Contracts are the heart and soul of an organization. They dictate both internal and external interactions, outlining the terms of every agreement that takes place between the company and its employees or outside parties.
Knowing the different types of contracts at work within your organization is a vital part of formulating an effective contract management strategy. Backed by a strong understanding of each contract type, you can develop a strategy that maximizes the utility of your organization’s contracts while also protecting the business and your fellow employees.
In this guide, we will go over 5 important types of contracts and define how they often interact with contract management tools and strategies.
1. Sales Contracts
Sales contracts, which govern the sale of goods and services between a seller and a buyer, are fundamental to business operations. They are often express contracts, meaning they are formally agreed upon with clearly defined terms understood by all parties.
Some sales contracts can be narrowed down into more specific categories, such as:
- Unilateral contracts: Only one party is bound to complete a specific action.
- Bilateral contracts: Both parties must complete a specific action.
Automation and Efficiency
CLM systems automate the creation, negotiation, approval, and execution of sales contracts. This reduces the time required to finalize agreements and minimizes human errors. Automation also makes it easier to track and manage any contract renewals, expirations, and amendments.
Risk Management and Compliance
Sales contracts often contain terms and conditions that need to comply with various regulations and standards. These regulations may vary depending on the industry your organization works in. CLM tools help ensure that contracts adhere to those legal and regulatory requirements, thereby reducing the risk of non-compliance penalties. Additionally, CLM systems can monitor contractual obligations and milestones so that both parties meet their commitments.
Data and Analytics
CLM systems provide insights into various business metrics through data analytics. By analyzing past contracts, businesses can identify trends, assess performance, and make better decisions in the future. This data-driven approach helps optimize pricing strategies and identify opportunities for upselling or cross-selling.
2. Procurement Contracts
Procurement contracts, which govern the acquisition of goods and services from suppliers, are necessary for maintaining the supply chain and controlling company costs.
Like sales contracts, procurement contracts can also be broken down into categories, including:
- Fixed price contracts: All parties agree upon a set price to be exchanged in return for established goods or services.
- Implied contracts: Informal acknowledgement of an understanding between all parties, such as the functionality of a product.
Supplier Management
CLM systems help manage relationships with suppliers by maintaining a centralized repository of all supplier contracts. This enables businesses to monitor supplier performance, track compliance with contractual terms, and identify opportunities for cost savings and performance improvements.
Risk Mitigation
Procurement contracts often involve significant financial commitments and operational dependencies. CLM tools can mitigate potential risks by checking that contracts include appropriate clauses, such as penalties for non-performance, warranties, and dispute resolution mechanisms. Plus, they can also monitor market trends and supplier performance to identify risks early and take proactive measures.
Cost Control and Efficiency
CLM systems automate the procurement process, from requisition to payment, reducing administrative overhead and improving overall efficiency. By streamlining workflows and speeding up approvals, businesses can accelerate procurement cycles, which could help lower costs in the long-run. Furthermore, CLM tools enable better visibility into contract terms and historical supplier performance, leading to better negotiation strategies.
3. Employment Contracts
Employment contracts outline the terms and conditions of employment between an employer and an employee. While many employment contracts are formally written out, some terms may also be set forth in the form of a verbal agreement.
Compliance and Legal Requirements
Employment contracts must comply with various labor laws and regulations, which can vary by jurisdiction. CLM systems can help ensure that contracts are drafted, reviewed, and approved in accordance with all applicable federal and state laws for the industry.
Document Management
CLM tools provide a centralized repository for storing and managing employment contracts. This gives the necessary parties easy access to employee records while streamlining renewal processes and making sure that contracts are always up-to-date and accurate.
Employee Lifecycle Management
A hearty CLM tool provides support throughout the entire employee lifecycle, from recruitment to termination. By automating processes such as onboarding, performance reviews, and contract renewals through a contract management system, businesses can help employees hit the ground running and maintain that pace. Some systems can even track employee milestones, such as promotions and salary adjustments, to make updating contracts easier.
4. Intellectual Property Contracts
Intellectual property (IP) contracts govern the creation, use, and protection of intellectual property assets, such as patents, trademarks, copyrights, and trade secrets.
IP Protection and Compliance
CLM systems help ensure that IP contracts comply with relevant laws and regulations, reducing the risk of IP infringement and legal disputes. It’s important that businesses make managing IP contracts effectively a priority in order to protect their IP assets and enforce their rights in case of unauthorized use or infringement.
Licensing and Royalties
IP contracts often involve licensing agreements, which grant third parties the right to use IP assets in exchange for royalties or other compensation. CLM systems facilitate the management of these agreements by automating royalty calculations, tracking payments, and checking compliance with licensing terms. This helps businesses maximize revenue from their IP assets and maintain control over their use.
Collaboration and Innovation
IP contracts frequently involve collaborations between multiple parties, such as joint research and development agreements. CLM tools streamline the management of these collaborations by providing a centralized platform for tracking project milestones and managing deliverables. These small automations can do wonders to accelerate the development of new products and technologies.
5. Service-Level Agreements
Service-level agreements (SLAs) define the expected level of service between a service provider and a customer. Like sales and procurement contracts, SLAs can also be broken down further into additional categories, including:
- Times and materials contracts: One party agrees to pay a fixed rate per hour of labor performed by the other party in addition to the cost of materials.
- Unit pricing contracts: One party agrees to pay a predetermined cost per unit of work completed by the other party.
Service Quality and Compliance
CLM systems help ensure that SLAs include clear and measurable performance metrics, such as response times, uptime guarantees, and resolution times. By monitoring these metrics, businesses can quickly and easily identify potential areas for improvement.
Customer Satisfaction
Effective management of SLAs is necessary for maintaining customer satisfaction and building long-term relationships. CLM tools enable businesses to track customer feedback and address any issues proactively, which, in turn, helps maintain higher service standards and drives customer loyalty.
Dispute Resolution
SLAs often include provisions for resolving disputes between the service provider and the customer. CLM systems can maintain a comprehensive record of all interactions, performance data, and contractual terms, making it easier to manage these disputes if they arise. In this way, the right tool can help the organization resolve disputes fairly and efficiently, minimizing the potential impact on customer relationships or reputation.
To learn more about how a CLM tool could fit into your contract management strategy, contact Koho Consulting today to schedule a conversation with one of our expert team members.
