Unlike in large companies, small companies usually do not have a specific individual as a contract administrator – so who is responsible for contract management inside a small business of 10-100 employees?
Most Commonly: The Finance Team
This is the most common way of handling contract management in small companies. Typically the finance department is responsible for collecting contracts from vendors and customers, making sure that they are filled out correctly, and that they are filed appropriately.
Advantages of the Finance Team:
The most obvious advantage is that the finance department is responsible for the company’s finances: they know how to read contracts, they know how to reconcile them and they understand the contract’s implications for the balance sheet.
Disadvantages of the Finance Team:
One obvious disadvantage is that the finance team may not have time to manage contracts. They already have their hands full with their primary responsibilities (like managing the company’s finances) and contract management is often an afterthought.
Another disadvantage of this method is that some contracts are not financial in nature and do not directly affect the company’s finances. For example, a distribution contract may be handled by the sales department and a purchasing contract may be handled by the purchasing department. In this scenario, the finance team may not be commercially aware enough to do anything with the contracts other than store them.
Quite Commonly: Operations Teams
If the finance department does not have time to manage contracts, then many small businesses choose to pass this responsibility to their operations teams. This is especially true for SMBs that deal with manufacturing, distribution or other types of physical goods.
Advantages of the Operations Team:
The operations team is responsible for the company’s day-to-day operations: they know how the company’s business operates and they understand the implications of the contracts.
Disadvantages of the Operations Team:
The main disadvantage of this method is that the operations team may not have any experience in contract management. They may have no idea how to fill out a contract, or how to reconcile contract terms – and they may not have any experience with the legal ramifications of a contract.
The other disadvantage of this method is that the operations team may not have the time to manage contracts. While they may have the knowledge, if they are already overworked (which is common in small businesses), they may not have the time to manage contracts.
Somewhat Commonly: In-House Legal Teams
While it is not common for a small business to have an in-house legal team, it is not unheard of. If the company has a legal department, then it is likely that the legal team is responsible for contract management.
Advantages of the In-House Legal Team:
The obvious advantage of this method is that the legal team is experienced in contract management and has the expertise to deal with contracts.
Disadvantages of the In-House Legal Team:
The main disadvantage of this method is the speed of contract management using an In-House Team. In our experience, it can considerably slow down contracting processes because work piles up alongside other legal matters and is rarely treated as a pressing priority.
Somewhat Commonly: The CEO
Less commonly, small businesses put contract management responsibility in the hands of the CEO. This is especially true for small businesses that deal with high-value contracts.
Advantages of the CEO:
The obvious advantage of this method is that the CEO is always around and tends to know the most about what’s going on across the business, making it easy for them to understand each agreement.
Disadvantages of the CEO:
The CEO is typically extremely busy in their role – often, having a CEO handling contracts means an executive assistant is actually handling those contracts.
Uncommonly: Outside Contract Administrators
If a small business can’t find someone to manage contracts, then they may decide to outsource this work to a third-party. This is especially common for small businesses that deal with a large number of contracts.
Advantages of an Outside Contract Administrator:
The most obvious advantage of outsourcing contract management is that the outsourcer can handle all of the work for a fixed cost and with agreed service level agreements (SLAs).
Disadvantages of an Outside Contract Administrator:
One disadvantage of this method is that the outsourcer may not be as familiar with the company’s business as a member of the company’s team. They may not understand the implications of the contracts or how they affect the company, which can turn them into a liability risk!
Uncommonly: Human Resources
Human resources is typically not responsible for contract management. They are responsible for handling employment contracts, but they typically don’t manage vendor or customer contracts. However, in our work with clients, we have seen that HR team members often become de facto company contract managers, because they are so experienced at handling contracts already.
When should you hire a dedicated contract manager?
When it comes to contract management, small businesses tend to adopt one of the methods listed above. However, it is clear that most small businesses are not experts in contract management – when we start working with companies, we often work to improve processes before we start to worry about who’s handling contracts (or where).
If you feel that your small business is not able to manage contracts effectively, then it may be time to hire a dedicated contract manager. The best way to determine if you need a dedicated contract manager is to ask yourself the following questions:
- Are you having contract management-related problems?
- Is your contract management affecting the speed of your business?
- Are your contracts not being handled correctly, or are you missing important information?
- Are your contracts not being filed correctly?
- Are you not sure what to do with your contracts?
- Are you not able to find your contracts when you need them?
If the answer to any of these questions is “yes,” then you may need to hire a dedicated contract manager.
Ultimately, contract handling inside small business depends on the bandwidth, skills and motivation of the employees responsible. No matter who is in charge, equipping them with the right tools to do their job is important.