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How long do you typically spend searching for contracts? Are you always aware of upcoming renewals? Do you often spend weeks drafting and negotiating new deals?

Well, if your answers are “a few hours,” “sometimes,” and “yes,” then you may be managing your contracts the wrong way!

Poor contract management is characterized by slow drafting and negotiation processes, inefficient storage and retrieval systems, limited oversight mechanisms, and poor communication, among others, which often result in heavy legal consequences and financial losses for organizations.

In this guide, we have discussed some of the risks associated with poor contract management alongside some of the best strategies you can leverage to ramp up efficiency and improve contract management processes across your organization.

What are the risks of poor contract management?

On average, it costs around $6,900 to draft and sign a low-risk contract. But despite the costs associated with contracts, over 71% of companies still misplace 10% of their contract documents. Poor contract management practices such as this have been shown to cost businesses about 9% of their bottom line every year.

Beyond the revenue side of things, poor contract management puts you at risk of several other complications, including regulatory penalties, security breaches, and reputational damages.

#1 Risk of legal and regulatory liabilities

Poor contract management can put you at risk of non-compliance with contractual obligations, which can result in legal action and potential damages or fines. It may also lead to breaches of laws, regulations, or policies, which come with legal repercussions. 

Therefore, it is crucial to establish clear processes for contract management to minimize the risk of legal liabilities.

#2 Possible financial losses through penalties and missed revenue opportunities

You may also end up with revenue loss as poor contract management amplifies your chances of missing deadlines, delivering below expectations, or breaching crucial terms and conditions.

Financial losses may come in the form of legal fees, damages, customer churn, litigation expenses, and so on.

#3 Susceptibility to unauthorized access and loss of confidential data

Security risks associated with poor contract management typically involve the failure to adequately protect confidential and sensitive information contained within contracts. This can include personally identifiable information (PII), financial information, trade secrets, and intellectual property.

Poorly secured contracts can be vulnerable to unauthorized access, intellectual property theft, and data breaches, among others.

Also Read: Hacks and Tips for Securing Your Contracts

#4 Potential for reputational damages

Poorly managed contracts may result in misunderstandings, disputes, or performance issues that can negatively impact the perception of the parties involved. 

Performance issues may come in the form of delayed delivery or poor-quality work. This not only results in disputes and legal actions but also bears negative publicity for the organization.

#5 Increased risks of disputes

Poor contract management is characterized by ambiguous terms, inconsistencies, limited trackability, and poor record-keeping, all of which make the contract susceptible to misinterpretation, misrepresentation, non-compliance, and, ultimately, disputes.

5 main causes of poor contract management

There is no smoke without fire. In the same vein, poor contract management can be as a result of several contributing factors. In this section, we’ll discuss a few of the major ones.

#1 Inadequate record-keeping techniques

Poor record-keeping can lead to difficulties in tracking obligations and deadlines; loss or misplacement of contracts; inaccurate, incomplete, or outdated information; increased risk of non-compliance; and reduced efficiency.

#2 Too many manual processes

When contract managers are engrossed in too many repetitive manual processes, they become prone to burnout, errors, and declined efficiency.

Manual processes are also plagued with limited visibility, poor collaboration, and reduced scalability. A standard Fortune 1000 business manages between 20,000 to 40,000 contracts documents at a time. Imagine managing all that with manual systems!

#3 Misalignment between legal teams and stakeholders

Misalignment usually occurs when legal teams and stakeholders have different views and objectives regarding a contract.

If the legal teams have limited access to contract documents from internal teams, managing the contract becomes challenging and unpredictable for the legal counsels. Also, because the legal team and company stakeholders do not have full cross-functional transparency, legal counsels experience difficulties negotiating terms and standardizing contracts based on historical performances.

#4 Limited expertise

“Who are the most valuable players on any sports team? The players who can do more than one thing.  The same is true in-house. To showcase your value to the department and the company, consider how you can a) enhance the skills you already have (e.g., contracts, litigation, intellectual property) and b) expand or create skills in new areas.”

Sterling Miller, CEO & Senior Counsel, Hilgers Graben PLLC

Ten Things: How In-House Lawyers can Thrive in Times of Uncertainty and Change

When contract managers lack some of the requisite skills for proper contract management, poor performance is inevitable.

Some of the skills required for effective contract management include negotiation capabilities, legal exposure, data analysis, digital technology, business expertise, and financial acumen, among others.

Without the right skill set, contract managers are prone to misinterpreting contract terms, overlooking errors, and putting their companies at far-reaching legal and financial risks.

#5 Inadequate technology

From cabinet file systems to paper-based documentation, the traditional contract management approach is largely powered by manual processes and outdated technology.

For small-scale contract management, this may seem harmless. However, when organizations begin to expand and ramp up partnerships, traditional contract managers struggle to keep up with the ever-increasing contract volumes. This leads to a surge in contract errors and a dip in productivity.

With inadequate technology, organizations will struggle to collaborate over contracts, track obligations and milestones, and keep critical contract data secure and accessible.

The impact of poor contract management on critical business operations

The effects of poor contract management cuts deep, running its sharp, malicious edges through the fabric of critical business operations, from procurement and sales to legal and finance.

This section highlights some of the critical business operations that get the worst hits from poor contract management.

#1 Delays in contract negotiations and approvals

Inadequate contract management can result in delays in contract negotiations and approvals, leading to prolonged sales cycles and missed revenue opportunities. Poorly managed contracts can also lead to pricing discrepancies, incorrect invoicing, unenforced payment terms, as well as missed opportunities for upselling or cross-selling, all of which can negatively affect your organization’s bottom line.

“One of the revenue leaders I worked with told me, ‘Time kills all deals; you gotta close deals fast,’ and I keep this in mind every time I’m pulled into a sales deal.”

~Sue Suo, Head of Legal, Hopin

The Counsel Corner: Contract Management in Hypergrowth Startups

#2  Adverse effects on financial operations

Poor contract management can have adverse effects on financial operations. You may be prone to errors like overpayment/underpayment, inaccurate revenue recognition, and breach of financial regulations. These can lead to costly disputes and legal sanctions, depreciating the business's overall financial health.

#3 Missed deadlines, incorrect invoicing, inadequate communication, and poor delivery

When contracts are not managed effectively, it can lead to missed deadlines, incorrect invoicing, inadequate communication, and poor delivery.

Poorly managed contracts are also characterized by ambiguous or inaccurate contract terms and conditions that may lead to disputes and strained relationships between businesses and customers.

#4 Unidentified red flags leading to breach of regulations 

A contract is a legal document meant to protect the interests of businesses. However, when managed poorly, it can do just the opposite.

Poor contract management can significantly impact risk management and compliance operations within an organization in several ways.

It can limit your ability to identify red flags that can put your organization at risk. You’ll also be more likely to miss contractual obligations and breach critical regulatory standards.

#5 Cost overruns and ineffective risk management

When contracts are not properly managed, contracting parties will have to deal with delays, cost overruns, disputes, unclear expectations, scope creep, and ineffective risk management. 

Poor contract management is also characterized by inadequate performance tracking, which leads to subpar deliverables, quality issues, and missed deadlines.

Strategies for improving contract management

Effective contract management is crucial for successful project outcomes, mitigating risks, and ensuring compliance. This section discusses some of the best strategies you can leverage to significantly improve your contract management experience.

#1 Standardize your contracts with templates

Develop standardized contract templates with clear and concise language, predefined clauses, and terms that align with your organization's policies and legal requirements. This promotes consistency and reduces the risk of errors or omissions.

“The absence of contract templates leads to non-standardisation and makes contracts prone to errors. The legal team, therefore, is required to delve deep into contracts and proofread all clauses with a fine-tooth comb to identify and rectify the simplest of human errors.”

—-
Igor Poroger, Director of Legal, EMEA, Vectra AI
The Counsel Corner: How CLMs Empower Legal Teams in B2B SaaS Companies

#2 Invest in training

Provide comprehensive training to contract managers and other relevant personnel on contract management best practices, legal principles, negotiation skills, and risk management. 

With proper training, navigating contract complexities, identifying potential issues, and ensuring compliance will become a lot easier.

#3 Conduct regular contract assessments

Periodically review and assess your existing contracts to identify areas for improvement, assess their effectiveness, and mitigate risks. Look for opportunities to update outdated terms, enhance contract language, and align contracts with changing business needs or legal regulations.

#4 Let your data speak to you

Utilize contract analytics and reporting tools to gain insights from contract data. Analyze contract performance, identify trends, and detect potential bottlenecks or areas for improvement. 

Data-driven decision-making enables proactive contract management and facilitates better negotiation and risk mitigation strategies.

#5 Leverage a Contract Lifecycle Management (CLM) tool

A CLM improves contract management by streamlining and automating the entire contract lifecycle. 

It offers a centralized platform to create, store, track, and manage contracts, ensuring efficiency and compliance. 

CLMs provide features such as automated contract creation, template management, contract version control, milestone tracking, and automated alerts for renewals or expirations. 

See how the legal team at Buoy Health used SpotDraft to keep track of contracts, effective/termination dates and even specific clauses.

They enable organizations to standardize contract processes, enhance visibility, reduce manual errors, and accelerate contract cycle times. Additionally, a CLM offers advanced analytics and reporting capabilities, enabling better insights into contract performance and helping organizations make informed decisions.

Also read: 8 Top Contract Management Software Platforms

How does SpotDraft help ensure effective contract management?

As a leading all-in-one CLM, SpotDraft has a track record of helping organizations streamline their contract management processes. It comes with all the tools you need to manage every aspect of your contract lifecycle.

Here are a few ways SpotDraft makes your contract management tasks more efficient:

  1. It enables you to generate and send contract drafts in minutes. You simply fill out a few essential details, and SpotDraft automatically creates a robust contract fitted with all the legal guardrails that keep you safe and compliant.
  2. It lets you automate approval processes so you don’t have to wait forever to get signatures for certain contracts.
  3. It offers a secure and searchable repository for all your contracts and contract data. That way, you can locate documents in just a few clicks.
  4. It facilitates collaboration and redlining processes through a robust contract editor specifically designed for contracts.
  5. It comes with data analytics features that give detailed insights into your contract management processes. That way, you can estimate contract value, identify bottlenecks, and optimize future processes.
  6. It comes with an API that allows you to seamlessly connect your existing business tools like CRMs, cloud storage, and collaboration tools, so you won’t have to juggle between systems.

Raising the bar with effective contract management

A well-structured contract management process ensures that your organization gets the best value from every initiated contract, reduces risks, and reaches its revenue milestones in record time.

This is hardly achievable with manual processes, which have become the emblem of poor contract management.

To keep up with the fast-paced modern world of business and ensure your contracts are serving their purpose, taking advantage of CLMs is highly recommended.

Still sitting on the fence? Why not request a demo with SpotDraft to see how a CLM can take your business to another level?

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