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A typical scenario for your day-to-day as an in-house legal professional could be somewhat like this: your team has meticulously crafted a well-defined contract, outlining all deliverables, services, and terms. It's been signed by all parties, and you're ready to reap the benefits.

But here's the catch: unless you actively monitor that contract's performance, you might be missing out on those expected advantages. It's like going on a diet without regular weigh-ins to track your progress – you need to keep a close eye on your contract's journey to ensure everything is going according to plan.

Contract monitoring is the secret ingredient to unleashing the true value of your agreements. However, with a growing portfolio of contracts, it becomes increasingly difficult to keep tabs on them manually.

That's where the right mix of people, processes, and technology comes into play. By implementing best practices for contract monitoring, you can proactively mitigate risks, drive optimal performance, and safeguard your organization from potential pitfalls.

What is contract monitoring? 

Contract monitoring is the process of overseeing and ensuring that the terms and conditions of a contract are being met by all parties involved. This includes verifying that the goods or services provided are of the expected quality, that they are delivered on time and within budget, and that the parties are complying with any legal or regulatory requirements.

Importance of contract monitoring

By implementing effective contract monitoring, organisations can avoid costly mistakes, reduce risks, mitigate potential legal risks, prevent disputes and non-compliance, and maintain positive relationships with their clients or vendors. Moreover, contract monitoring can help companies with the following: 

  • Ensuring compliance: By monitoring the performance of each involved party, any breaches or deviations from the contract terms can be identified and addressed promptly.
  • Mitigating risks: By monitoring KPIs and contract milestones, potential issues can be detected early, minimising the impact of any risks.
  • Improving communication: Regular contract monitoring allows for a collaborative approach to problem-solving, thereby preventing disputes.
  • Enhancing contract performance: Contract monitoring can help identify areas for improvement and can lead to the optimisation of the contract terms. 
  • Providing accountability: Contract monitoring provides a framework for accountability and creates a sense of ownership, clarifying who is responsible for what and when.

Who is typically responsible for monitoring contracts? 

Contract monitoring is typically carried out by the contract manager, who is responsible for ensuring that the contract is being adhered to and that any issues or disputes are resolved in a timely manner. 

However, depending on the organisation and its structure, contract monitoring might also be done by legal teams, finance teams, or customer success teams. 

Top 5 challenges in contract monitoring 

Contract monitoring can be arduous for several reasons - volume & complexity of contracts, inconsistent language, changing regulations, time constraints, etc. Here’s a dive into the top 5 challenges pertaining to contract monitoring. 

#1 Contract volume and complexity 

Organisations process contracts in bulk, and therefore the volume of contracts that require vetting is high. Consequently, contract managers and legal teams are always low on bandwidth when processing contracts. Additionally, certain contract types include complex technical terms. Hence, monitoring those becomes a critical challenge.

#2 Inconsistency in contract language 

In several companies, contracts are not standardised. This absence of standardisation leads to an inconsistency in contract language. Therefore, it becomes tough for legal teams to compare contracts and spot mistakes.  

#3 Changing regulations 

Regulations and laws are prone to rapid changes, making it difficult for the legal teams and contract managers to keep contracts compliant. 

#4 Technology limitations 

In most cases, required teams do not use cutting-edge tools to monitor contracts; rather they use manual methods, which are not only time-consuming but also ineffective and prone to errors. 

#5 Lack of visibility into the contract pipeline  

Legal teams may not have access to all the relevant data and information needed to monitor contracts effectively, impacting their ability to identify and manage risks. 

These challenges make contract monitoring difficult for legal teams and contract managers. What legal teams can do is strategise beforehand and take an informed approach to streamline contract monitoring. 

Setting up the groundwork for contract monitoring

Legal teams can streamline contract monitoring by taking a granular approach - breaking it into phases and streamlining steps within each phase separately. The three phases are pre-contract monitoring, contract implementation, and contract evaluation.

Pre-contract monitoring
  • Risk assessment
  • Contract strategy
Contract implementation
  • Record keeping
  • Performance tracking
Contract evaluation
  • Performance evaluation
  • Compliance assessment

#1 Pre-contract monitoring phase

Pre-contract monitoring involves identifying and evaluating potential risks and opportunities associated with a proposed contract, analysing its terms and conditions, and assessing legal, financial, and operational implications. In this phase, legal teams can assess risks and devise a fool-proof content monitoring strategy.

  • Risk assessment - To assess contract risks, legal teams can review the contract terms, identify potential legal, financial, and operational risks, evaluate their likelihood and potential impact, and develop strategies to mitigate or avoid them. Risk assessment tools can also come in handy.
  • Devising a foolproof contract monitoring strategy - To devise a foolproof contract monitoring strategy, legal teams should establish clear objectives and priorities, define roles and responsibilities, set up a systematic contract monitoring process with defined timelines and metrics, and regularly review and update the strategy to ensure its effectiveness and relevance. 

#2 Contract implementation phase

In the contract implementation phase, legal teams should ensure that the contract is executed as planned and that all parties comply with its terms and conditions. This involves tracking contract milestones, monitoring performance, addressing issues and disputes, and maintaining accurate and up-to-date contract records. 

  • Record keeping - Record keeping involves creating and maintaining accurate and up-to-date records of all contracts, including key terms and conditions, contract history, and relevant correspondence. As a result, it becomes easier for legal teams to manage risks, ensure compliance, and facilitate contract performance evaluation and reporting. Contract records can be kept using document management tools or contract management systems.
  • Performance tracking - Performance tracking is crucial in contract monitoring to assess compliance and outcomes. To track performance, legal teams can establish metrics, monitor compliance, and proactively address disputes. Tools like contract management software and data analytics can help streamline and optimise performance tracking and also set benchmarks for tracking contract performance in the future.

#3 Contract evaluation phase

In this phase, legal teams assess the effectiveness of the contract and identify areas for improvement. Through contract evaluation, legal teams can identify best practices, evaluate the performance of the contract in meeting organisational goals, and provide feedback. They also make informed decisions regarding contract renewal or termination. 

  • Performance evaluation - Performance evaluation helps legal teams assess contract outcomes and identify areas for improvement. To evaluate performance, legal teams should establish clear evaluation criteria, collect and analyse relevant data, and compare actual results to expected outcomes. Legal teams can also use tools, such as data analytics and reporting software, to streamline performance evaluation.
  • Compliance assessment - Compliance assessment involves verifying whether parties adhere to the contract terms and conditions, as well as relevant laws and regulations. To assess compliance, legal teams should collect and analyse relevant data, monitor parties' activities, and proactively address any issues or disputes. 
Also read: Why Contract Monitoring Checklists are Essential for Effective Contract Management

6 best practices to fine-tune the contract monitoring process

To ensure consistency, reliability, and quality in the contract management process, it is essential to streamline contract monitoring. Here are a few best practices that could help legal teams with standardised approaches and guidelines for monitoring contracts, reducing the likelihood of errors, inefficiencies, and non-compliance.

#1 Understand what you want to monitor and define clear KPIs

As a pre-ritual, legal teams should objectively define the parameters that they want to monitor in any given contract. On top of that, they should also define clear KPIs to monitor the performance of contracts. By doing so, legal teams can allocate resources adequately and productively monitor contracts.

#2 Assign dedicated contract managers

Contract monitoring is a crucial and long-term process. If contract monitoring tools are not implemented in the company’s tech stack, legal leaders should hire dedicated contract managers to monitor contracts. By doing so, they will be able to monitor contracts effectively and optimise the bandwidth of other members of the legal team.

#3 Set up a contract monitoring schedule

Setting up a contract monitoring schedule ensures that contract monitoring activities are conducted regularly and systematically, minimising the probability of missed deadlines, overlooked issues, and non-compliance. 

#4 Establish channels for effective collaboration & communication

Effective communication and collaboration between cross-functional teams can go a long way in monitoring contracts, and there will be improved visibility into the contract pipeline. With clear communication channels in the system, legal teams will be able to understand and address the potential challenges of stakeholders better.   

#5 Centralise contracts

Centralising contracts enables legal teams to access and manage contract information from a single location, reducing inefficiencies. Centralisation also enhances collaboration, improves data integrity, and provides legal teams with a holistic view of the organisation's contractual obligations and risks.

#6 Use CLMs and other relevant tools for automation and analytics

Using CLMs can help legal teams automate a lot of mundane contract monitoring tasks and also help with analytics. It also becomes easier to track performance KPIs and manage contracts better. With all contracts centralised and standardised, the likelihood of errors reduces significantly. 

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