time for renewal, take a personalized approach targeted at these details.

Why Effective Contract Management is Critical for QTC

Now we’ve touched on how contract management plays a role in the quote-to-cash process, but we haven’t yet addressed why effective contract management is so critical for QTC success.

Let’s dive in.

It mitigates business risks.

Manual processes are always error-prone. As an example, a study found that 94% of spreadsheets used in business decision-making have critical errors. If you’re using spreadsheet-based quoting and document-based contract management procedures, you’re leaving yourself open to a seriously high probability of operational mistakes and financial losses.

Beyond that, if you don’t have a way of tracking things like obligation fulfillment, you’re risking non-compliance — be it missed payments, unmet deliverables, or even data privacy mishaps that can result in legal action and reputational damage.

It automates the revenue recognition process.

Revenue recognition according to ASC 606 (or IFRS 15 for international companies) is remarkably complicated — every type business has to handle it differently.

For instance, SaaS contracts entail payment up front, but service delivery over the course of the billing period. So, revenue is recognized the month after, despite being paid for the full month before. 

Milestone-based companies, like construction firms or manufacturers, must document progress toward completion and use those records to determine the amount of revenue that can be recognized at specific intervals.

Each type of contract demands unique tracking, which can only be handled (a) with accuracy and (b) at scale with the right software.

It dramatically improves the customer experience.

Customers want things to be as frictionless as possible. Gartner surveyed hundreds of B2B buyers and found that 77% of them described their last B2B purchase experience as either “difficult” or “extremely complex.”

A lack of streamlined contract management processes is a huge part of that. And it’s costing businesses tons of sales.

With contract management software, every step — from document creation to negotiation to e-signature and beyond — can happen in one place which streamlines communication. The interface is intuitive and app-like, so even non-technical users can figure it out.

Not to mention, automated approval routing makes it so customers know what’s happening with their contracts at all times, and they can give what’s needed from their end as quickly as possible.

It’s scalable, unlike spreadsheets and hands-on monitoring.

Software can handle as many additional customers, end-users, and deals as you need. You can have 10, 100, 1,000, or 10,000 and the UI will work the same. It won’t slow down as you add more contracts, either.

If you’re using spreadsheets and manual tracking methods, things will start falling through the cracks as your business grows. It’s only possible to monitor a few contracts at once when you’re doing everything by hand.

Contract management software eliminates these limitations and makes it easy to tack on enterprise-level features as your business expands.

Challenges in Contract Management for QTC

As far as the contracting process is concerned, you’ll face plenty of challenges as a company:

• Human error in the quoting, contract drafting, invoicing, and monitoring processes
• Lack of end-to-end visibility throughout the contract lifecycle
• Missed compliance issues
• Late or delinquent payments
• Slow approval, modification, and dispute resolution processes

These all affect the stability of your cash flow and can lead to significant revenue losses.

Tools and Software for Streamlining Contract Management

From quoting to termination, there are a few tools you 100% need if you want to run a successful business.

Configure, price, quote (CPQ)

Configure, price, quote (CPQ) software enables sales reps to configure or select items, calculate pricing for them, and generate quotes/proposals to send customers. It handles the first step in the contract management process, where you define the items that go into a contract and their associated prices.

Contract lifecycle management (CLM)

CLM software enables you to centralize, standardize, automate, and audit the contract management process.

It handles everything:

• Request intake
• Contract creation and customization
• Negotiations and redlining
• Approvals and electronic signatures
• Storage, search, and retrieval
• Version control and audit trails
• Compliance tracking and reporting

These features integrate directly with your CPQ system, so you have a seamless data flow between sales, legal, finance, and other departments involved in the contracting process.

Digital sales rooms

A digital sales room is a virtual space where all parties involved in the sales process can collaborate, negotiate, and finalize deals. It’s like a digital version of a physical meeting room or conference room.

Digital sales rooms allow for real-time communication, document sharing, contract redlining, and e-signatures — all without leaving the microsite. They also provide a central location for all contract-related information, making it easy to track changes and assign tasks (e.g., approval, signature) to specific stakeholders in the deal.

Note: Some CPQ systems, like DealHub CPQ, have CLM and digital sales rooms built into their platform. We recommend using these all-in-one solutions because they combine the first and second steps of the contracting process, making it easier to manage.

Billing software

Billing software facilitates and automates invoice generation, distribution, payment tracking, and collections. It also allows you to set up recurring invoices for retainer-based contracts. And it integrates with your accounting system for revenue recognition and reconciliation purposes.

Subscription management

If you’re a B2B SaaS company, your billing has to happen automatically. A subscription management tool like Chargebee will automatically charge customers, send invoices and receipts via email or your application, handle upgrades/downgrades/cancellations, and reconcile payments without your finance department lifting a finger.

Best Practices for Managing Contracts in the QTC Process

So that you get the QTC process down perfectly, here are a few essential contract management best practices to keep in mind:

• Standardize templates and clauses. You can do this within your system. Then, basic policies that apply companywide are easy to drag and drop when you build a contract.
• Automate approval workflows. Assign the right people in the organization to review, approve, and sign off on contracts. You can do this according to deal size/type or account type. But, whatever you do, don’t add unnecessary layers of approvals.
• Carefully manage access to contracts and related information. Contracts contain sensitive information, so you need to be careful about developing a system of access and permission controls, complete with hierarchies and deal ownership.
• Set up alerts for contracts that need renewals and renegotiations. Your CS team should get notified every time there’s a contract coming up for renewal. They can target these accounts for upselling, expansion, or, if they’re at risk of churning, retention.
• Develop an escalation process. A contract management system should also have a process for handling contract disputes, delays, and unresponsiveness from the customer. Standardize this so that everyone on your team knows how and when to escalate an issue.
• Track contract milestones. You should benchmark your performance against your forecasted timeline to identify bottlenecks and adjust for future deals.
• Keep records of previous versions. You might need to refer to one if there’s ever a dispute or misunderstanding. Your CLM system should have version control built in, but you need to make sure not to delete or hide any history.

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Andrew Parker

Andrew is a professional copywriter with expertise in creating content focused on business-to-business (B2B) software. He conducts research and produces articles that provide valuable insights and information to his readers.