At one point, the majority of the managers find themselves creating and managing business contracts. Managing these commercial contracts can become a complex activity. The variations and volume involved become overwhelming. If not well managed, contracts can fail to attain the objectives of reducing costs, limiting compliance, and legal risk.
It is good to understand that the only way that can help an organization to achieve the full potential of contracts is by actively managing them. Whatever the size of the business, tracking down and managing contracts manually or using an excel spreadsheet can become complicated hence leading to poor results. The main objective of a perfect contract process should not only be to mitigate the risks involved in running a business but also to build commercial value.
Contract lifecycle management (CLM) is one of the important processes that help managers and entrepreneurs to increase sales in their businesses. A business should always make sure that it is on top of its contracts by updating and administering them efficiently. This article takes an in-depth look at CLM including the steps involved in the process, software used and best practices.
What Is Contract Lifecycle Management?
Contract life cycle management (CLM) can be defined as a process involved in tracking and managing a business contract. It includes monitoring the compliance, performance, and other factors that contribute to the success of a contract. It is executed using automated CMS (contract management systems). Performing CLM manually is a time-consuming practice that can end up wasting a lot of time that could have been used to benefit a business.
A contract lifecycle management is a significant tool that simplifies the whole process of managing a contract. It helps one to serve his or her customers effectively and maintaining compliance with the governing bodies and the contract’s terms. To put it clearly, CLM simply means successfully managing agreements/contracts and how the entities relate by effectively planning the contract management phases resulting in minimizing legal, financial, and procurement risks.
Contract Lifecycle Management Process
This is an evolutionary process whereby a contract is drafted, created, reexamined, approved, signed, and executed. This lifecycle is a model by which the understanding of a contract’s complex journey is empathized and compartmentalized. It involves the following steps:
1. Contract Request
Contract lifecycle management (CLM) usually begins with the requesting stage where a party initiates the process and later uses that information to draft and author the contract document.
2. Contract Authoring
This stage is known as the drafting phase. In this phase, the parties involved gather essential details regarding the new contract, modification, renewal, etc. It is usually the stage where signing parties and approvers are determined to capture all details of the contract. The stakeholders put the contract terms, key dates, counterparty information, etc. This stage sets the tone as to whether a contract will efficiently go through the other phases or it will face delays.
3. Contract Review
During this phase, the stakeholders review the parameters that were drafted in the previous stage. After enough collaboration and redlining, the conditions arrived at offer insight concerning the expectations of the parties involved. To make this process easier, it is recommendable to use CLM software. With the help of the CLM software, you can create automatic workflows that allocate contracts to the right candidates. This is as opposed to sending contracts manually to either be approved or rejected.
4. Contract Approval
An evaluation regarding all the parties takes place in this phase. Certain factors are laid down to meet contract milestones, obligations, compliance standards, and other terms of the contract. To attain a successful approval process, it is important to keep records of all the changes that have occurred throughout the contract process. An audit trail that has been recorded by the CLM software is very key for efficient contract management.
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5. Agreement Signing and Execution
The approved document is sent to the relevant parties for signature. This can be done manually or online. Platforms that provide user-friendly and future-minded electronic signature software (ESS) functionality eases the whole process of signing. The ESS is very efficient in signing bulk or one-off contracts and helps to save time.
The world is going digital and you should keep up with it. The execution of the contract should be mobile and quick. Through the use of CLM software, you can put up workflows to make it easy to perform a contract. Electronic signature integration helps in saving time and resources that could have been wasted during printing out and faxing of the contracts.
Instead, the contracts can be sent through email, signed, and are returned to your company within a short time. It is in this stage where all the stakeholders acknowledge their duties, tasks, deliverables, key dates, milestones, and payment windows.
6. Contract Performance
CLM does not come to an end when parties append signatures to the contract. It is very crucial to keep reviewing and managing the performance of the signed contract throughout the execution process. This may entail checking performance, examining the current performance against expectations, examining spending among other factors. You need to keep inspecting the contract’s performance to be able to manage compliance. Irrespective of what is outlined in the contract, general contractual rules, guidelines, practices, and standards are complied with. Proper compliance management aid in reducing late fees, bottlenecks, litigation and sets the platform for future contracts.
7. Contract Renewal
It is advisable to be aware of when the contract will reach its end. This will help you to decide if you want to renew it or not before it expires. It is very important to make up your mind since some contracts have a built-in auto-renewal system hence causing financial risks to the parties involved.
However, CLM software plays a great role as far as the renewing contract is concerned. The software sends notifications messages to the relevant parties reminding them of the expiry date of their contracts. This enables the parties to be up to date in reviewing contracts hence making informed decisions.
Contract Lifecycle Management Best Practices
It is always advisable to embrace best practices in contract management for your business to be successful. The following practices will help you examine how best your company complies with the laid contract’s standards in order to achieve amazing outcomes.
1. Automated and Digitized Processes
Most organizations are now realizing the benefits of digitalizing the contract process by adopting CMS. It is not easy to maintain contracts manually without some of them getting lost. This was well highlighted when the Covid pandemic began. The majority of businesses faced many negative impacts across their parties’ relationships. This is because most workers had to switch working from the office to working remotely hence lack of access to manual files.
This is a very unfortunate scenario because lack of file access means that one is not getting all the information in the contract clause. Due to such factors, organizations were put at the worst risk and ended up in crises that companies using CMS didn’t face. Companies that were using CMS, had insight into every important information needed within a short while, unlike organizations that were working manually.
2. Tracking and Taking Action on crucial Contract Dates
It is very discouraging to discover that before renewing the agreement, your organization’s systems have auto-renewed a contract without you noticing or reviewing the contract performance. This is very common in an organization where manual contracting is done. This is because contracting is done through human intervention to track termination and renewal of contract terms. With the help of CMS, you will automate the important dates so that you and the relevant parties are notified concerning the expiration/ renewal dates hence leading to undertaking the appropriate action.
The online Keeping of the contract approval process is very important in every company. The company is at an advantage of getting the contracted services and goods sooner hence saving time and money. Second, a shorter contract cycle contributes to a positive relationship because it brings about convenience for the parties involved. Besides, organizations with quicker and responsive processes are likely to seize many opportunities
3. Standardize Contract Creation
Speed is very key in any contract cycle management. That is why parties need to align the process of authoring and execution appropriately. Automating the process using a contract management system (CMS) is essential. Without this, many organizations struggle with the growth of their businesses in the effort of maintaining the manual process.
Efficient contract management always leads to an effective work process. Companies can attain significant improvements through pre-approving and standardizing contract languages. For many companies, a standardized set of conditions, languages, and terms work well for many contracts. For example, in the legal field, pre-approved language helps counsel to minimize review time and pay more attention to other parts of the contract in question.
4. Conduct Regular Compliance and Risk Reviews
The parties need to review if they are within the state regulatory guideline and to the contract. Some states set high penalties and fines that are imposed on companies that fail to comply with the government regulating policies. At times the company’s business license can be revoked due to compliance failure.
5. Understand Key Performance Indicators (KPI’s)
Measuring performance is one of the important aspects of every contract management. If you fail to measure the performance, it is very difficult to know if you are making progress or not. Focusing on KPIs in contract management provides a transparent goal for the success of every company. It is very easy for company leaders to come up with practices that generate good outcomes when they are aware of what they are aiming for.
Indicators that are not met may reveal productivity issues and leaking costs that may be hard to spot without having a good benchmark to establish the standard. It is good to know that having access to important information from your contract and being fully aligned to it produces productive, less risk, and successful relationships between parties.
6. Budgeting and Regular Reporting
Reducing costs is a factor that most companies consider when managing a contract. Anything that lower cost down is very important as far as authoring, negotiating, approving, execution of the contract is concerned. A company needs to be dedicated to making financial metrics. It is also recommendable to involve a financial officer regularly in the contract management process. This helps in comparing contract performance and the company’s budget expectations.
Contract Lifecycle Management Software
Contract management software (CMS) is a tool used to manage the whole process of the contract cycle. It helps business parties to self-serve, accept and handle routine contracts.
There are so many CMS solutions in the market today. Each of them provides a wide range of features and benefits. It is crucial to select the appropriate solution which has that functionality that you require at a budget that will be affordable to you. The following are some of the features that you need to look at:
- Document management: This is a vital repository for current templates, active contracts, contract history, etc
- Contract search: This is a well-organized facility that helps in finding terms and conditions about the contract.
- Contract drafting: This is done through the use of specific templates, electronic signatures, and a preapproved clause library.
- Notifications and alerts: These features help the stakeholders to receive reminders concerning the contract’s milestones such as escalation, performance, and renewal dates.
- Compliance: This feature offers an audit trail and version control that helps in tracking down whether the parties are adhering to or deviating from the governing and statutory prerequisites.
- Reporting: It is recommendable to have customized reports about the contract status and supplier performance on a visible dashboard.
Contract life cycle management (CLM) is not only important but a necessary process that every company needs to undertake. However, it is not easy especially when done manually. It is advisable to manage the contracts using the software. Also, CLM aligns well with most operational practices that a company needs to employ. Proper CLM is a vital function for any company dedicated to achieving excellence and success.