Vital to business engagement with suppliers, contracts accrue in the same way as business needs do. And with time they become more complex, more interdependent, and more difficult to manage.
When two companies wish to do business, contracts specify all activities to be carried out by both of them, and the terms by which they must fulfill their obligations in an agreement.
Contracts affect also business profitability directly. If written in an unsatisfactory way, a company can lose a lot of money due to simple technicalities that have gone unnoticed.
According to a survey of the Aberdeen group, 66% of business leaders seek better control over their expenses, 44% want higher visibility of contractual agreements, 40% want to reduce supplier-related risks, 37% want more supplier compliance with contracts, and 34% wish access to supplier performance in their contracts.
Another study by the same firm reveals that 60% of corporate litigation is related to contractual disputes. And from such group, 73% indicated price changes as the reason for lawsuits.
It’s likely that some of these price changes are a result of disorganized contract management – considering that, according to the study, 12 to 15% of the contracts of a company are lost or unaccounted for.
In order not to feel vulnerable when comes to suppliers and their risks, implementing life cycle enhancements in procurement contracts is the best way to organize and manage such vital documentation, for any business – as in addition to creating a powerful business relationship, it also opens the way to increase long-term profit.
But what is contract management after all?
Those who handle contracts on a daily basis know that it’s common to find inaccuracies in those documents that are made manually. The problem is that this is usually noticed only after a negative event, such as a failed audit or an unexpected expense.
Contract management is applied to avoid disruptions, and to monitor and organize agreements of a company. Known as Contract Lifecycle Management, or simply CLM, it’s a management mode that encompasses the whole contract life cycle – that is, it tracks the bonds agreed with suppliers, partners, customers or employees.
Such management mode enables to administer the creation, execution and analysis of contracts, in order to maximize the operational and financial performance of a company, and decrease risk at the same time. With efficient control, you can have a thorough understanding of each stage of a contract process.
Although they are increasingly pressed to reduce costs and improve performance, many business leaders still don’t see contract management as an important component of this strategy of cost reduction and performance enhancement.
However, with digital transformation of business processes, those who want to update their structures, in order to stay relevant in the current world, have realized that contract management is a vital issue to ensure the organization of the whole company, particularly if this management is based on technology.
The importance of contract management
The business world is no longer the same. New ways to earn revenue are forcing such business leaders to rethink how they will manage the customer’s life cycle – which makes contract management be seriously considered.
Even sounding so simple, contract management is also integral part of the sourcing process, and can bring a number of benefits to the company.
And even if they don’t realize it, contracts help drive and shape just about every business. It’s known that from 60 to 80% of all business transactions are ruled by contracts, particularly in finance, IT, legal, procurement, sales, operations and HR areas.
Additionally, contracts aren’t meant only to establish a relationship with third parties and employees. Contractual agreements are an important part of the sustaining framework of any company. In fact, they structure the way that the company works with people and other companies – including rules, guidelines, and obligations, so everyone is aware of what to expect.
When properly managed, contracts can help businesses reduce costs, improve profitability and mitigate risk. When a contract management strategy is successfully implemented, it:
- Ensures that contractual obligations of both supplier and customer are met
- Is able to eliminate situations of possible contractual violations
- Can increase adherence to the goals of outsourcing contracts
- Can provide a well-documented audit trail
- Assures more favorable results for the contract
- Is able to improve service quality and customer focus
- Enables to reach a proper value for financial control
- Decreases risk level
- Defines the roles and responsibilities of contract managers, contractors and end users clearly
- Can identify problems rapidly and solve them before they can affect results
- Provides assessment for contract performance and identifies changes or variations
How can technology help with contract management?
For any company, the automation of contract life cycle management can bring considerable improvement in several aspects, such as productivity, collaboration with suppliers and corporate governance, among others.
Contracts are now more complex: they establish business relationships in new markets, offer sales and purchase agreements with prices and penalties based on results, and regulate interrelated value chains that depend on each other.
A contract management tool is the first step to gain more control and governance. The technology behind the CLM solution developed by Mercado Eletrônico streamlines all contract-related processes, and offers features that go well beyond a mere central repository, providing analytical reports.
Finding a good contract management tool is the first step toward better control and governance. The technology behind Contract Lifecycle Management (CLM) developed by Mercado Eletrônico streamlines all contract-related processes and offers features that go well beyond a mere central repository, and can deliver accurate analytical reports.
Its creation, negotiation and optimization capabilities can standardize and accelerate the contracting process, while reducing the risk of negative events that expose weaknesses and cost the company dearly.
With a CLM tool, companies ensure compliance with renewal times, expiration dates, and quantities to be negotiated – in addition to gaining a 360-degree view of all contracts, which helps the company identify the potential of an agreement, and decrease risks during contract life cycle.
Much more than a database containing key contracts of a company, Mercado Eletrônico‘s CLM solution relies on a configurable workflow to manage the whole process, thus facilitating control and management processes.
Therefore, this solution allows to search and access contracts in a quick and direct way, from any information base, and enables also to save and share filters with other employees.
From the governance viewpoint, the tool aggregates all negotiation history, attached documents and supplier interactions in a single place. With terms, conditions and clauses gathered on the same platform, you can accelerate business processes, shorten sales cycles, reduce costs, generate rich analytics for risk management and increase performance. In other words, contract management is key for those companies that want to take the first step toward simple, smart and sustainable B2B commerce.