What is contract lifecycle management, and how do you manage contracts efficiently? The answer to this question, in terms of execution, remains more or less the same. However, technological improvements over the past few years have begun to offer drastic changes to the methods and tools by which we do it.
Welcome to Precisely’s Contract Management 101. We’re going to take a closer look at what contract lifecycle management actually is. Also, we will cover the topics that help you understand and use tools to make your workflow faster, with solutions, tips and tricks.
What is contract lifecycle management (CLM)?
We’re sure you know plenty of legal workers who define contract management as stuffing finished documents into file cabinets until needed. However, most people generally understand that this isn’t the best way to archive important information.
To begin with, contracts come in all shapes and sizes. This includes simple standard agreements to comprehensive, resource-demanding and legally complex ones. Contracts are the backbones of businesses. That is why successful contract management can increase profits through long-term business relationships.
At the same time, poor contract management can result in lost revenue for many reasons. For example, missing a renewal date, early terminations or weak collaboration.
Describing contract management
The description of contract management, or contract lifecycle management (CLM), is similar to the process of managing contracts to maximize performance. This means all the way from initiation to renewal or termination. However, this is not a very elaborate answer.
Times are changing, as well as technology. Thereby, the answer to what contract lifecycle management means is changing too. Earlier, contract management would involve a lot of lengthy processes. As a result, it put demands on both man-hours and other resources. For instance, manual drafting, proofreading and inefficient approval processes.
The good news is that technology and software have come a long way and these processes are evolving. In fact, there are contract lifecycle management solutions for almost every type of contract and every need that might arise during the process.
Therefore, it’s time to repaint the picture and bring justice to modern contract lifecycle management. First, let’s take a look at the different phases of contract management by looking at it from an operational and a transactional view. That is to say, which present contract lifecycle management software should, and can, offer support.
The focus of this article is a modern take on how to manage contracts effectively but we have also written about why traditional contract management is inefficient.
Navigating the different phases of the contract lifecycle
The contract lifecycle can be put into two direct phases – operational and transactional. These are in turn put into a series of steps.
The operational phase
It is during the operational phase that mainly general (not contract-specific) prep work is done. A big part of the operational phase relates to setting routines. Moreover, this is done to streamline your contract management process. It is also done to provide you with the best conditions possible for entering the transactional phase.
- Specify — The first part of the operational phase mainly involves choosing authorities and responsibilities. This includes everyone relevant to the contract management process. It’s important to know who will be in charge of development. Equally important is who will define the contract and document-related issues and decide over other roles.
- Develop – This can be a heavy step production-wise. This is where you determine standard terms and clauses, templates and boilerplate languages. Not to mention, the procedures for using them.
- Nurture – Monitoring is a crucial part of the contract lifecycle. Performing research of different sorts, such as mapping recurring issues in the contracting process, allows for suggestions for, and nurtures, improvements.
- Educate – Implementing policies, having (and correctly using) the right tools, as well as providing training in the tools for those operating the processes, is crucial for quality consistent contract management.
- Measure – The last step of the operational phase is the analysis — defining your metrics and KPIs. This is done in order to make sure contracts are performing properly. Also to check that your goals are met. Define and regularly report on any data that can directly provide you with this information.
The transactional phase
When routines and other frameworks are set, it’s time to move on to the transactional phase. This is the contract-specific phase.To clarify, this means that many agreements you carry out go (or at least should go) through it.
- Assess – The first part of the transactional phase relates to deciding whether or not an agreement should begin at all. Identify a suitable contract model, or review the counterparty’s proposed terms and conditions. If the counterparty is the proposing side, the transactional phase jumps to the “negotiate” step.
- Approve – Now, it’s time to involve the relevant internal stakeholders for review. Have them evaluate and approve or disapprove non-standards and correlating factors, such as necessary resources and similar contracts. It’s important to mention, however, that approval can be a recurring step of the transactional phase.
- Assemble – If all the pieces come together, it’s time to push the go button. In other words, creating the contracts you need with the use of templates, or by drafting completely new contracts.
- (Approve) – After a contract is assembled, it’s common practice to review it before moving on to negotiations.
- Negotiate – Handing over a finished draft to your counterparties usually sheds some light on disagreements. For instance, strategy, fallbacks and trade-offs. This is where you attempt to redraft and concord, or in the worst case, terminate the negotiations.
- Execute – Once you can negotiate and agree on all terms between the parties, it’s time to execute. In other words, sign and issue the contracts.
- Manage – How are your contracts performing? This step involves handling complaints, disputes, and changes, as well as recordings of these. This also involves storing your contracts, which should be done in a central archive.
- Evaluate – Unless they are evergreen, contracts will eventually reach an expiration date. With previously mentioned procedures for measuring performance data in hand, it’s time to make a decision of termination or renewal. Thus, the contract lifecycle begins again.
It’s the circle of (a contract’s) life!
How technology makes contract management more efficient
Now that we can establish what the contract management process looks like in theory, it’s time to ask an important question in light of the latest decade’s technology improvements. How can software improve the different stages of the contract lifecycle? And how do I apply it to my business?
The contract lifecycle begins as soon as a request for a contract is made. Functions in charge of contracts, e.g. the legal department, look for re-usable legacy contracts and/or templates. To be clear, this is where the first bottleneck occurs if contracts are not easy to locate.
Modern technology, such as online searchable storage, eliminates the need to dig through file cabinets. Thus making it possible to find exactly the contract or template you’re looking for in the blink of an eye.
Perhaps more importantly, best-in-class online contract lifecycle management systems make sure the latest version of a specific template is at hand.
Next up, it’s time for an unnecessarily time-consuming step – drafting the contracts. Even if legacy contracts or templates are available and found, chances are they’re in need of editing, proofreading and possibly more editing before they can be re-used.
At a minimum, certain fields in the template need to be filled in. Often the same information is entered in multiple parts of the contract. Contract management software not only streamlines the contract authoring with the help of automation but also makes it possible for anyone to create compliant contracts in a matter of minutes, even without legal knowledge.
For example, using intelligent templates and questionnaire-based drafting allows contracts to be drafted with minimum error. If you’d like to learn more about contract creation and drafting software, read about the benefits here to learn more about the functions and advantages of such solutions.
- Approval (and perhaps, negotiation)
After finalizing the first draft of the contract, there’s often a need for approval. In other words, upper management or the legal department. Without clearly defined responsibilities and workflows, the approval process often becomes drawn out.
Contract lifecycle management solutions streamline the approval process with the use of automated and customizable approval workflows. Typically, this means that each relevant stakeholder is notified automatically once the contract is ready for approval. Likewise, the person requesting the approval will automatically receive a notification when the contract has been approved.
Depending on the nature of the contract, it may often enter negotiations. Traditional negotiation practices may involve sending a red-lined Word document back and forth. Unfortunately, this results in a lack of a clear overview of all changes from the first draft.
Instead, modern contract management solutions let you carry out negotiations directly in the contract management platform. You get a complete audit trail and version control covering all changes that have been made since the first draft.
What is contract lifecycle management? “Contract Management consists of all the various tasks and activities that enable an organization to maximize the value of its recorded relationships.”
– Rajini Saudranrajan, Iris Corporation Ltd.
The next step in the process is the execution of the contract.
In the traditional way, this means sending the contract for signing by postal service or courier. However, this can quickly turn into a long waiting period, especially if the receiver isn’t located in the same city or even the same country.
Modern contract management technology reduces this process from weeks to days or even hours using legally binding e-signatures. Not only does it help businesses take an important digital step by stopping paper waste, but it saves both time and expense!
After signing the contract, it’s time to store and monitor. Common solutions are filing cabinets, local storage on hard drives and cloud storage. These solutions organize the contracts to some extent, but a lack of search functions and reporting still makes it hard to find and evaluate.
As you may have heard before, it is estimated that ten(!) percent of all signed contracts in a company have completely disappeared (Faulkner Information Services). Most likely, this is due to this dated way of storage mentioned above.
Enduring contract management platforms offer a central and full-text searchable archive. In addition, you are able to set up different user access levels and permission settings on documents and folders. This allows authorized staff to instantly locate, search for and report on contracts and their performance – from anywhere, at any time.
The contract lifecycle does not end when the contract is signed and put into an archive. In fact, you will often need to follow up on each party’s rights and obligations. This is also true when the contract is up for termination, renegotiation or renewal.
Many of these actions pass by unnoticed due to a lack of monitoring procedures. (It could also be that the contract is lost in space). Tracking and following up on a contract is complex and resource-demanding.
Nevertheless, missing a renewal or termination, or following up on each party’s rights and obligation, exposes your company to major legal risks and can greatly reduce profits.
Using modern monitoring and alert functions makes sure that any upcoming follow-up actions, renewals or terminations surface before it’s too late.
PS. I’ve seen monitoring efforts of all kinds and forms. Often, the follow-up actions are set up in a private calendar or remote spreadsheet by the person in charge of taking the action.
Although this might work in the short term, I highly recommend an approach where all reminders and upcoming alerts are kept in one place. Here are just some of the reasons:
- Increased efficiency (e.g. by allowing team members to assign alerts to others within the contracting platform)
- Risk diversification (e.g. not losing track of the upcoming actions when a person leaves the company).
You understand how contract lifecycle management works, now how will you use it?
Contract lifecycle management is basically the process of managing contracts to maximize performance throughout the entire contract lifecycle. Hopefully, we’ve managed to provide you with new insights above and bring some justice to contemporary contract management.
Want to get into further detail about the solutions available for common challenges in contract management? Don’t miss part two of Precisely’s Contract Management 101 series, The 7 Challenges of Contract Management!