The deal’s done, the congratulatory drinks drunk, the contract’s filed, everything’s sorted…. Or is it? For many parties the euphoria of finally signing the deal clouds the reality that this is only the start and not the end. Many a deal has landed on the rocks, not because of bad drafting or negotiation, but due to poor contract implementation by one or both of the parties. But is this negative result avoidable?
The answer is a resounding “yes”. But, just like resources were expended to finalize the contract, so resources will need to be allocated to the efficient managing of a contract after it has been concluded. This process of managing a contract through its life-cycle, including variations, extensions, renewals, disputes and eventually its termination, is generally referred to as ‘contract management.’
Contract management as a discipline has become very sophisticated, with large companies, particularly ones dealing intensively with contract procurement, using dedicated teams and sophisticated software platforms to manage their contracts and to minimize or prevent their exposure and risk in relation to such contracts. But, for most businesses that deal less frequently with contracts, dedicating people or bespoke software options are not always affordable or appropriate. The latter, does however not mean that good contract management principles cannot still be applied and implemented.
In this article, we unpack a few key principles any business, large or small, should consider in order to adopt an effective contract management strategy bespoke to the unique needs of the business.
The first vital principle, is an appreciation of the importance and need for a contract management strategy. This must flow from an understanding that contracts have obligations, financial provisions, deadlines and risk that if just left, could lead to major issues, losses and even liability. If your organization therefore has many contracts, or the value of the contracts or risks are high, it will require resources to be allocated proportionate to the risk.
The second principle, is understanding the life-cycle of a contract, which typically starts at signature and involves contract conditions, obligations, milestones, financial provisions, liabilities, variations, renewals, to name a few,. until the eventual expiry or termination. Any contract management approach must therefore deal with all of these phases, as each phase could have dire consequences if ignored or simply overlooked. Let’s take the simple example of a contract with conditions such as a party must by a fixed date deliver a bank guarantee, failing which the contract is void. After all the effort that went into negotiating the contract, the last thing that should happen is for the contract to be declared void merely because no one paid attention to the agreed deadline.T
The third principle, is having a clear understanding of the various risks related to a contract and understanding that where you are the bearer of the risk, that risk will need to be carefully managed or mitigation strategies implemented to reduce residual risk for your business. An example could be where your company is contracted to deliver fresh produce every week to a store, failing which you shall face penalties, or eventual cancellation of the supply contract. Not only is the obligation here to deliver important, but also the fact that the risk for the quality of the produce, The potential for delivery issues as a result of truck breakdowns, road closures, strikes, to name a few, may lie with your business and would need to be adequately managed and/or mitigated. Some remedies or precautionary measures that a party in this case could employ could include obtaining appropriate insurance, back-to-back agreements with produce suppliers, or even additional stand-by truck options. The point is, if this is your risk and it’s not managed, it could have very adverse consequences for your business.
The fourth principle, is allocating the responsibility for contract management to a designated person(s). This can be internal in your business or even sourced externally, through for instance the services of an attorney or contract management specialist. Either way, somebody must be allocated with the responsibility or else nothing is going to happen.
The fifth principle, is understanding the nature and complexity of the different types of contracts your business enters into. Grouping your contract types and understanding the obligations and risks of different types of contracts can assist enormously in managing your contracts and prioritizing contracts or even provisions within types of contracts for attention. If you take an approach of managing only what lands on your desk, then critical contracts could be missed and vital opportunities for improving contract provisions, identifying performance issues and generally minimizing your risk is lost.
The sixth principle, is organizing your contract management system in a manner that allows you to manage key data items and not each contract in totality. Imagine having to scan through hundreds of agreements on a daily just to check what has to happen in that specific contract today. An impossible task! It is way more ideal and time efficient to record the key elements of a contract that you would want to know and to manage only those aspects. It does imply that the contract manager must have a level of understanding of contracts, law and even the relevant type of contract to effectively extract the right data needed for the contract management. For this reason, businesses often engage attorneys or legal specialists to assist with this critical aspect. It is also why contract managers often create a database or find software that can better help organize the data and enable reporting and review.
Lastly, management and review of contract data and risk is an ongoing process that cannot happen in isolation to the other operations of a business. Contracts are often pervasive with inputs, obligations and responsibilities relating to a contract spread across the organization. It also means management must be aware of issues, key metrics, risk and liabilities in relation to any existing contracts that the business is a party to. Regular reporting on key metrics needed by management must therefore form part of any proper contract management strategy.
The scale and application of each of these principles will vary from business to business, but the golden thread remains that no or a poor contract management framework can hold serious ramifications for a business and brings to mind the old adage - “a job half done is as good as none”.Should your business be in need of a proper contract management framework or even a review of your existing framework, don’t hesitate to get in touch with our compliance team to see how we can be of assistance.
Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).