Good contract management practices are imperative to a business's long term growth. Small process inefficiencies may not seem like a big deal on the surface, but when bad practices and manual tasks are multiplied across hundreds or thousands of contracts, their effects can become huge. When going unnoticed for a long period of time, they can even dramatically impact a company's P&L.
Regular audits of your contract management process can help you spot the issues that quickly lead to larger problems down the line - such as lost files, wasted hours, longer contract lifecycles, and legal risk. But it's important to know what to look for. While the contract lifecycle ultimately varies from company to company, below are some universal questions that can help guide your audit of each contract lifecycle stage:
The speed and accuracy in which a new contract is created has a large impact on your organization's ability to grow. The key to optimizing this stage is ensuring internal teams have tools to quickly draft a new contract and successfully collaborate on the intended business requirements. Good contract management software can make a big difference here!
- Do sales and procurement teams have an effective way to communicate business requirements to the legal team?
- Are there guidelines for determining when it's acceptable to work off of a vendor's paper?
- Does your company has a full library of quality contract templates to speed up the contract generation process?
The Negotiation Process
Contract review and negotiation can take months or even years, and it is often considered the most expensive part of the contract lifecycle (at least when it comes to employee hours). However, there are steps businesses can take to eliminate some of the manual work and ultimately reduce time it takes to negotiate and agree to terms. Staying organized and having a clear process that facilities back and forth communication is key.
- Are internal contract reviews conducted in a centralized location (as opposed to email exchanges) where all employee feedback can be captured?
- Does your contract software have audit trail capabilities that allow you to track all changes and uploads?
- Does your platform have versioning control tools that ensure employees are reviewing the most recent contract draft?
- Can you easily compare redlines when you receive a new draft?
Storage and Accessibility
The manner in which your organization stores its contracts has a major impact on productivity. The more time employees spend sorting through files or struggling with ineffective keyword search tools, the more time and money is wasted. In this stage, it's important to audit the way your contracts are grouped and organized as well as the effectiveness of your repository's search tools.
- Is there a "single source of truth" where all signed contracts are stored?
- Are contracts and key terms able to be located quickly and efficiently? How powerful is your search?
- Is your company using a universal labeling system for categorizing documents?
- Are user roles and permissions properly configured to prevent access or edits from unauthorized employees?
While security may not directly improve operational efficiency, protecting your confidential contracts from cyber security threats is crucial. Whether your industry regulates data security or you just want to sleep well at night, checking security standards is an important part of any contract management audit.
- Is your contract repository's security standards in compliance with industry standards or regulations?
- Is your contract platform SOC2 certified or ISO27001 certified to ensure compliance/standards are met?
- Are documents backed-up and encrypted (both at rest and in-transit)?
- Are vulnerability and penetration tests conducted on a regular basis to protect against external data threats?
Renewals and Other Key Alerts
Problems with ongoing contract management can be very disruptive to business operations. Missed renewals, lost contracts and contract breaches are all issues that can occur as a result of a poor document storage and review process. Without careful tracking, price increases or compliance milestones can be missed. During your audit, carefully evaluate the post-signing activities - all contracts should be reviewed multiple times throughout the year to ensure deliverables are being met and that the contract is delivering value to the business.
- Are negotiations happening regularly and well ahead of expiration or auto renewal dates?
- Is your business terminating contracts that no longer add value?
- Is your team effectively using alerts to manage the renewal process, as well as tracking any other key contract dates?
When Should I Audit My Contract Management process?
If your contract lifecycle needs work and your average time to execute an agreement is longer than 25 days, it may make sense to conduct quarterly contract management audits. By looking at the process on a frequent, recurring basis, you can identify inefficiencies and monitor the results of corrective actions. Be sure to set clear metrics around what success looks like (ex: average time to execute an agreement, % of key dates missed, etc). Once you've met your goals, then you can schedule your audits on an annual basis.
Auditing your contract lifecycle on a regular basis is the best way to optimize your team's capacity for contract volume. The more contracts your team can manage without error, the faster your business can grow. Contract management software can help eliminate many of the time-consuming, error prone processes in your lifecycle. If you're looking to further automate your contract management process, check-out ContractSafe today.