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6 Steps to Successful Third-Party Contract Management

5 min read
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When your organization partners with a third-party vendor, you’ll need to engage in a variety of activities to ensure that the relationship continues to provide value. Activities like ongoing monitoring and periodic due diligence are critical, but third-party contract management essentially sets the standards for your vendor relationship.

Third-party contract management is the oversight of written agreements with vendors that provide products or services. This critical process includes negotiating the terms of the contract, monitoring compliance, and the eventual execution. It also involves change management, contract analysis, and the ongoing maintenance of the third-party relationship.

Overall, third-party contract management is performed with the goals of financial benefit, consistent service delivery, and effective risk management.

6 Steps to Managing Third-Party Contracts

Here are six steps you will want to keep in mind as you navigate through the process of third-party contract management:

  1. Assign responsibilities. You will need to decide who should be involved in contract reviews and who is authorized to change the agreement. Also, consider which department will lead the negotiations and overall review of the contract.
  2. Negotiate the terms. Many third parties will introduce standard contracts, but these should be revised throughout the negotiation process. It is critical to ensure that the needs of both parties are being considered and addressed.

    Pro tip:
    The legal department often performs the contract negotiation function, but it may also be a shared responsibility with the line of business.

    Here are a few areas you might consider negotiating:
  3. Approve and execute. Decide who is authorized to approve and execute the agreement within your organization. Ensure that they understand the terms as well as the associated risk.
  4. Set reminders. Make sure that important contract dates such as mid-term review and renewal periods are tracked and managed. Whether these reminders are automated through your system, or manually added to your calendar, it’s important to keep track of key dates to ensure your organization has enough time to review, renegotiate, or terminate contracts as needed. 
  5. Consider storage. Third-party contracts should be housed in a centralized location that’s easily accessible to multiple departments in your organization. This helps to prevent important dates from lapsing, such as the contract non-renewal notice period.

    Use this list of questions to make sure you’ve included some of the most essential details about contract storage:
    • Will the contract be housed in a centralized location that multiple departments can easily access, as needed?
    • What are the key dates and timeframes we need to remember?
    • Have we tracked these key dates and timeframes? Some of the most important items include:
      • Effective date of the contract
      • Termination date of the contract
      • Renewal date of the contract
      • Timeframe for a set renewal notice
      • Nondisclosure agreement date
      • Dates of documents that are incorporated into the contract by reference or that are signed after the agreement (e.g., exhibits, statements of work, work orders, purchase agreements, amendments, etc.)
      • Timeframes associated with non-renewal, breach or remedies and notification periods
  6. Establish an ongoing contract review process. Review the third party’s product and service delivery and assess the relationship on an ongoing basis to ensure they’re meeting performance standards. Keep track of any contract gaps or other issues that may need to be addressed before the renewal. Also remember to document any changes or issues related to risk and performance levels. 

successful third-party contract management

3 Objectives of Contract Management

Successfully managing a third-party contract can serve many objectives for your organization. Here are just a few:

  • Negotiates financial and legal terms – This is perhaps one of the primary goals of a contract as it will clearly state the terms of your third-party relationship.
  • Provides a holistic view of vendor relationships – Proper management and storage of your vendor contracts allows you to have a more complete view of your engagements.
  • Mitigates vendor risk – Service level agreements and other contract provisions are essential in mitigating the risk that comes from partnering with vendors.

3 Questions to Ask Before Termination

Despite the extensive planning and negotiating that go into third-party contracts, there’s no guarantee of a perfect vendor relationship. If things go south and it’s time to consider contract termination, ask yourself the following questions to ensure that you’re prepared for the next steps:

  1. Have we reviewed the contract to confirm our rights to terminate? It’s a good idea to review your contract once more before officially notifying the vendor that you’re ending the relationship. This can help avoid any disputes about your right to terminate the contract. Review the contract thoroughly if terminating:
    • Early for convenience, as there may be substantial penalties involved.
    • Due to default or breach by vendor. Know your rights and whether any vendor penalties are applicable (i.e., portion of upfront fees refunded).
  2. Who needs to be involved in the termination process? Make sure you’ve identified all the roles and responsibilities that will be involved in ending your third-party contract. There will likely be different individuals within your organization and on the vendor side, and confirming these details can help keep the process moving forward quickly.
  3. What are the immediate next steps in our exit strategy? Your exit strategy is probably going to have several components, such as verifying the data retention or disposal process and finding a replacement vendor. Also consider whether you need to establish deconversion services the vendor will provide, along with specific timeframes and potential costs. It’s important to confirm what needs to be done immediately, just to ensure that you won’t have any issues. 

As you can see, the contract management function is a key component in a healthy third-party relationship. An effective contracting strategy will help ensure that your partnership is beneficial to both parties.

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