The role of contract management in IT

Contract management—the realm of Information Technology (IT)—is an orchestration of all the legally binding agreements governing any software, services, and vendor relationships. As organizations navigate this landscape, the efficiency of all IT contract management becomes paramount. From the initiation of contracts to their execution and ongoing management, this process is a strategic cornerstone in ensuring smooth operations and safeguarding against potential pitfalls.

What is IT contract management?

Contract management refers to the process of overseeing legally binding agreements from initiation through to execution. Contract management activities typically involve initiation, negotiation, approval, execution, and ongoing support.

IT contract management specifically focuses on the management of contracts related to information technology products, services, and vendors. It involves the administration of contracts that pertain to software licenses, hardware purchases, IT services agreements, cloud services, and other technology-related contracts.

Dive deep into the subject of IT contract management and how it plays a pivotal role in the efficiency of your IT management.

Why is IT contract management important?

Contracts define the terms and obligations of a business relationship, providing clarity for all parties involved. By unambiguously outlining expectations through contract management, these agreements minimize the likelihood of misunderstandings that could potentially harm an organization's reputation and financial well-being.

Moreover, effective contract management is essential for mitigating risks and protecting business interests. Contracts often involve financial commitments and legal obligations, making it imperative for companies to sufficiently manage risks throughout the contract lifecycle. By carefully reviewing and negotiating contract terms, businesses can identify potential risks and implement measures to mitigate them, such as including indemnification clauses, specifying performance standards, or establishing dispute resolution mechanisms.

What is the CLM (Contract Lifecycle Management) process?

The contract lifecycle management (CLM) process encompasses the entire journey of a contract from its creation to its closure, ensuring that each stage is effectively managed to maximize value and mitigate risks for an organization.

Initiation

The initiation stage marks the beginning of the contract lifecycle and involves the identification of the need for a contract and its initial preparation activities. During this phase, stakeholders within a business will assess their requirements, determining whether entering into a contractual agreement is necessary to achieve their goals. 

After the need for a contract is established, stakeholders should develop a plan to guide the contract management process. This will outline the steps and resources required to manage the agreement effectively throughout its lifecycle.

Authoring

During the authoring stage, stakeholders define a contract’s scope, objectives, and requirements. This may involve gathering input from various departments, such as legal, finance, sales, and operations, to ensure that an agreement aligns with organizational goals and complies with pertinent regulations.

Once the terms and conditions are defined, contract authors will create a written document that clearly specifies the rights, obligations, and responsibilities of each party. This includes outlining deliverables, timelines, pricing, and other relevant provisions.

Process and workflow

Process and workflow focuses on designing standardized processes to ensure transparency and accountability in contract management activities. Organizations typically establish workflows that outline the tasks and decision points involved in each phase of the contract lifecycle.

In this stage, businesses will also identify key stakeholders and their roles in the contract management process. Additionally, it may involve mapping out the flow of documents and approvals between stakeholders, ensuring that all team members have access to the necessary resources to perform their duties effectively. 

Negotiation

Negotiation occurs after the initial drafting of the contract and is essential for aligning the interests of all parties and finalizing the details of the agreement. This stage involves a dynamic exchange of proposals, counteroffers, and concessions as parties seek to protect their interests while finding common ground to move the contract forward.

Successful negotiation requires careful preparation and a clear understanding of company objectives. Negotiators must conduct thorough research and assess the strengths and weaknesses of their position before entering this phase.

Approval

The approval stage ensures that the contract has undergone a thorough review and that all parties are in agreement with its terms before it’s executed. This process typically requires internal review by relevant departments within the organization, such as legal, finance, operations, and senior management. 

These reviews should rigorously assess the contract’s terms, conditions, pricing, and other provisions. Legal experts may examine the agreement to ensure that it accurately reflects the intentions of the parties, is enforceable under law, and adequately protects an organization's interests.

Execution

Execution marks the commencement of the contractual obligations outlined in the finalized agreement. During this stage, the involved parties begin to fulfill their respective responsibilities as outlined in the contract. This may involve initiating work orders, delivering goods or services, or making payments.

Furthermore, companies will need to closely track their performance to track the deliverables and deadlines specified in the contract. This may include conducting regular check-ins, providing status updates, and promptly addressing any deviations.

Ongoing management

Ongoing management is a dynamic phase that encompasses the monitoring and optimization of contracts throughout their lifecycle. This stage begins after the execution of the contract and continues until the contract is either fulfilled, renewed, or terminated. 

During this stage, stakeholders are responsible for overseeing the implementation of the contract, weighing performance against agreed-upon metrics, and ensuring compliance with contractual obligations. This involves regular monitoring of key deliverables, milestones, and deadlines to ensure that both parties are meeting their respective commitments.

Problem with traditional contract management

Classic contract management approaches often suffer from several shortcomings that can increase risks and impede the achievement of desired outcomes. 

Firstly, manual processes are prevalent in traditional contract management, leading to inefficiencies, delays, and potential errors. Overseeing contracts using spreadsheets and paper documents can create difficulties in tracking changes, maintaining version control, and ensuring timely access to critical information.

Additionally, traditional contract management methods lack adequate visibility of contract lifecycle activities, making it challenging to monitor performance and identify emerging risks. Without a centralized repository to manage documents, organizations may struggle to access information quickly, leading to inefficiencies in contract administration and decision-making.

Modern business demands have adjusted our need for better contract management

IT contract management software (CMS) can address many of these difficulties by providing companies with a centralized place to streamline contract lifecycle management processes.

These systems usually offer robust features for document management, allowing organizations to digitize contract documents in a secure, unified repository. This ability facilitates straightforward access and retrieval of documents, reducing the reliance on manual processes and paper-based records.

Moreover, contract management software enhances the visibility of the contract lifecycle, providing real-time insights into contract status, key performance indicators (KPIs), and major milestones. This reporting capacity allows companies to easily track important dates and set up automated alerts to ensure timely action and compliance with contractual obligations.

89% of organizations currently report that they don’t feel that their contracting processes are very effective. A broader adaptation of contract management software would likely significantly reduce that percentage.

CLM’s Role in Vendor and Contract Lifecycle Management (VLCM)

The IT contract lifecycle management plays a pivotal role in vendor and contract lifecycle management (VCLM), ensuring smooth operations throughout the lifespan of agreements between an organization and its providers.

Central to VCLM is the efficient storage of contract data. CLM solutions offer centralized repositories where all contract-related information is securely stored and easily accessible. This centralized approach enhances visibility into vendor contracts, enabling organizations to proactively monitor obligations, track performance, and mitigate risks. 

Moreover, CLM systems assist in navigating the complex legal processes associated with vendor agreements. These tools often include built-in compliance features that help ensure contracts adhere to regulatory requirements and internal policies. Also, by facilitating e-signatures, CLM enables organizations to accelerate contract workflows, reducing turnaround times and minimizing errors associated with traditional processes.

Benefits of IT contract management

Leveraging CMS can provide a variety of benefits that range from automating routine tasks to assessing and mitigating potential risks. The exact advantages to be gained by your business will depend on your identified pain points and how you plan to utilize your software to address them.

End-to-end contract automation

Starting with the initiation stage, CMS facilitates the creation of contracts by providing customizable templates, pre-approved clauses, and standardized workflows. Users can easily draft contracts by selecting relevant templates, reducing the effort required for manual document creation. CMS’s wide array of automation features can result in an 80% faster average contract cycle time for businesses that utilize these solutions.

Once an agreement has been executed, CRS can enhance ongoing management efforts by providing centralized access to documents, data, and insights. Automated reminders may also prompt users to take action on upcoming tasks, minimizing the risk of missed deadlines and ensuring the continuity of contractual relationships. 

Risk and compliance mitigation

With contract management, users can define risk criteria and evaluate contracts against these criteria to identify potential areas of concern. These processes also enable stakeholders to track risk indicators, monitor risk exposure, and implement risk mitigation strategies to minimize the impact of identified risks on the organization.

Even more, contract management solutions verify compliance by automating the enforcement of contractual obligations and regulatory requirements. They often provide customizable compliance checklists, audit trails, and reporting capabilities, to ensure that contracts adhere to relevant regulations and internal policies.

Business rules automation

Companies are empowered to define business rules that govern various aspects of contract management through CMS utilization. Users can configure rules-based workflows that automatically route contracts to the appropriate stakeholders for review based on predefined criteria, such as contract value, type, or risk level. 

Additionally, these tools usually support dynamic document assembly, allowing companies to automatically generate contracts by populating predefined templates with relevant data from integrated tooling.

IT Contract Management vs. Contract Lifecycle Management

IT contract management and contract lifecycle management (CLM) are similar in that they both involve the oversight of contracts between parties, but differ in that one is focused on day-to-day contract activities, while the other emphasizes a more holistic approach that addresses the entire lifecycle of agreements.

Scope

• IT Contract Management typically focuses on individual contracts, involving tasks like drafting, negotiation, and execution for specific agreements.

• Contract Lifecycle Management, on the other hand, has a broader scope, encompassing the entire lifespan of contracts from initiation to closure. It involves managing multiple contracts simultaneously, coordinating workflows, and optimizing processes across the entire contract portfolio.

Timeframe

• IT Contract Management operates within the confines of each contract's duration, addressing day-to-day activities and issues that arise during the term of the agreement.

• Contract Lifecycle Management requires more of a long-term perspective to optimize processes, ensure compliance, and drive strategic value over time.

Activities

• IT Contract Management tasks generally include drafting, negotiation, approval, execution, monitoring performance, handling amendments, and addressing disputes.

• Contract Lifecycle Management activities encompass all stages of the contract lifecycle, including contract creation, storage, compliance management, risk mitigation, vendor management, and analysis of contract performance.

Software & Tools

• IT Contract Management may involve basic tools such as word processors, email, and spreadsheets, along with specialized CMS designed to streamline contract workflows.

• Contract Lifecycle Management typically relies on comprehensive CLM tools, which offer centralized repositories, e-signatures, compliance management, analytics, and integrations.

Strategic Importance

• IT Contract Management is crucial for ensuring the successful execution and fulfillment of individual contracts, managing risks, and maximizing the value derived from each agreement.

• Contract Lifecycle Management allows organizations to optimize their entire contract portfolio, mitigate risks across multiple contracts, ensure regulatory compliance, and leverage data-driven insights to make informed decisions that align with broader business objectives.

Channel and vendor payment compliance

CMS enables businesses to easily establish and enforce payment terms and pricing structures outlined in vendor contracts. By integrating with financial tools, these tools can automate invoice validation and payment approval workflows, ensuring that payments are made in accordance with contractual agreements.

Contract management systems also facilitate the monitoring of vendor performance against service level agreements (SLAs), invoice processing times, and payment reconciliation, helping to continuously optimize payment processes.

How Freshservice can help your organization

Freshworks’ Freshservice solution offers all the tools that a business requires to efficiently manage its contracts and business relationships. Our unified dashboard focuses on enhancing visibility across all relevant fields, allowing companies to easily identify agreements that are approaching expiration dates, conduct customized audits, manage software costs, and much more. Furthermore, our no-code Orchestration Center supports a plethora of third-party apps that can be integrated with workflow automation, helping expedite and customize processes to fit your business needs.

Freshservice is a software solution that offers an array of features designed to enhance your organization's contract management system. Our no-code Orchestration Center can automate license allocation across your tools and servers, while SaaS Management provides a 360-degree overview of your entire SaaS estate. Additional capabilities include easy tracking of contract activities, auto-renewals, curated analytics, and much more.