As a SaaS CFO, contracts are at the HEART of your company’s success. Contracts drive recurring revenue, and optimizing contract management can help you increase organizational cash flow.
In this blog, we take a deep dive into what SaaS contract management entails for CFOs. We’ll be 1) Looking at why it matters and how it affects your business operations and profitability, 2) Providing step-by-step guidance on the contract management process, and 3) Exploring how you can streamline it for maximum efficiency.
Let’s get going.
Understanding contract management in SaaS
Recurring revenue companies enter into a new ongoing subscription contract with every single customer.
As you scale, you could be responsible for overseeing thousands of customer contracts at any given moment. This leads to the problem of properly storing and managing those contracts across time, in addition to other considerations we’ll discuss.
By taking contract management seriously, organizations can mitigate the complexities of high contract volumes and the liabilities that can arise from them. Let’s dig a bit deeper.
The value of contract management for SaaS CFOs
SaaS finance leaders stand to gain a lot from proper contract management. How you handle your contracts is directly tied to your ability to secure customer renewals.
That may sound surprising, so let’s reframe it and say it this way. And this should not sound surprising. In addition to providing a stellar product, you also need to be stellar about clear customer communication and laying out mutual expectations for doing business. This is the essence of a SaaS contract.
That’s the 10,000-foot, high-level explanation of why SaaS contract management is important. But it also carries direct operational risks and benefits for your organization.
How does contract management impact SaaS operations?
Taking a scattershot approach with your company’s contracts can cause problems that interfere with your daily operations. If left unsolved, these issues can reach deeper, interfering with your cash flow or causing churn spikes.
Contract management pays dividends for SaaS organizations because:
- Efficiently managing contracts reduces administrative burden: Keeping your contracts in order can mean the difference between a calm and streamlined company and a hectic work environment where “something always goes wrong.” Manual contract management puts a massive workload on finance teams, draining collective focus and making errors more likely in other workflows.
- Contract management increases revenue visibility and predictability: SaaS organizations that prioritize centralized and streamlined contract management unlock increased cash flow visibility. This makes sense, given that SaaS revenue is tied to renewals, and renewals are tied to contracts. Without centralized visibility into contracts, keeping track of subscription cash flow can quickly grow difficult.
Now that we’ve covered the importance of having systems in place for dealing with contracts at scale, let’s dissect contract management step by step.
Steps of the contract management process
For subscription SaaS companies, the contract management process is made up of three distinct phases.
1. Contract creation and drafting
The first step in contract management is to create the contract. This is the part of the process where you lay out:
- The scope of customer usage rights
- Your organization’s performance obligations
- Information about pricing and plans
- Payment terms and user data rights
- Automatic renewal terms and all other relevant info
Once that’s all ironed out, it’s time to move on to the second phase.
2. Contract approval or contract negotiation
At the approval or negotiation phase, the customer either signs the contract or attempts to renegotiate the terms.
Contract negotiation is a prime example of the value of data centralization. Someone outside your department might need to change a contract on short notice to reflect the commitments made in a sales negotiation.
If your contracts aren’t centralized and easily accessible, this could be a drawn-out process. Your prospect might walk away if their needs are urgent.
3. Execution and administration of contracts
In the third phase, the contract is executed and contract administration begins. For recurring revenue companies, these steps are distinct and ongoing.
- Contract execution: Execution involves carrying out your performance obligations as spelled out in your contract, and then gradually recognizing your revenue in compliance with ASC 606.
- Contract administration: Administration encompasses everything after the execution step. It includes the safe storage of customer contracts, contract amendments, further negotiations, and related considerations.
How can SaaS CFOs streamline this crucial workflow?
Streamlining and optimizing SaaS contract management
SaaS companies are known for championing innovation. It’s how the organizations that win their market manage to do so–and then stay at the top.
For example, unique and flexible billing models are a mainstay of SaaS innovation. But more mundane corners of the business world–like contract management–are also prime candidates for innovation.
How can open-mindedly looking beyond legacy accounting optimize your contract practices and standards?
Enhancing contract efficiency with cloud accounting software
In recent years, SaaS CFOs have been turning to cloud-based automated software for contract lifecycle management. In a legacy SaaS company, contracts are frequently scattered in different software applications or even entirely different departments.
This leads to confusion and employee errors, and can make you more vulnerable to a data breach. Many SaaS companies now include contract management automation among their best practices because it:
- Boosts transparency and allows stakeholders to collaborate in real time.
- Prevents problems and bottlenecks that endanger renewals and revenue.
- Keeps you from getting bogged down in paperwork and administrative tasks.
- Enables seamless post-negotiation contract amendments and encrypted storage.
For small businesses and large companies alike, accounting software equipped with AI is one of the best ways to enhance your business’s operations around contracts.
Take control of your contract management today
From contract centralization and security all the way to tracking your performance obligations across the contract lifecycle, you can’t escape the central role of contracts in SaaS success. They’re at the core of customer renewals and recurring revenue. And if handled properly, they provide a template for predictable cash flow.
To learn more about the relationship between automation and contract management, check out our ebook: ASC 606 and Subscription Businesses–Why Compliance Can’t Wait.
Recommended Next Read
What are the expansions in today's SaaS CFO's responsibilities?