Contract Management for SMBs: a Step-by-Step Guide

Contract Management

Contract management may seem like overkill, especially when you’re trying to get a deal inked quickly. 

But poor contract management costs companies 9% of their bottom line, according to WorldCC. And improving it can save up to 2% of your annual costs, according to a study by PricewaterhouseCoopers. 

Clearly, contract management shouldn't be an afterthought. So let’s look at some tips for getting started — and save your business time, money, and headaches.

What Is Contract Management?

Contract management is the workflow your business puts into place to oversee the creation, execution, and follow-up of all your business agreements. 

A proper contract management process includes standardized playbooks and documents, key performance indicators (KPIs), and a tracking system for signatures, renewals, and terminations. 

The point? Making it easier to finalize contracts while mitigating risks and minimizing costs.

Does Contract Management Matter for SMBs?

Contract management can reduce your financial risk and improve your operations by making contracting as simple and straightforward as possible. 

For many businesses — especially SMBs — contracts are handled as they come in. Businesses fear that a formal management process would take more time than its worth, slowing deals and hurting revenue. 

As a result, contracts are handled differently by everyone on the team. They’re saved in different places with random naming structures. And if a contract is needed, no one can remember where it was filed.

According to WorldCC, fewer than 11% of organizations feel their contracting process is very effective. And according to the Journal of Contract Management, three out of four (71%) of companies can’t find 10% or more of their contracts. 

That’s no way to run a business! Contract management should be a priority, no matter how big or well-established you are.

A Simple Contract Management Process?

Contract management has five steps:

  • Creation
  • Negotiation
  • Execution
  • Tracking
  • Renewal

Contract Management

 

1. Contract creation

When creating contracts, one of your goals is consistency. Ideally, all of your contracts will have similar terms, so it’s easier to remember them and stay compliant.

The best way to create consistency is to develop contract playbooks that outline your guidelines for different types of contract.

The first stage has two primary concerns:

Contract requests – When you get a request for a contract, it should trigger a workflow for logging the request, gathering resources, and drafting the contract. Create a system for gathering all the information you’ll need: 

  • A description of the agreement
  • Its purpose
  • The other party’s name and contact information
  • Documentation to support the purpose of the contract

Contract creation – It’s a good idea to develop contract templates for the different types of contracts you use. For instance, you might create a standard template for your Master Service Agreements (MSA) and Statements of Work (SOW), mutual NDAs, and employee contracts.

Note: It’s never a good idea to download generic online templates. Here’s a better way.

Using your own templates, it’s relatively easy to draft contracts that align with your business concerns. Of course, you’ll still need to review the template to ensure it’s appropriate for the agreement you’re executing, and tweak as necessary.

2. Contract negotiation

Step 2 of contract management is negotiation. The goal: to agree on terms that are mutually beneficial for all parties. Here, you’ll focus on two things:

Contract redlining and negotiations – Both parties are responsible for reviewing the contract to identify terms that are inaccurate or put their business at risk. This is often done with a quick red flag review.

Then, negotiations begin. 

Each party takes turns redlining the contract to recommend changes. With each iteration, the contract comes closer to the final agreement.

Keep in mind, contract negotiations are about compromise. There’s a lot of give and take as you iron out the terms of your agreement. Focus on winning favorable terms on the clauses that are most important to your business, and be prepared to compromise on other clauses.

Contract approval – Once both parties have agreed to the terms of the contract, it’s ready for signatures. 

For this stage of the process, you’ll benefit from an internal workflow that ensures the contract moves efficiently from one person to the next without getting lost in the shuffle. It’s a good idea to create a checklist that everyone adheres to.

3. Contract execution

To execute the contract, you need to prepare the document for digital signatures, gain the required signatures, and execute the contract. 

Prepare the contract – Once approved, you’ll need to remove any remaining redlines and comments from the document, and upload it to a signature app. 

Digital signing – Both parties must sign and date the contract for it to be valid. With an e-signature app, each party’s signature is date-stamped and validated. 

Execution of contract – After the contract is signed, a contractual relationship now exists. All of your contractual obligations begin at the agreed-upon date.

4. Tracking contract dates and obligations

Every contract has dates that must be adhered to. To stay compliant, you need to create a system for tracking everything.

Obligation management – It’s your responsibility to manage and track the obligations listed in any contract you sign. Start by identifying each contract’s requirements and deadlines. Then log the data in a spreadsheet, workflow platform, or contract management system. 

Auditing and reporting – A contract audit tells you where and how you can improve contract management. With regular auditing and reporting, you can identify the parts of your contracts that cause the most friction, how much time you spend managing contracts, and the cost per transaction. 

Use Delino’s Sunk Cost Calculator to know how much contracts cost your business. 

5. Manage renewals and terminations

It’s important to stay on top of renewal dates so you don’t accidentally renew contracts you want to let go or let contracts expire that you want to keep.

Create a system that lets you see at a glance when contracts are approaching their expiration date. You may want to add these dates to your calendar and set alerts for opening renewal discussions with the other party. 

When a contract reaches its expiration date, you need to decide whether you’ll terminate or renew it.

Some contracts renew automatically. If not, it’s up to you to reach out to the other party to renew it. Either way, this is the perfect time to negotiate new rates or update the terms and obligations.

If you want to terminate a contract, it’s especially important to track dates, so you don’t end up paying to renew services you no longer need or want. Read your termination clause to determine the best way to terminate a contract.

Contract Management Best Practices

An effective contract management process starts with building a workflow that’s simple and efficient. Here are a few tips to keep in mind.

Standardize your contracts

There’s no need to draft a contract from scratch every time you hire a new employee or sign on a new client. By standardizing your contracts, you essentially create templates with pre-approved terms. This allows you to put together a new contract quickly with only a few changes. 

It’s also a good idea to standardize acceptable limits to your contract terms. Decide in advance which terms can and can’t be changed, and how far you’re willing to change them. This allows your team to negotiate with confidence — shortening the time to a signed contract.

Create a contract filing system

Contract management is about standardizing the way you handle contracts. That includes the way you name the documents and file them. 

Create a folder for all contracts — a tiered, or tree root, filing system works best.

Contract filing system

Then create a document naming convention that makes it easy to search for and find any contract in just a few clicks. For example, your filing system might look like this: 

Counterparty Name - Contract Type (year-month-date) Status

ABC Company - MSA (2022-Jun-8) Executed

Be sure to set up rules about who can access these folders. You may choose to password protect some folders or give individual permissions.

Set up an automated workflow

To make sure you never miss a renewal date, set automations that alert you to contracts that are nearing their expiration date. 

For instance, Delino stores your contracts and sends you an email when a contract needs your attention.

Get Started with Contract Management

When you manage your contracts properly, your contract compliance increases too. That minimizes risks while allowing you to accelerate growth.

There isn’t just one way to manage contracts effectively. So focus on what works for you. Create a system that’s easy to use and prevents things from falling through the cracks.

That’s where Delino can help.

Delino is a smart contract review platform designed specifically for small businesses. It can help you manage your contracts from redlining and negotiations to renewal.

If you’re ready to uplevel your contract management, sign up today for Delino’s Beta.

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DISCLAIMER: Delino is not a lawyer and makes no warranties that its advice will protect your business from lawsuits or damages. Users rely on contract feedback at their own risk. Please consult your attorney for legal advice.