As a business, you have various contracts with suppliers, providers, stakeholders, customers, and employees. DocuSign found that 68% of contract professionals have to refer back to completed contracts a minimum of once per week, whether this is to look for information about upcoming renewals or to identify deviations from contract terms. Others may be reminding themselves of the payment or the agreed service or legal requirements.
So, keeping track of all these different contracts and managing them effectively would be practically impossible without a contract lifecycle management system in place, right? In this article, we’re going to explain what the key stages of the contract lifecycle involve and how you can successfully manage them so that mismanagement doesn’t lead to financial loss and poor third-party relationships.
What Is Contract Lifecycle Management (CLM)?
A contract lifecycle is an end-to-end process of when a new contract is created through contract negotiation, contract review, contract approval, contract renewal, or termination. So Contract Lifecycle Management (CLM) is the process of managing contracts within your business.
It is likely that a contract will go through the different stages of the lifecycle at varying speeds depending on the complexity of the contract and how quickly procurement and legal teams can process the ins and outs of the terms.
Some contracts may go through the negotiation stage and then get to the contract review stage and have to return to the negotiating stage, perhaps because a new service has been added to the contract, for instance. When a contract is up for renewal, it may be that it needs to jump way back to the negotiation change because the terms have changed and the contract is no longer relevant.
You can see why having an effective and streamlined CLM solution could be a make or break for your whole business. If your CLM process is poorly set up, it can cause bottlenecks if your team isn’t able to smoothly progress contracts through the different stages. This can impact your third-party relationships because it may mean that you miss crucial contract details, or you come across as inefficient or unorganized and cause customer service dissatisfaction.
In addition, a badly run CLM system can cause delays in your supply chain management. If contracts are not signed off quickly enough or aren’t renewed on time, it could mean your business continuity is impacted, which ultimately affects your bottom line.
8 Key Stages of CLM
Let’s go through the key stages of the contract lifecycle.
1. Contract Authoring
This is where both sides discuss and put forward the individual terms of the contract. Each party may have its own clauses and requirements to adhere to.
For example, some company policies may say that they need to include a confidentiality clause or a noncompete clause in all their contracts.
Other companies include indemnity clauses in their contracts to protect them against third-party claims. For instance, if a company produces rugs and supplies them to a hotel, they may create an indemnity clause in their contract with the hotel so that if a hotel guest makes a claim for an injury caused by the rugs, the rug company is protected.
2. Contract Creation
This is where you collate all the terms and information from both parties, including the exact details of the agreement, the scope of services, pricing, and renewal date. At this stage, it will be decided what language the contract will be written in or whether there will be translated copies. It may also include information about what happens in case someone breaches the contract or if one side wants to end the contract.
3. Contract Negotiations
After this, the negotiation process begins. Each party may want to tweak the agreement or negotiate terms like the renewal date or the final price.
4. Contract Review
In this stage, a final copy is given to each side for their legal teams to review. Both sides will make sure it aligns with everything that has been agreed upon and that there are no uncertainties that may cause nasty surprises later down the line. If the contract has been translated into another language, it may be that this version needs to be checked to ensure that it is accurate.
5. Contract Approval
Once everyone is on the same page (literally) and they agree on everything in the contract, it moves to the approval stage. At this stage, it’s possible the contract will go back to the contract review stage in case there are any items that have been missed or need to be checked and then renegotiated. If not–and the contract is approved by both parties–it will proceed to the next stage.
6. Contract Execution
This is also known as contract signing where both parties sign the agreement and it becomes legally binding. Depending on the way the company has been incorporated and the individual laws of the state or country the company operates in, the contract may need to be signed by a particular person to be made valid (like a director or CEO, for instance).
7. Contract Tracking
This stage is where the contract is periodically monitored and may form part of an organization’s ongoing monitoring process in its third-party risk management program. Checking the performance of the contract may be a category on your vendor scorecard, for instance.
You can track risks to your business by verifying that the third party is doing what was outlined in the initial contract, which can help to mitigate financial and operational risks. If the third party is not performing in the way that was agreed in the contract, perhaps they aren’t adhering to your required standards, or the quality of their service is poor. This might impact the service you are able to provide to your customers.
So in the review stage, you can assess how best to handle this. Maybe you cut the contract or make them aware of performance problems, for instance, to try to resolve the issues.
But if you’re constantly reviewing contractual performance, you are in a better position to bring up any issues and iron out problems before they begin to have a huge impact on your business.
8. Contract Renewal
Once the contract renewal date is near, you can decide what to do next. You should make sure that you have a system in place to notify you when renewals come up so that you aren’t continuing business with third parties when the contract has run out. It may mean that you are legally unprotected, which increases potential risks to your business.
4 Top Tips to Manage Your CLM Process Better
According to an EY Law study, 57% of business development leaders said that inefficiencies in their contracting process slowed their revenue recognition. As you can imagine, when you have so many contracts to manage, having a manual process would just not cut it. There’s more chance of human error, like things being missed or lost.
Without an automatic contract lifecycle management software or process, there could be lots of different versions of contracts flying around, leaving you wondering which version is the right one and putting your company at risk. This is just one example of what could go wrong, so let’s go through the tools you can use to streamline your contract management process.
1. Use an Automated Platform
According to a report by PricewaterhouseCoopers, having an automated CLM process helps to make the contract negotiation process 50% faster. Using an automated platform like Certa lets you reduce manual intervention, helping you to efficiently manage contract lifecycles to avoid human error and increase time effectiveness.
CLM software or platforms should have features like dashboards, electronic signature workflows, and redlining that allow you to automate the end-to-end process. Through artificial intelligence, CLM softwares can extract metadata from contracts, activate workflow requests, and monitor renewals. With these controls in place, your CLM process will be more efficient and cost-effective with little room for silly mistakes.
2. Automatic Drafting Templates
Having automatic contract templates allows you to quickly put together drafts at the contract creation stage. You can set up a searchable database where you can access clause libraries so that you can input relevant clauses like indemnity clauses that are applicable to specific contracts. This will save time and streamline the process for all stakeholders involved.
3. Create Contract Workflows
The contract lifecycle involves various stages, and when you’re managing different contracts that are each at their own stage, it is difficult to keep up. You can set up automatic workflows to help each stakeholder — like your procurement and legal team, as well as third parties — understand what is expected of them and when. You can create automatic alerts to notify people of what they need to do, which helps the contract easily slide between stages.
4. Milestone Management Approval Process
You can automatically track contract milestones like negotiations, review, execution, and renewal. With the help of workflow software or a platform, you can get notifications when the contract is at each stage to help monitor your obligations and keep an audit trail.
By approving each stage of the contract cycle, you can ensure that all obligations have been executed correctly and nothing has been missed.