What is contract management?

Contract management is often equated with contract administration. The following explains why contract management is more than just the administration of contracts.

1.1 What Is a Contract?

Contracts form the basis of all business activities. According to Wikipedia’s definition, a contract is“an agreement between at least two parties, each of whom makes a declaration of intent. […] A contract coordinates and regulates social behavior through a mutual commitment. A contract is entered into voluntarily between two (or more) parties. In the contract, each party promises the other to do or refrain from doing something specific (and thereby to perform a service desired by the other party).”

The term“contract”can be interpreted even more broadly, in the sense that it also includes voluntary commitments—for example, to national and international technical, professional, or social standards. This can also be described as a contract that a party enters into with itself.

Contracts are complex structures and are shaped by many factors, such as power dynamics, economic contexts, and legal frameworks, which are constantly changing. Consequently, the very design of a contract poses significant challenges and requires strong negotiation skills from all parties involved, always with the awareness that overlooked factors or errors in the contract can lead to high risks and costs in the event of a crisis. However, those who ensure orderly, proactive contract management as early as the negotiation phase can guarantee in advance that, in the event of a crisis (i.e., a breach of contract), the consequences and costs for their own company will be kept to a minimum. At the same time, the negotiation process itself is optimized, transparency is increased, and money is saved.

1.2 What Is Contract Management?

Contract management refers to the comprehensive process of planning, implementing, and administering contracts between clients and contractors. It encompasses the structured management of contractual negotiations as well as the effective implementation and adaptation of contracts, taking into account technical, time-related, personnel, and financial aspects.

Contract management is referred to in English as“Contract Management”or, more broadly, as“Contract Lifecycle Management”(CLM).

In contrast, “contract administration” is generally understood to mean the mere organized filing of previously concluded contracts for future retrieval. While this does form the basis of organized contract management, it covers only a small subset of contract management. In this respect, the definition of contract management is more comprehensive.

Contract management differs from simple contract administration and filing primarily in that it makes contract data available for actively monitoring and influencing business processes and provides support in many areas. In many companies without “true” contract management, this is done using Excel analyses or small custom-built solutions—but comprehensive analyses and reporting are hardly possible with these methods, or only at great expense.

1.3 What tasks are involved in contract management?

To manage contracts and related documents and files optimally, it is not enough to simply optimize storage. Ideally, a contract management system supports all processes throughout the entire contract lifecycle. This usually begins with the digitization and creation of documents, continues with the use and control of contracts and documents, and ends with audit-proof archiving or destruction.

The literature lists a wide variety of tasks and components. These include:

• Searching for and locating contracts based on a wide variety of criteria, metadata, and full-text search (also known as free-text search).
• Digitizing paper contracts and storing them in the digital contract file, including text recognition and OCR
• Audit-proof storage of all documents, correspondence, and emails
• Monitoring of dates and deadlines
• Automated reminders in electronic form
• Automated contract and document creation
• Version management and document comparison
• Task management for recurring and ad hoc tasks
• Workflow management
• Approvals and authorizations
• Legally compliant electronic signatures via signature software
• Implementation of all data protection regulations, e.g., in accordance with the European General Data Protection Regulation (GDPR)
• Contract monitoring
• Risk management for contracts and contractual relationships
• Contract management and SAP integration

2.1 How does the digitization of existing contracts work?

Paper files, contracts, and all other types of documents must be digitized before they can be stored electronically. Ideally, this is done immediately upon receipt of the paper mail (early scanning) or after processing is complete (late scanning).

Scanning can be done in several ways: externally via a specialized service provider, or internally—either through a mailroom or, on a case-by-case basis, using group or workstation scanners.

Contract management offers a standalone function for optical character recognition (OCR). If scanning is performed by an external service provider, this saves additional costs. Even existing electronic archives can be retroactively processed with OCR, allowing them to be easily searched using full-text search.

2.2 Do the contracts comply with the latest GDPR regulations?

The General Data Protection Regulation (GDPR), which took effect in May 2018, focuses primarily on improving the cross-border protection of personal data. In addition to strengthening the rights of data subjects, it aims to increase transparency regarding data processing. Contracts typically contain a wide range of data protected by the GDPR. Data subjects have the right to access information about the processing of their data. At the same time, they can request the correction, deletion, or restriction of processing. In such cases, the contract management system can generate reports in response to requests for the deletion or correction of data. At the same time, thanks to process documentation in the contract management system, various departments within a company can access the history of a data subject’s request at any time.

2.3 How exactly are IFRS 15 and 16 addressed?

The new International Financial Reporting Standards 15 (Revenue from Contracts with Customers) and IFRS 16 (Leases) take effect in 2018 and 2019, respectively, and place increased demands on costing and accounting systems. Companies must review and reevaluate all existing lease agreements and capture previously undocumented data for financial reporting purposes. Adjusting existing processes is often unavoidable. These new requirements under IFRS 15 and IFRS 16 can be met with a contract management solution specifically designed for this purpose. Effective contract management prepares contracts for inventory and classification, complies with documentation requirements, enables faster analysis, and provides the accounting information needed for the annual financial statements.

2.4 Is integration with MS Outlook possible?

According to figures from BITKOM, every working professional receives an average of 18 work-related emails per day. Extrapolated over a month, that amounts to approximately 400 emails, and over the course of a year, nearly 5,000 emails per employee related to business transactions. However, these emails often remain in the recipient’s inbox. This widespread issue is not ideal for fast and well-structured business processes, as it effectively withholds important information from other departments and employees. This can be resolved by strategically making online communications available.

An important feature of contract management is therefore the ability to store, manage, and properly archive emails as well. However, this audit-compliant archiving of emails is only effective if the email is archived unchanged—that is, if all formatting, attachments, etc., are preserved. A good contract management system imports emails from MS Outlook directly into the electronic file and archives them there, along with all text formatting and attachments.

2.5 Can the creation of contracts be automated?

Contract management supports the creation process of a contract and document not only by capturing or importing a finished document, but also by enabling the automated creation of documents or Excel spreadsheets based on custom templates and data from the SAP system.

Company employees often spend a large portion of their work time repeatedly creating the same types of documents, retrieving data from the SAP system, printing it out, and sending it.

With automated document generation, all types of documents—such as contracts, cover letters, forms, confirmations, inquiries, etc.—can be automatically and customized as individual or form letters, as well as for mass production, in MS Office, PDF (PDF/A), or other print formats, and sent with an automatic copy filed in the respective digital contract file

Document generation can be event- or user-driven via a dialog, time- or event-driven, or triggered as a result of an SAP print output or an SAP report. If the values of the variables change subsequently, they are also updated in the already generated and individually modified document as needed.

In terms of legal accuracy, the automated creation of contracts and standard documents offers immense relief. This process is based on legally reviewed text modules that are always kept up to date. The templates are binding for everyone. Special provisions, country-specific clauses, or paragraphs—such as those for confidentiality and data protection agreements—can be added. This allows even non-lawyers to create documents efficiently and accurately.

This not only eliminates costly typos but also minimizes risks. And there is no need to involve the legal department for standard contracts. This significantly reduces response times as well as administrative and labor costs.

2.6 What happens if contracts change or a revision of the contract has taken place?

If, during the negotiation phase—which may have taken place years ago—the individual intermediate steps, comments, and side agreements were not documented and archived, it often becomes difficult to trace every detail of the contract. Why were certain clauses deleted? Why were clauses worded one way and not another? What was actually intended at the time?

Even during an ongoing negotiation phase, it can be very helpful to see what changes the other party has made.

To be able to trace the development of a document or contract—from the draft stage through changes made during its term to its current status—a good contract management system automatically saves edited MS Office and PDF documents as new versions when they are filed in the electronic file, regardless of whether the document was edited directly in the system or via check-out/check-in—that is, by exporting it outside the contract management system and then transferring it back. This makes it possible to trace ambiguities even years later, resolve them if necessary, and, as a result, potentially reduce or even avoid litigation costs.

To quickly verify what changes the other party has made to an MS Word or PDF document, different document versions can be compared within the system, and every change can be displayed at a glance.

As the person in charge, can you say off the top of your head where specific contracts, documents, and emails are stored within your company? Which of these are current, still valid, or outdated? When do contract terms expire, and how much are the current payment obligations? Or, in the case of incoming invoices: Are they justified if there is no corresponding purchase order, no contract, or no physical receipt of goods?

In practice, answering these and other important questions is often difficult or requires a significant administrative effort. This is because information within companies is scattered across different departments, folders, databases, Excel spreadsheets, or independent systems. With a structured, proactive contract management system based oncontract management software, every department (e.g., sales, purchasing, human resources, legal) and the company as a whole are empowered to take proactive action rather than merely reacting.

Once contracts and information are stored in a contract management software system in an audit-compliant manner, all employees can access them directly company-wide without further delay or search for them using various search functions. Ideally, employees decide for themselves how and through which platform they access the contract file—whether via a mobile device, MS Outlook, MS SharePoint, or MS Windows.

Contract management is one of the most important management tasks. It includes, among other things, risk monitoring, monitoring contract compliance, and spend analysis.

Contract management supports the company in this regard with a wide range of analysis and reporting options. Ideally, these can be interactively sorted, grouped, totaled, and customized in their presentation.

A 360° integration of master data from the underlying ERP system—such as supplier master data, material master data, and organizational elements (accounts, cost centers, projects, and much more)—provides decision-makers with optimal transparency. All information is then intelligently linked—both historically and prospectively—in conjunction with the contract management system’s extensive, forward-looking data set. The company can then easily and interactively simulate the impact on future business success, make targeted strategic decisions, and, for example, streamline its supplier portfolio.

play an important role and have now become established in various forms as a management tool in many companies. In Germany, this is attributable, among other things, to the Act on Control and Transparency in the Corporate Sector (KonTraG), which took effect in 1998.

This law requires company management to operate a company-wide early-warning system for risks and to document statements regarding risks and the company’s risk structure as part of the company’s annual financial statements.

“Risk management” refers to the systematic handling of risks. In general, companies aim to:

• avoid risks
• mitigate risks, and
• transfer risks.

To this end, the risk management process is divided into four phases:

• Identification of risks
• Risk assessment
• Risk control
• Monitoring of risks

Contract management’s risk management function manages supplier and customer risks throughout the entire business relationship in accordance with the aforementioned levels of organization.

Most medium-sized and large companies use SAP software as their business management or commercial platform. So why should the contracts and documents related to the processes in the SAP system be managed externally?

There are various providers of “SAP-integrated” contract management systems. But what does that actually mean?

Some interpret “100 percent integration” with SAP systems to mean nothing more than checking contract management data against SAP master data, such as vendors, customers, and cost centers. However, this involves only isolated interfaces from a third-party system into the SAP system.

Conversely, a contract management system that is 100 percent integrated—in the truest sense of the word—is SAP-system-integrated from its very foundation and completely interface-free. The digital SAP contract file is thus a natural component of the SAP platform. Only in this way is seamless information exchange within the SAP ecosystem possible.

Such deep process integration opens the door to numerous scenarios. For example, contract management can be process-integrated with the standard SAP modules for Finance, Controlling, Sales, Purchasing, and many others, and can be accessed from any function within the SAP system.

Contracts and documents are thus not only managed in isolation but are consistently and transparently mapped in the context of transaction, contract, cost, and posting relationships. Invoicing and payment schedules can automatically create and trigger purchase orders and contracts in the standard SAP system, as well as prepare or generate actual FI and FI-AA/CO postings in the SAP system. SAP Contract Management is thus only the first step toward comprehensive, SAP-integrated contract management.

7.1 Contract Management

Contract Management as a Central Information Hub
All information related to a contract is directly available within Contract Management, such as relationships to other contracts or objects, billing plans, service levels, etc. The types of information that can be created for a contract can be flexibly customized. Of course, all related documents for a contract can also be found there. Everything is in one place.

The Electronic File
For each contract, Contract Management maintains an electronic file in which all related documents are stored in a clearly organized structure. The structure is therefore ideally defined centrally for each contract or file type. To ensure that all necessary documents for a specific contract are available, a minimum number of documents that must be stored in the respective file is defined. Depending on the contract type, not only can the file structure be defined differently, but also the layout and number of subfolders, as well as dependencies and the respective validity checks. In addition to the defined file structure, additional subfolders can be created as needed—even during ongoing operations.

Optimized Search
With purely paper-based contracts, the search process alone takes a great deal of time—especially when documents are scattered across multiple locations and must first be requested. However, even digitally stored documents that are difficult to locate offer a company no significant advantage over paper-based filing or storage in the company network’s file system. Contract management therefore enables quick retrieval of stored documents and all available information through various search functions.

Monitoring Tasks, Dates, and Deadlines
Active contract management optimizes and accelerates business processes. This applies not only to the contract initiation phase, during which contracts must be drafted, negotiated, and finalized in a short period of time. Even during the contract term, a wide range of dates and deadlines must be observed, and tasks must be completed. To design these workflows optimally and efficiently, tasks must be clearly assigned and tracked.

Monitoring deadlines and due dates is one of the core functions of contract management and optimizes the workflow at every stage of the contract lifecycle. Deadlines and due dates can recur throughout the contract term or occur only once. Among other things, the following are monitored:

• Minimum terms
• Notice periods
• Renewal options
• Exceedances of threshold values
• Follow-ups
• Minimum and maximum retention periods

As soon as the lead time for a specific deadline is reached, follow-up actions can be executed. The responsible employee then receives an email notification and a new task in the to-do list, or the corresponding follow-up process is triggered automatically. This could include, for example, renewing or terminating the contract.

Task management (also known as task tracking), including the escalation process, complements deadline and due date monitoring as well as the to-do list, which allows different tasks to be defined for each contract and document. Users can create these tasks not only for themselves but also for other individuals or departments.

However, when it comes to contracts and documents, a wide variety of recurring, necessary processes—such as the often time-consuming and labor-intensive approval process—also shape day-to-day work. A machine-supported workflow integrated into the contract management system provides a solution, making it easy to manage tasks. For example, the contract management system generates events for the SAP Business Workflow and can itself be utilized by the SAP Business Workflow. Standard workflow scenarios are implemented and can be customized; others can be created at any time, such as for complaint management.

Only with this type of task and workflow management can the company ensure that processing and decision-making procedures are followed and that processes are handled optimally. And it relieves employees of the burden of keeping track of all deadlines by having to set their own reminders or stick Post-its to their screens.

7.2 Contract Archiving

Documents remain secure until their final destruction, e.g., after the minimum retention period has expired. This means they are stored in an audit-proof manner in a connected archive—or, depending on the application and specific circumstances, in multiple archives—such as on the contract management server itself or in other established systems like those from OpenText or SAP.

To this end, all changes made to the document are reliably and traceably logged throughout the entire “lifetime” of a contract and document. This makes it possible—even decades later—to determine who changed what and when.

After the contract expires, statutory retention periods of varying lengths apply to original contracts, depending on the type of contract. However, the first documents from the contract negotiation phase could be destroyed as soon as the contract ends and the warranty obligation expires. These deadlines are often quickly forgotten, though, and mountains of paper pile up that could have been destroyed long ago.

Contract management offers various automated processes to prevent this. Documents can be sent for organized destruction either semi-automatically—via a reminder to the responsible employee—or fully automatically once the minimum retention period has expired.

There is a wide range of contract management software available, and their feature sets vary greatly. The following questions may help you choose the right solution for your company:

• What types of documents and contracts need to be managed, and what is their volume?
• Which departments will be using the system, and what are their specific requirements or existing technical skills?
• What factors are particularly important to you when it comes to digital contract management? What is the goal of contract management? Digitization, faster search capabilities, data security, ease of use, analysis and reporting functions, etc.?
• Which other systems should be integrated into the digital contract management system—for example, if your company already uses SAP?
• Are there any special requirements, such as multilingual support or accessible software operation?