A Quick Guide To Understanding Contract Lifecycle Management
Regardless of the type of organization, contracts are an essential part of day to day operations. These written agreements are created when a group of people meets and decides what the key terms should be—and then they are drafted.
No matter how experienced or knowledgeable that group may be, it is highly likely that at least some important details will have been missed in these contracts.
This makes managing a contract a largely manual process in most companies whether they are large multinational corporations or small business owners working independently from home.
However, for an organization to function smoothly, it needs to manage contracts efficiently. It’s an essential part of any business operation.
In fact:
- According to stats collected by CottrillResearch, CLOC, and ACC, “Contracts play a huge role in the world of business, governing around 70-80% of business operations.”
- World Commerce and Contracting suggests that, “9% in yearly revenue is the cost incurred by poor contract management processes.”
- In its 2019 Benchmark Survey ACC stated that, “80.8% of in-house lawyers had to participate in managing contracts by simply reviewing and drafting documents.”
- A KPMG Survey says, “around 40% of a contract’s value can be lost without proper management of contracts.”
So, how do you take care of this critical task? +
The answer is efficient Contract Lifecycle Management.
What is Contract Lifecycle Management?
Contract Lifecycle Management (CLM) is a term used to describe the various stages of a contract’s life, from creation to expiration to renewal.
There are many points of contact where documents can be altered, overlooked, or sometimes skipped entirely. Which means that crucial steps of the contract management process may not actually be done in an ad hoc way.
This increases the risk the organization may have, or worse, could be open to litigation. The goal of a comprehensive CLM is to ensure that all contracts are managed effectively and efficiently while minimizing risk and maximizing ROI.
There are several key components of CLM including the below:
- Contract creation
- Processing and approvals
- Compliance tracking
- Reporting on key metrics
Proactive and effective lifecycle management of your contracts is done with the help of a Contract Lifecycle Management Software (CLMS). It can help you save money and operate more efficiently.
You can automate contract creation, tracking, and approvals as well as reporting ensuring that all aspects of the contract are accounted for and that no important steps are missed.
Plus, automating and understanding CLM with the help of CLMS may also minimize an organization’s risk by lowering missed obligations and improving legal compliance.
Many organizations are adopting new technologies such as artificial intelligence and machine learning to protect, accelerate and optimize their contract management that could save their time and money.
Cost of Not Having a CLM Solution
There are many drawbacks to not having a repeat CLM in place. Some of them are:
- Failure to enforce contract terms: This may give rise to claims of breach by your customer, or disputes over how much you should be paid.
- Negative publicity: These are costly in terms of time and money. They also result in negative publicity for your business, especially if the claim is groundless. However, it consumes a significant amount of your time and money.
- Missed opportunities: Many contracts include valuable concessions that are only available during the term of the contract.
- Passing up on renewal rates: The current supplier may increase their rates between one agreement and the next, meaning that if you’re still tied to your first contract it could end up costing you more than you’re paying now.
- Wasted time: Reviewing contracts, chasing up late payments, redrafting agreements can all eat into your employees’ time if the CLM is not in order.
- Human error: Without a reliable CLM, it’s easy for an employee to miss
a contract clause or forget to process a payment. This can result in several serious consequences including legal issues and financial loss.
Different Types of Contracts:
There are several types of contracts that each business uses. The most common types of contracts that many organizations typically have to deal with day-in and day-out:
- Offer letters
- purchase orders, terms, and conditions
- Agreements with distributors, resellers, strategic partners
- Service contracts
- SaaS agreements
- Software licensing agreements
- Non-Disclosure Agreements
What Is the Contract Lifecycle Management Process?
A contract lifecycle management process ensures that all steps of the contract are accounted for and completed, from creation to expiration.
Now, each organization has a unique CLM process based on the type of contracts they use, the amount of automation possible, and several other factors.
However, there are some general stages that are usually included in a CLM process:
1. Document Generation
The document generation process begins with the identification of the need for a contract. Once the need is identified, the relevant data is collected and entered into an appropriate template (or form), which is used to create a first draft of the contract.
Sometimes, it also involves the generation of pre-drafted contracts that can be used as a starting point for new agreements. Once this first step is done, the draft is sent to the appropriate parties for review and negotiation.
2. Review and Negotiation
The review and negotiation stage is where the draft is sent to the other party (or parties) for their input. This step is so critical and necessary that according to a report, it consumes 18% of the selling cycle.
It can involve anything from negotiating the terms of the agreement to hammering out the specifics of a single clause. The organization delivering the service usually first sends the draft to the customer (or client), who then sends it back with any suggested changes.
The contract then goes into a review process where it is read by legal professionals, stakeholders, and senior management before being sent back for negotiation or amendment.
During this stage, amendments to the original contract may be made in order to reflect changing circumstances or to incorporate the feedback of the other party.
3. Document Signing
Once both parties have agreed on the final version of the contract, it’s ready for signature. Although this does not make-up a great part of the process, it’s still an important step as it finalizes the agreement and makes it binding.
Both the parties receiving the contract and any applicable regulators must sign this document in order for it to be valid and enforceable (this is why it’s important that you check with your legal department before signing a contract esp. if it has the potential of legal implications).
The signature can be done manually i.e. signing pages physically and scanning them back, or electronically by using a digital signature.
4. Integration with Systems of Record
After it is signed, the contract is usually integrated with the systems used by both parties (this can be done manually). The systems of record used by organizations can vary depending on their industry and the type of contracts they use. However, some of the more common ones include enterprise resource planning (ERP) tools, customer relationship management (CRM) systems, and accounting apps.
5. Search & Analysis
Lastly, the contract is also stored in a searchable database where it can be accessed and analyzed for performance, or compliance issues. This stage helps organizations keep track of their contractual obligations and ensures that the terms of the agreement are being met.
It also makes sure that it is available for reference at all times in a format that is easy to work with. For example, if your company is being audited, the auditor would likely want to see a copy of your organization’s contracts and be able to search through them easily. That’s when storing it safely in an easily-accessible location is necessary.
Now that you know what CLM is and its process, let’s take a look at what a CLM System is.
What is a CLM System?
A CLM system (CLMS) is software that helps organizations manage their contracts. It includes features such as contract creation, review negotiation, signing, integration with systems of record, and maintenance. It also has the ability to store and search through contracts for analysis purposes.
No wonder the demand for CLMS is growing consistently over the past few years.
Benefits of CLMS
There are several benefits to using a CLM system. These include:
- Increased visibility into contract status and agreements made
- Better communication between stakeholders, legal departments, and senior management
- Reduced risk of penalty, litigation, or other financial losses due to non-compliance
- Faster and more efficient management of the contracts
In short, it will help you streamline processes, save time and money, and ensure that your organization is always complying with contractual obligations.
How To Automate Contract Management Workflows
Contract management workflows are the steps or processes that need to be followed in order for a contract to be executed.
These workflows can be automated in order to speed up the process and make it more efficient. This is done by a CLMS that can create contracts, send them for review, get them signed, and integrate with systems of record.
On a broader level, the goal of the lifecycle management solution is to bring various operational procedures together under one roof in order to provide a seamless end-to-end agreement management experience.
These solutions even allow you to work with new technologies and applications without compromising on the quality of your workflows.
They also allow you to integrate with other workflow tools such as email, document management systems (DMS), forms, and digital signature providers. They also offer features like contract analytics, single-click access to contracts from anywhere on the web, and a user-friendly interface.
On top of that, these integrated workflows can all be automated and streamlined to ensure that you’re saving time and money in the business process. And, that automation of workflows is an important pre-requisite to choosing any software because it decreases risk and errors and thus boosted compliance by 55%.
An efficient contract workflow system implies that the time spent on contract lifecycles is decreased by 25%-30%, saving you 20-30 days that would otherwise be spent on different stages of CLM
Now, these software solutions can be helpful in various departments of an organization such as –– sales, legal, project management, procurement, risk, and compliance.
While these CLM systems play a role in many of these departments, a procurement department is one that can especially use the help of a CLM system.
The Role of CLM in Procurement
A procurement department is responsible for the acquisition of goods and services for an organization. This can be done through purchase orders, contracts, or requisitions. And, as you can imagine, managing all of those documents can be a daunting task.
But with a CLM system, you can not only store and access contracts from anywhere but also automate their review, approval, and signature workflows. This saves time as well as money because the organization gets to avoid penalties or litigation costs due to non-compliance.
How Can a CLM Help Your Procurement Process?
The procurement process in simple terms is defined as the steps taken in order to acquire goods and services.
These activities are carried out by various departments such as finance, project management, legal, customer service, and of course –– procurement.
CLM systems play a role in every step of the procurement process because they help you store and access documents easily. This includes everything from RFI/RFP, specifications, and tenders to purchase orders and invoices.
They also allow you to automate workflows such as contract management and collaboration with suppliers and help your supply chain managers in contract visibility and tracking.
A good CLMS also:
- Keeps track of all changes made to a contract to ensure that it accurately reflects the current situation. The program notifies clients when any modifications have been made to a contract so they know which contracts need special attention.
- Sends users renewal notifications to avoid any legal problems as their contract is set to expire.
- Enables organizations to manage their library of digital assets, documents, and media electronically, which is accessible to any stakeholders including supply chain managers, procurement experts with the proper credentials.
In short, CLM is fundamental to ensuring that your organization is able to acquire the goods and services it needs in an efficient and effective manner.
Conclusion
Contract management may not be a fun task, but it is a necessary one. To make Contract Lifecycle Management easier, your firm should consider adopting a CLMS. It would benefit your business in more than one way.
