Implementing and following good contract management processes is good practice, whatever the size of your business.
Good contract management discipline means:
- Generating the maximum value from your contract agreements
- Controlling costs
- Minimising business risks
These outcomes are equally beneficial for start-ups as they are for mature businesses.
In fact, given the innate volatility of startup businesses, you could argue that they’re even more important for startups than larger businesses.
When we talk about what contract management actually entails for startups, we’re not necessarily talking about using a specialist contract management software. For smaller businesses with a low number of contracts, this won’t likely make financial sense.
However, what we are talking about is following good processes and being disciplined when it comes to contracts. What that means in practical terms is having at least:
- A central repository containing the contract documents and some simple metadata.
- A method for tracking and reminding relevant parties about key dates such as renewals.
- A method for tracking and reminding relevant parties about contract obligations and commitments, including for compliance purposes.
With a small amount of manual effort, all of the above could be done using something as simple as an Excel spreadsheet (see below).
Why do startups fail to implement contract management?
Startups are inherently chaotic. With limited resources to deploy and new challenges arising constantly, it’s only natural for some parts of a business to be relatively neglected until they become a serious issue that needs to be addressed.
And proactively managing contracts is an activity that in some circumstances can be postponed without significant penalty.
If a business is lucky in its early days it might not experience any catastrophic issues relating to contracts and can therefore continue to grow successfully (albeit with unquantified levels of risk).
With a comparatively small number of contracts, a startup can also get by with manual contract oversight. For instance, an in-house legal counsel might review each and every contract and believe they have a good understanding of their associated risks and key information.
However, over time the number of new contracts will grow, while existing contracts will renew on different terms or close out.
And this is where the risks associated with a startup’s contracts start to multiply rapidly.
These “growing pains” are not just limited to contract management either. Startups face this exact scenario across many different areas of the business, often at the same time.
Business owners and senior management find themselves asking the question “are we now too big to be doing things this way?“ about a variety of functions and processes.
And the reality is that the issues can’t all be solved at the same time. Solutions cost both time and money, especially if they involve hiring people or purchasing a new technology.
So startups fail to implement contract management effectively in their organisation because:
- There are competing priorities for limited budget and management resource.
- There will be other “higher profile” areas such as Sales or HR with clear business owners that require attention and will generally be prioritised.
- They haven’t yet realised that they’ve outgrown the manual process.
What are the benefits for startups of implementing contract management processes?
The first thing to understand about contract management is that when it’s deployed correctly, it can easily become a source of competitive advantage.
In most startups, metrics like top-line revenue and growth will typically grab the majority of the headlines and attention.
However, both can be directly influenced by managing contracts more effectively. The IACCM estimates that poor contract management is costing businesses up to 9% of annual revenue.
When startups can be growing at upwards of 100% year-on-year, 9% can seem relatively trivial. However, the compound impact of 9% improvements can quickly become significant as a business grows.
An obvious example of the positive influence of contract management comes with the handling of contract renewals.
Companies that manage renewals well, with timely preparation and reviews of contract performance, will typically be able to negotiate better subsequent terms than businesses that leave it until the last moment or indeed leave contracts to auto-renew without intervention.
In fact, implementing contract management has several specific benefits for startup businesses:
- Acquisition/Investment. By having a clear centralised record of all contracts, their value and their associated obligations it becomes much easier for potential investors to do their due diligence and to appraise the company accurately.
- Risk mitigation. Crucial for businesses of any size but particularly for smaller businesses where there is generally less financial insulation from situations like supplier failure or macro-events.
- Benefits realisation. Typically as much as 50% of negotiated benefits are never realised in contracts. In startups, where priorities can shift rapidly, and people are spread thinly, the risk of this happening is increased. Having a process in place that prompts timely action and follow-up is crucial to getting the full benefit of what’s agreed.
- Reduced administrative overhead. It’s considerably easier to implement processes from the start and to centralise the data when the business is smaller and the number of contracts is lower.
These benefits combine to improve the short-to-medium term outlook for the startup, while also stabilising it for the future, making it more likely to succeed and more likely to attract the interest of investors.
Managing contracts effectively is an under-appreciated discipline when it comes to growing organisations.
When the team is small, you can get away with manual, non-scalable processes. Close communication and awareness of the other areas of the business keep everyone on the same page.
As soon as businesses grow, these manual processes start to become risks and eventually barriers to further growth.
In the world of startups, where growth is often the primary aim, this becomes a problem that needs to be dealt with.
Effective contract management gives a startup business a stable platform from which to grow. The disciplines ensure that maximum value is gained from contracts, whilst the centralised record keeping mitigates contract risk and provides reassurance to potential future investors.
If your startup is still in its early stages, we have two FREE resources to help you get started with contract management: