What is contract lifecycle management?
Contract lifecycle management refers to the proactive, methodical management of a contract from initiation through award, compliance, and renewal. Implementing contract lifecycle management (CLM) can improve cost savings and efficiency. Understanding and automating contract lifecycle management can also limit organizational liability and increase compliance with legal requirements.
Business associates, customers, and legal authorities expect organizations to remain involved and accountable for their contract management. Government firms and any organization which receive reimbursement from the government, are held to a higher standard when it comes to contracts. Even the most minor mistakes in CLM could lead to a damaged reputation for any organization or business.
Steps in a Contract lifecycle management process:
The critical steps in a contract lifecycle management process are:
- Capture: Secure all existing paper contracts in a visible, central place. If you have no idea of what contracts you have, you have no clear idea of your exposure risk. The next step is to capture/obtain the data from the contracts.
- Track: Once you identify where all your contracts are, the next step is to track any crucial data, so you don’t miss any milestone. This affects both old and newly-signed contracts.
- Author: With tracking a CLM in place, the focus can change to accelerating the new contract creation process. The “authoring” process is to set up contract templates and clause libraries to empower business and legal users, individually, to create new contracts in a fast but controlled style.
- Create: Contract creation has two steps. The first step is to allow business users with self-service, wizard-based creation utilizing intelligent templates pre-approved by legal. The second step is to simplify the process for the legal team when drafting complex deals on your paper or evaluating and “patching” contracts negotiated on others’ papers.
- Approve: Organizations need an approval workflow process to assure that potentially risky contracts are evaluated and approved by the right person. Risks can be minimized by assigning approvals to appropriate stakeholders in the finance, legal, and compliance departments. Ideally, trustworthy deals are pre-approved.
- Negotiate: The typical negotiator needs to include issues into a checklist for each deal type, the way of marking up a paper to highlight how different it is from the original or the final draft, and a way of capturing and signaling those differences.
- Sign: When the contract is finalized and agreed upon, it needs to be signed by all the relevant people, and the signed copies are to be stored. Someone also needs to confirm that the final signed version was not altered in any way after fully executed copies were distributed.
- Analyze: Companies with 100+ contracts need to examine those contracts for potential risks, rights, and necessities. Executives and legal and risk management professionals require reports to manage common risks and ad hoc reports for unexpected scenarios. “Fingertip access” to contract terms and data allows people to react quickly to new methods and deal with time-sensitive risks.
The Lifecycle of a Contract
Each contract goes through a set of contract management stages within the course of its achievement:
- Template Authoring: Contracts are typically based on preexisting templates as it is rare to have a unique contract. Most companies use a template library containing modules and tags used in a building-block model. The process of contract design has plenty in common with software development.
- Contract Origination: As soon as the negotiation and approvals are made, the contract is generated from templates with filled-in details. There may be a slight difference between the two contracts, excluding the names, dates, and dollar amounts. Still, a basis of rules for gathering the contract helps them comply with process controls that guard the company’s interests.
- Contract Finalization: In this step, the whole document is reviewed and agreed to by all associated parties. A new business engine is born, setting the mutually beneficial commercial terms whereby two businesses may cooperate through their respective duties.
- Contract Execution: Project managers must achieve the terms of the contract on both sides, who take the terms and implement them as tasks to fulfill. All of the terms, clauses, and conditions get impacted through this process. The contract then becomes a mandate, commissioning the company’s total power to uphold its terms. A review is required to ensure all parties’ compliance with the contract’s terms. Performance oversight may be necessary to analyze the contract’s outcome and conclude whether the company is getting the best use out of it.
- Contract Continuation or Termination: A contract can be a continuing agreement that will proceed indefinitely, or it can be written to terminate a specified time when it is no longer required. Sometimes, the parties associated can terminate a contract for strange reasons like a breach or renegotiation.
- Contract Lifecycle Management is the act of managing contracts from start to finish. Managing CLM is similar to managing the business itself, given that legally binding agreements are the basis of all proper business conduct.
Industries and Internal Teams Involved in Contract lifecycle management
Contract lifecycle management is primary to any field that depends on contracts. Advanced contract management can help companies across several industries, including manufacturing, technology, telecommunications, healthcare, and financial fields.
In any organization, various departments may be involved in Contract lifecycle management efforts:
- Sales and sourcing departments manage the need for external contracts and are committed to negotiation, approval, and performance measurement.
- Legal departments are often in charge of securing contracts in compliance-heavy industries. This department is committed to negotiation, approval, compliance, and regular audits. Often, legal teams will also work with due diligence teams to check all contracts are acceptable to the management team before moving forward.
- Human resources departments usually leverage contract lifecycle management within the organization. They may be involved in internal negotiation and utilize performance measures and specific clauses in contracts to know the state of the business concerning its employees.
- Management teams tend to oversee each of the associated teams in lifecycle management to ensure that all are serving towards the same goals and following organizational protocol.
Contract lifecycle management is essential for all modern organizations. Amending the contract lifecycle management process will allow you to stay well organized and up-to-speed on your company’s contract performance. Moreover, effective contract management will enhance your governance and accountability, helping your company avoid missteps that could alter its future.
Challenges Associated with Manual Contract Management
Research reveals that poor contract practices cost organizations 9% of their revenues each year. Manual contract management is hugely time-consuming and inefficient. Following are the list of challenges associated with the manual contract management process:
Poor visibility and control
- With the engagement of multiple stakeholders at all times in contract lifecycle management, decentralized contracts offer poor visibility. Operating through required documents is a task. Visibility is also crucial during the contract renewal process. If the contracts and other legal reports aren’t visible in a centralized location, you can exercise limited authority over them.
Lack of standardization
- Inconsistent legal language can create confusion in the contract, thereby increasing risk exposure. The loophole can further be exploited to lose revenue or compliance because of the uncertainty.
Inability to manage change
- A contract management solution is of supreme importance to manage changes like renewal dates, pricing variations, and policy changes. Your retention rate depends on how efficiently you can communicate these changes to your vendors and stakeholders.
- A contract lifecycle management solution’s absence leads to impossible contract tracking post-execution. Obligation management becomes incapable, and cost comparison also becomes complex, thereby increasing non-compliance.
Low process efficiency
- The manual contract management process is highly inefficient. The document management is complex, and because of increased timelines at each of the contract lifecycle stages, turnaround time (TAT) rises, resulting in lower process efficiency.
Contract Management Solution Optimization Advantages
- Improve the effectiveness of the contract lifecycle management process
- Eliminate overhead associated with contracts
- Executing contracts effectively is essential to streamline the consistency of contracts and contract processes across the organization for due diligence and proactively manage risks.
- Risk Mitigation and control of risk and revenue recognition issues
- Increase enterprise-wide visibility of contracts and related information – team members have access to the information they need
- Eliminate redundant entry of information
- Increased Vendor and Supplier Compliance
- Increased Legal Compliance by using standard contract drafting tools and consistent terms and conditions.
- Legal compliance by efficiently using Contract Management System can provide a quick Return On Investment (ROI) for your company. All of the project teams can utilize the same system for managing contract documents and metadata in one place, standardizing and optimizing Contract Management tasks and activities.
- Increased Spend Optimization.