Contract management and it’s best practices
The top 10 contract management best practices to drive business
Jul 23, 202420 MINS READ
In today's dynamic business environment, managing contracts effectively is no longer optional. With an increasing number of agreements and ever-changing regulations, organizations are looking for the best ways to streamline processes, mitigate risks, and maximize the value of their contracts.
In this article, we’ll explore 10 best practices for managing contracts in 2024 to drive efficiency, manage risks, and foster stronger relationships with vendors and partners.
What is a contract?
A contract is a legally enforceable agreement between people or organizations for the purchase of products or services, or a common project or goal. Each person or organization who agrees to a contract is known as a “party.” The contract can be thought of as an understanding or a deal where one party (the supplier) agrees to provide goods or services to the other party (the customer). A contract records the obligations, terms, and conditions by which each party agrees to abide and what each party has agreed to do to avoid future misunderstandings. It protects the rights and needs of both parties and can drive them to be responsible for what has been promised. Contracts can be written or verbal, although it is difficult to prove agreements in a verbal contract. Contracts can be defined in a single document, in a collection of linked documents, or as a separate section in an order a customer has placed with a supplier.
What is contract management?
Contract management is a set of processes and techniques for managing a contract's end-to-end lifecycle. Each party should perform contract management. The level of activity when managing different contracts can vary substantially. A contract for a customer to buy off-the-shelf products from a supplier would require little, if any, continuous involvement from the customer’s contract-management function, as the management actions under the terms of this type of contract would only be necessary if the supplier failed to deliver the products on time and of the specified quality. More complex contracts for products, such as high-value bespoke software developments or outsourced IT services, are likely to require the entire range of contract-management activities. This is because the customer is more likely to require specific terms and conditions in the contract with the supplier to manage the risks to the customer’s business.
What are the benefits of following contract management best practices?
Following contract management best practices benefits businesses through:
Improved productivity and efficiency
Following contract management best practices boosts productivity and efficiency by streamlining processes and reducing risks. Effective contract management ensures that all agreements are systematically monitored, minimizing the likelihood of oversight and errors and ensuring compliance with terms and deadlines. This systematic approach facilitates faster decision-making and smoother workflows because stakeholders clearly see contract statuses and obligations. Having standardized contract processes in place also reduces the time spent on negotiations and revisions, leading to quicker contract turnaround times and improved relationships with partners and suppliers.
Better ROI
Following contract management best practices can increase ROI by enhancing financial performance and reducing costs. It ensures that all financial terms are clearly defined and adhered to, minimizing revenue leakage through overlooked clauses such as auto-renewals, penalties, and incentives. The standardization of contract processes reduces administrative overheads, which lowers operational costs. Efficient contract management also reduces legal risks by ensuring compliance with regulatory requirements and contractual obligations, thereby avoiding legal disputes and penalties. Additionally, following contract management best practices improves supplier and vendor relationships by ensuring transparent and timely communication; this can lead to better negotiation outcomes, bulk purchase discounts, and improved terms, all of which contribute positively to ROI.
Reduced risk
By standardizing the contracting process, organizations can ensure consistency and avoid errors or omissions that lead to contract breaches. It also helps identify potential issues early, allowing for timely remediation before they escalate into more serious problems. Additionally, well-managed contracts maintain clear documentation and accessible records, enhancing transparency and accountability and mitigating risks associated with miscommunication or disputes over contract terms. Overall, following contract management best practices protects organizations from potential legal liabilities and reinforces operational reliability.
10 contract management best practices for 2024
Let’s dive into the top 10 contract management best practices for 2024 that will fuel your company’s productivity, ROI, and reputation.
1. Establish clear roles and responsibilities
Clearly defining who is responsible for each aspect of the contract lifecycle—from drafting and negotiation to approval, execution, and ongoing management—ensures accountability and efficiency. It prevents overlap and confusion, which allows team members to perform tasks more competently and promptly. It also facilitates better communication among parties involved, as stakeholders know exactly whom to contact for specific issues.
2. Create a contract repository
Creating a contract repository centralizes all contract-related documents and information, ensuring easy access, organization, and retrieval. A well-maintained repository reduces the time and effort spent searching for specific contracts or details, enhancing overall efficiency. It allows for the systematic storage and categorization of contracts by type, date, status, or other relevant criteria for quick monitoring and reference. It also aids in compliance and audit processes by maintaining a comprehensive and accessible record of all contractual obligations and changes. This supports better risk management by providing visibility into contract milestones, renewal dates, and key clauses, preventing missed deadlines and unintentional breaches.
3. Pursue optimized collaboration and communication
Pursuing optimized collaboration and communication significantly enhances the effectiveness of contract negotiations and execution. This practice involves fostering a collaborative environment where all stakeholders, including legal, financial, and operational teams, are encouraged to share information openly and actively participate in discussions. This ensures that each party understands the terms, conditions, and expectations involved, leading to more informed decision-making and fewer misunderstandings. By creating structured channels for feedback and dialogue, organizations can quickly address issues, adapt to changes, and make necessary contract adjustments. Dynamic communication not only speeds up the contract lifecycle but also strengthens relationships between parties, ensuring smoother transactions and better compliance.
4. Continually measure progress and act on data
Continually measuring contract progress and acting on data drives continuous improvement and enhances decision-making. By systematically tracking key performance indicators (KPIs) and metrics related to contract performance, organizations can gain valuable insights into compliance rates, contract cycle times, and financial outcomes. This data-driven approach allows for the early identification of trends, risks, and opportunities, which enables proactive management rather than reactive fixes. Advanced analytics and reporting tools help teams generate actionable insights that inform strategies for renegotiating terms, optimizing processes, and mitigating risks. Moreover, regular reviews and audits based on this data ensure that contracts align with organizational goals and market conditions.
5. Utilize standardized templates
Using standardized templates streamlines the drafting process and ensures consistency across all contractual documents. This uniformity can help prevent errors and omissions that can occur when contracts are drafted from scratch each time. It also aids in maintaining compliance with legal and regulatory requirements by embedding essential terms and conditions that must be consistently applied. Additionally, they facilitate easier review and approval processes because stakeholders become familiar with the format and key components of the contracts.
6. Ensure security and privacy measures are in place
Effective security protocols, such as encryption of digital contracts, restricted access controls, and regular security audits, are crucial for preventing unauthorized access and data breaches. Privacy measures ensure that personal and confidential information is handled according to legal standards, such as GDPR or HIPAA. Implementing these security and privacy frameworks protects the integrity and confidentiality of contractual data and builds trust with stakeholders and clients by demonstrating a commitment to safeguarding their information. It also mitigates the risk of legal repercussions and financial losses associated with data breaches and non-compliance.
7. Leverage AI
Leveraging artificial intelligence (AI) in contract management enhances efficiency, accuracy, and strategic insights. AI tools can automate routine tasks such as extracting key terms and clauses, monitoring compliance, and predicting potential contract risks by analyzing historical data. This frees up legal and managerial teams to focus on more complex negotiations and strategic decision-making. AI-driven analytics can also provide deep insights into contract performance, identifying trends and inefficiencies that might not be evident through manual analysis. These capabilities allow organizations to proactively manage their contracts and optimize terms during renewals.
8. Use electronic signatures
Electronic signatures are a secure and legally recognized way to expedite contract execution without physical documents, which can be especially beneficial in a globally dispersed business environment. This technology ensures that contracts can be signed instantaneously from any location, eliminating the delays associated with traditional mailing or in-person meetings. Electronic signature technology also often comes with built-in features such as time-stamping and IP tracking, which add an extra layer of security and auditability, ensuring that the signing process is transparent and verifiable.
9. Automate routine tasks
Automation tools can handle repetitive tasks such as generating draft contracts using templates, sending reminders for contract renewals or expirations, and tracking compliance with contractual obligations. This significantly reduces the time spent on manual data entry and administrative oversight, speeding up the contract lifecycle. It also leads to quicker turnaround times in contract approvals and renewals, ensuring that business operations are not delayed by contractual procedures. Additionally, automation supports a more robust risk management strategy by consistently applying rules and standards across all contracts.
10. Streamline negotiation processes
By implementing clear procedures for negotiations, including predefined negotiation terms, decision-making hierarchies, and effective communication channels, organizations can reduce the duration and complexity of contract negotiations. Tools like centralized databases for contract history and clause libraries enable quick access to relevant information and precedent contract terms, which can guide negotiations. This speeds up the process and ensures consistency and compliance with organizational standards. Teams can also adopt collaborative platforms that allow real-time editing and feedback to improve transparency and reduce back-and-forth communications. Streamlined negotiations lead to faster agreement on terms, minimizing delays and fostering better relationships between parties.
What are the typical types of contracts used in IT?
There are 6 main types of contracts used in the IT sector:
Sales contract
A sales contract is a legally binding agreement between a buyer and a seller outlining the terms and conditions of a sale of goods or services. It details the description of the goods or services being sold, the price, payment terms, delivery schedules, and warranties. Sales contracts also typically include clauses related to dispute resolution, termination conditions, and liability limitations. Clearly defining the rights and obligations of both parties helps mitigate risks, prevent misunderstandings, and ensure that both parties have a mutual understanding of their responsibilities. It also provides legal protection and recourse in the event that either party fails to fulfill their contractual obligations.
Purchasing contract
Purchasing contracts are agreements between a buyer and a supplier that outline the terms and conditions under which goods or services will be purchased. They outline the quality, quantity, and specifications of the items being procured, pricing and payment terms, delivery schedules, and any applicable warranties or guarantees. They also often include clauses related to confidentiality, dispute resolution, termination conditions, and compliance with relevant regulations. Purchasing contracts help ensure that the buyer receives the agreed-upon goods or services on time and at the agreed price, while the supplier is assured of payment and clear delivery requirements. They reduce the risk of disputes and enhance supply chain efficiency.
Partnership agreement
Partnership agreements are legal documents that define the terms and conditions of a business relationship between two or more parties who wish to collaborate on a venture. They outline the purpose of the partnership, the contributions of each partner, the distribution of profits and losses, and the decision-making processes. They also address issues like the duration of the partnership, procedures for admitting new partners, dispute resolution mechanisms, and the circumstances under which the partnership can be dissolved. By clearly establishing the roles, responsibilities, and expectations of all parties involved, partnership agreements help prevent misunderstandings and conflicts, ensure equitable treatment, and protect the interests of each partner.
Collaboration agreement
Collaboration agreements are contracts between two or more parties who agree to work together on a specific project or initiative, outlining their mutual goals, responsibilities, and contributions. They detail the scope of the collaboration, the roles and duties of each party, the resources and funding to be provided, and the timelines and milestones for the project. They also address intellectual property rights, confidentiality, dispute resolution, and termination conditions. By clearly defining these terms, collaboration agreements help ensure that all parties have a shared understanding of their obligations and the project's objectives. They also provide a legal framework that protects the interests of each party, fosters a cooperative working relationship, and enhances the likelihood of the project's success.
Sub-contract
Sub-contracts are agreements made between a primary contractor and a secondary contractor (subcontractor) to perform a specific portion of work or provide certain services within a larger project. They outline the tasks, responsibilities, timelines, and deliverables that the subcontractor must adhere to, as well as the payment terms, quality standards, and compliance requirements. Sub-contracts also include clauses related to confidentiality, liability, dispute resolution, and termination conditions. They help ensure that the subcontractor understands their role and obligations, which helps maintain the overall project schedule and quality, and provide legal protection for both parties by formalizing the relationship and offering recourse if the subcontractor fails to meet their commitments.
Master services agreement
Master services agreements (MSAs) are contracts that establish the terms and conditions governing the relationship between two parties for the provision of multiple services over a period of time. An MSA details payment terms, confidentiality obligations, intellectual property rights, dispute resolution mechanisms, and termination conditions. It sets the framework for individual work orders or statements of work (SOWs), which detail specific services or projects to be undertaken. MSAs allow businesses to expedite the contracting process for future projects, as they only need to negotiate the specific terms of each new SOW rather than renegotiating the entire contract. They reduce administrative burdens, enhance consistency in service delivery, and foster a stable and predictable business relationship.
What are contract management activities?
Contract management is full of moving parts and crucial steps, including:
Defining the contents of a contract
Defining the contents of a contract ensures all necessary elements and terms are explicitly detailed to create a clear and enforceable agreement. It involves specifying the scope of work, deliverables, timelines, and performance standards, as well as payment terms, including pricing, invoicing, and payment schedules. It also includes outlining the roles and responsibilities of each party, confidentiality obligations, dispute resolution mechanisms, termination conditions, and any compliance requirements. Clear, well-structured contracts provide a solid foundation for the business relationship, ensuring that all parties have a mutual understanding of their commitments and the expectations set forth.
Negotiating the terms and conditions of a contract
Negotiating the terms and conditions of a contract involves detailed discussions and bargaining between parties to reach a mutually acceptable agreement. It is a process that requires a thorough understanding of each party's objectives, constraints, and priorities, ensuring that the final contract reflects a balanced allocation of risks, benefits, and responsibilities. Negotiation encompasses various aspects, such as pricing, delivery schedules, quality standards, payment terms, and liability clauses, as well as dispute resolution mechanisms and termination conditions. Skilled negotiators aim to achieve a win-win outcome that cultivates a positive relationship that can lead to long-term partnerships.
Agreeing on a contract between parties
Agreeing on a contract between parties formalizes the mutual understanding and commitments established during negotiations. It involves finalizing and documenting the agreed-upon terms and conditions, ensuring that all aspects, such as scope of work, payment schedules, delivery timelines, and performance standards, are clearly articulated. In this step, both parties review the contract to confirm that it accurately reflects their intentions and agreements and make any necessary adjustments before signing. A finalized contract serves as a reference point throughout the duration of the agreement, guiding the execution and management of the contractual relationship and helping ensure that both parties fulfill their obligations and achieve their objectives.
Communicating a contract’s contents
Communicating a contract’s contents ensures all stakeholders are fully informed about the terms, obligations, and expectations established in the agreement. In this contract management activity, the finalized contract is distributed to all parties, like project managers, legal teams, finance departments, and any other individuals responsible for implementing or overseeing aspects of the contract. Effective communication also includes highlighting key provisions, deadlines, and compliance requirements to ensure that everyone understands their roles and responsibilities. This may involve training sessions, detailed briefings, or creating summaries for easier reference. By clearly communicating the contract’s contents, organizations foster alignment and coordination among teams, prevent misunderstandings, and promote accountability.
Ensuring compliance with contract terms and conditions
Ensuring compliance with contract terms and conditions requires monitoring and enforcing adherence to the agreed-upon provisions throughout the contract’s lifecycle. This step includes regular reviews and audits to verify that both parties are fulfilling their obligations, such as meeting deadlines, delivering services or products as specified, and making payments according to the schedule. It also entails tracking performance metrics and KPIs to identify any deviations or potential breaches. Actively monitoring compliance helps organizations mitigate risks, avoid disputes, and ensure that the contract delivers its intended value.
Taking remedial action if the contract’s terms and conditions aren’t fulfilled
Taking remedial action when a contract’s terms and conditions aren’t fulfilled ensures the integrity and enforceability of the agreement. This contract management activity begins with identifying and documenting any breaches or deviations from the contract’s stipulations, followed by promptly notifying the responsible party of the issue. Remedial actions may include negotiating corrective measures, such as adjusting timelines, amending contract terms, or providing additional resources. In cases of significant breaches, legal remedies such as invoking dispute resolution clauses, seeking damages, or terminating the contract might be necessary. Effective remedial action requires clear communication, a thorough understanding of the contract, and a strategic approach to resolving issues while maintaining the business relationship.
Managing any changes to a contract
Managing changes to a contract involves identifying the need for changes, such as adjustments in scope, timelines, pricing, or deliverables, and assessing the impact of these changes on the overall agreement. Effective change management requires clear communication between all parties, obtaining necessary approvals, and updating the contract to reflect the alterations. It also includes revising any associated documents and ensuring all stakeholders are informed. By meticulously managing contract modifications, organizations can adapt to evolving circumstances, address unforeseen issues, and ensure that the contract remains practical and aligned with business objectives.
Terminating a contract
The process of terminating a contract can be initiated due to various reasons, such as the fulfillment of contractual obligations, mutual consent, breach of contract, or changes in business circumstances. It requires a thorough review of the contract to ensure compliance with termination clauses, such as providing the required notice period and following any specified procedures. It also involves clear communication with the other party to outline the reasons for termination and address any outstanding obligations or issues. Managing contract terminations carefully helps businesses mitigate legal risks, preserve professional relationships, and ensure a smooth transition out of the contractual arrangement while safeguarding the interests of all parties involved and maintaining the organization’s reputation.
Why is contract management important to your business?
Contract management is important to your business because it safeguards the company's interests and promotes successful partnerships. It’s also critical for:
Risk Mitigation: Proper contract management helps identify and mitigate risks by ensuring that all terms and conditions are clear and enforceable.
Compliance: Ensures that all contractual obligations and regulatory requirements are met.
Cost Efficiency: Streamlines processes and reduces administrative overhead by automating routine tasks and using standardized templates.
Relationship Management: Fosters strong and transparent relationships with partners, suppliers, and customers.
Performance Monitoring: Allows for continuous monitoring of contract performance against key metrics, enabling timely interventions and adjustments.
Strategic Decision Making: Provides valuable data and insights that inform strategic decisions, helping businesses negotiate better terms and make informed choices.
Dispute Resolution: Establishes clear processes for handling disputes and taking remedial actions, which helps resolve conflicts efficiently and maintain business continuity.
Contract management techniques
There are many contract management techniques businesses can employ, such as:
How should contract management address compliance?
Contract management should address compliance by ensuring that all contractual obligations and regulatory requirements are clearly defined, monitored, and enforced throughout the contract lifecycle. This should include incorporating compliance clauses within the contract that outline specific standards and regulations to be adhered to, as well as establishing procedures for regular audits and reviews to verify compliance. Effective communication and training for all stakeholders on compliance requirements are also crucial to maintaining adherence. By proactively managing compliance, organizations can mitigate legal risks, avoid penalties, and ensure that all parties fulfill their responsibilities.
Contract management in IT
Contract management in IT ensures that technology projects are delivered on time, within budget, and meet specified requirements. It involves meticulous drafting and reviewing of contracts to include detailed specifications for software development, hardware procurement, service level agreements (SLAs), and intellectual property rights. Effective IT contract management requires ongoing monitoring and evaluation of vendor performance, adherence to timelines, and compliance with security and data protection regulations. Using contract management software tailored for IT can streamline these processes by automating workflows, tracking key milestones, and providing real-time visibility into contract status. By implementing robust contract management practices, IT teams can mitigate risks, optimize resource allocation, and drive successful project outcomes.
“Off-the-shelf” consumable sales contracts
Off-the-shelf consumable sales contracts are essential for businesses that sell pre-packaged, ready-to-use products like food items, cleaning supplies, or office materials. They typically outline the terms of purchase, including pricing, payment schedules, delivery timelines, quantity specifications, and clauses related to product quality, returns, and warranties, to ensure that the consumables meet the buyer's standards and expectations. Managing these contracts effectively requires regular reviews and updates to reflect current market conditions and business needs, as well as monitoring supplier performance to ensure consistent quality and timely deliveries. Maintaining well-organized and transparent off-the-shelf consumable sales contracts enables businesses to secure reliable supply chains, optimize inventory management, and enhance operational efficiency.
“Off-the-shelf” software sales contracts
Off-the-shelf software sales contracts are used for transactions involving pre-packaged software solutions that are sold as-is, without customization. They delineate the terms and conditions of the software purchase, including licensing agreements, payment terms, delivery methods, and usage rights. Their key provisions often cover software updates, technical support, and limitations of liability to protect both the vendor and the buyer. Managing these contracts involves ensuring compliance with licensing terms, monitoring renewal dates, and addressing any issues related to software performance or support. Efficiently managing off-the-shelf software sales contracts helps businesses ensure they maximize their software investments, maintain compliance, and foster positive relationships with software vendors.
Bespoke software development contracts
Bespoke software development contracts are used for projects involving custom-built software tailored to meet specific client needs. They outline comprehensive terms and conditions, including detailed project specifications, development timelines, payment schedules, and milestones. Their key components often include intellectual property rights, confidentiality agreements, and provisions for ongoing maintenance and support. Effective management of bespoke software development contracts requires continuous monitoring of project progress, adherence to agreed-upon milestones, and regular communication between the development team and the client. By diligently managing bespoke software development contracts, businesses can ensure successful project outcomes, maintain clear client relationships, and protect their interests.
Service-based contracts
Service-based contracts are crucial for agreements where one party provides a service to another, such as consulting, maintenance, or professional services. They clearly define the scope of services, performance standards, payment terms, timelines, and responsibilities of both parties. They also often include confidentiality clauses, dispute resolution mechanisms, and terms for modifications or termination of the agreement. Effective management of service-based contracts involves regularly monitoring service delivery, adherence to agreed-upon performance metrics, and timely invoicing and payment processing. Meticulously managing service-based contracts allows businesses to ensure high-quality service delivery, foster strong client relationships, and safeguard against potential disputes or non-compliance issues.
What are the challenges of contract management?
Part of effectively managing contracts requires understanding the potential challenges that come with it. Some challenges include:
Creating understandable contracts: Ensuring contracts are clear and simple requires balancing legal precision with readability. Misinterpretations or ambiguities can arise if contracts are too complex or not detailed enough.
Using different approaches to contract management: Adapting contract management practices to various contract types and industries demands flexible strategies and comprehensive staff training to maintain consistency and efficiency across different scenarios.
Checking contract terms and conditions: Regularly reviewing contracts to ensure they meet changing legal standards and business needs is a resource-intensive task. Identifying and rectifying discrepancies or outdated clauses requires thorough audits and sufficient time allocation.
Knowing when to apply the contract: Determining the appropriate circumstances for invoking contract clauses can be complex. Recognizing triggers such as breaches or changes in scope and ensuring all stakeholders understand when to apply the terms is crucial for avoiding delays or disputes.
How can you use software to track your contracts?
Businesses can improve their contract management processes by leveraging specialized software solutions. These tools provide features like:
Centralized repository: Contract management software offers a centralized digital repository for contract storage, making it easy to access, search, and retrieve documents whenever needed.
Automated alerts and reminders: The software can automatically send notifications for key dates such as renewals, expirations, and deadlines to prevent missed milestones.
Compliance monitoring: Advanced contract management tools can track compliance with contractual obligations and regulatory requirements, flagging any deviations or potential issues.
Efficient collaboration: These platforms facilitate seamless collaboration among stakeholders by allowing multiple users to review, comment, and edit contracts in real-time, ensuring that all changes are documented.
Performance analytics: This software provides detailed analytics and reporting capabilities, enabling businesses to monitor contract performance, identify trends, and make data-driven decisions.
Version control: The software maintains a history of all contract versions and amendments, ensuring that the most current and accurate documents are always in use and providing an audit trail.
Risk management: These platforms automate the tracking of contract terms and conditions to help identify and mitigate risks associated with non-compliance, missed deadlines, and unfavorable terms.
Integration with other systems: Contract management tools can integrate with other business systems such as CRM, ERP, and finance software, ensuring that contract data is synchronized across the organization.
Optimize your contract management with Freshservice!
Freshservice, a comprehensive IT service management tool, has robust contract management capabilities that streamline contract creation, tracking, and management. With Freshservice, businesses can centralize all contract-related information in a single, easily accessible repository, eliminating the need for disparate systems or manual tracking. This ensures that all stakeholders have real-time access to the most current contract data, improving collaboration and reducing the risk of errors or omissions.
Freshservice also has an automated alert and notification system that sends timely reminders for important dates such as contract renewals, expirations, and payment schedules, helping businesses avoid costly oversights. Additionally, Freshservice’s advanced analytics and reporting tools provide valuable insights into contract performance, compliance, and financial impact, enabling more informed decision-making. By leveraging Freshservice’s contract management capabilities , businesses can ensure that their contract management processes are efficient and aligned with their strategic goals, ultimately driving better business outcomes and stronger relationships with partners and vendors.
FAQ
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How can automation improve contract management?
Automation can improve contract management by streamlining routine tasks, reducing human errors, and ensuring timely compliance with contract terms through automated alerts and reminders.
What role does data analytics play in contract management?
Data analytics provide insights into contract performance, identify trends, and highlight potential risks, enabling businesses to make data-driven decisions and optimize their contract strategies for better outcomes.
How does effective contract management mitigate risks?
Effective contract management mitigates risks by ensuring compliance with legal and contractual obligations, identifying potential issues early through regular monitoring, and providing clear documentation and processes to address any problems promptly.
What are the key elements of a successful contract management strategy?
The key elements of a successful contract management strategy include clear and detailed contract documentation, regular compliance monitoring, automated alerts for key dates, effective communication and collaboration among stakeholders, and robust data analytics.
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