We take a look at the stages of the contract lifecycle and the risks of manually managing it, how digital CLM solutions save time and minimize risk, and what features to look for in a good CLM system.
Written agreements govern between 60 and 80 percent of all business transactions. This means that a typical Fortune 1000 company will have between 20,000 and 40,000 simultaneously active contracts. With each contract carrying its own set of rights and duties for the parties involved, simply maintaining smooth operations quickly becomes a daunting task.
A robust contract lifecycle management (CLM) system helps businesses not only ensure compliance with the numerous agreements it has executed but also extract the maximum value from them.
In this article, we’ll take a look at the stages of the contract lifecycle and the challenges organizations face with CLM. Then, we’ll examine what contract lifecycle management systems are and why they’re important. Finally, we’ll outline what features to look for in a lifecycle management system.
Table of contents
What is contract lifecycle management?
Contract lifecycle management (CLM) involves proactively managing contracts from the first request to compliance to renewal.
When most people think of a contract, they typically think of a signed document laying out the terms of an agreement between two or more parties. Although this perception is not inaccurate, thinking of contracts this way leads to them being mostly relegated to filing cabinets or servers and treated as monuments to transactions. Poor contract lifecycle management practices cause businesses to lose the equivalent of 9% of their annual revenue each year.
In contrast, effective CLM breaks contractual relationships down into discrete steps that each have their own objectives and obligations.
The stages of the contract lifecycle
You may already be familiar with the stages of the contract lifecycle, but let’s take a quick look at each one to understand what it entails. That way, we’ll more easily be able to understand their associated costs and challenges and why effective CLM is so important.
Request
This is the typical start of the contract lifecycle: someone requests a contract. Who requests the contract, and the form it will ultimately take, will vary based on the contract’s purpose and the nature of the businesses involved. During this step, the parties gather the data they will need to develop the contract.
Authoring
During this step, the parties put their terms in writing. Oftentimes, drafting a contract will be done using contract templates or clause libraries, particularly if the contract is part of the ordinary course of doing business for one of the parties. If a more unique or one-off situation requires a contract, this step may also involve creating a written agreement out of whole cloth.
Negotiation
During negotiation, the parties hash out specific contract terms and parameters, and they will adjust the drafted contract accordingly. This stage often involves redlining various drafts and lots of back-and-forth communication between the parties and between the departments within their organizations.
Approval
At this step, all the relevant stakeholders will review the contract to ensure it meets their requirements. Who needs to review and approve a particular contract is unique for each business and for each type of contract, but all the appropriate department heads and executives should review and greenlight the contract before it proceeds to the next step.
Execution
During execution, the contract gets signed by the necessary representatives of the parties and becomes official. Just like some of the other steps, who will need to sign a contract will vary depending on the nature of the agreement.
Compliance/Management
At this stage, the parties focus on carrying out their duties under the contract. This involves translating those responsibilities into tasks for personnel, tracking dates, and maintaining oversight to ensure compliance. The parties may also monitor various indicators to determine if they are getting their expected value from the agreement. Occasionally, this stage may involve modifying the agreement.
Expiry/Renewal
Expiry/renewal is the last stage of the contract lifecycle, but what exactly happens here depends entirely on what the parties decided during negotiation and compliance. Some contracts will automatically terminate once certain conditions have been met or certain dates have passed. Others may automatically renew, restarting the obligation and management stage of the contract’s life.
Challenges and risks of manual contract lifecycle management
At a glance, it may be difficult to spot where value leakage occurs in CLM, particularly with written agreements. If there is a document that clearly spells out each party’s rights and responsibilities under the agreement, getting the expected value should be as easy as referring to that document to hold the parties accountable. While that might be the case in an ideal world, the world of manual CLM is far from ideal.
Fortunately, even in the real world, most of these challenges and risks can be addressed using digital solutions. First, however, let’s take a closer look at the problems with manual contract lifecycle management.
- Visibility issues: 81% of companies reported that just locating a contract is problematic, and 71% of companies could not locate at least 10% of their contracts. As you may imagine, it is difficult to manage compliance with terms in a document you can’t even find. Manual CLM leaves contracts spread out, languishing in inboxes and “Downloads” folders. Poor visibility also makes tracking compliance and end dates more difficult. According to the Gartner Group, 60% of supplier contracts automatically renew because the buyer fails to give notice to terminate. Depending on the contract, this leads to undercharging clients or getting overcharged by vendors. Modern CLM requires a centralized, digital repository for easy storage, retrieval, and tracking of agreements.
- Inefficient and error-prone processes: Asynchronously drafting and negotiating agreements between parties is inherently difficult, and outdated processes slow down overall workflows. Passing redlined versions of a document back and forth via email or other methods makes tracking changes and versions challenging. This opens the door for errors and contracts that lack critical terms. Manually tracking contract compliance efforts for the number of contracts modern businesses have leads to missed deadlines or blown commitments, which opens organizations up to late fees or litigation. Automating workflows with digital solutions standardizes processes, streamlining them and eliminating errors.
- Excessive manual hours: Average costs for a contract from request to signing range from $6,900 for simple contracts up to $49,000 for more complex contracts. Manual contract lifecycle management only adds to these costs as time spent tracking the duties and deadlines of numerous contracts rapidly compounds.
- Difficulty managing changes: Regulatory and internal policy changes that affect contracts are difficult enough to incorporate on their own, but coupled with inefficient processes and contracts that cannot be located, adaptation and compliance become almost insurmountable obstacles.
TRENDING
The General Counsel’s Guide to No-code Automation
Find out how in-house legal teams use no-code to save time, increase capacity and provide faster services to internal clients.
Download your guide now
What are contract lifecycle management systems?
Generally speaking, CLM systems are tech solutions that automate and facilitate various processes through the contract lifecycle. Using automation, databases, and other technology, these tools cut through repetitive processes in the contract lifecycle, facilitate collaboration, and streamline contract workflow. This ultimately leads to massive savings on time, money, and risk for companies.
Just like the contracts they’re designed to manage, these tools differ between industries, but most will have similar features. Before examining exactly what features to look for in a CLM system, let’s look at their benefits over manual CLM.
Advantages of CLM systems
A good CLM system alleviates most of the challenges of manual contract lifecycle management. Automating processes and handovers leads to a more efficient overall workflow, saving between one and four weeks of effort for medium to long contracts. This doesn’t just reduce manual effort and free up time for more high-value tasks — it also reduces risk by guiding processes according to clear, predefined rules that comply with legal and policy requirements.
In addition to improved efficiency, CLM systems facilitate lifecycle management that is both repeatable and easily trackable. This transparency eliminates errors, reduces risk, and restores control over contracts, cutting back on things like erroneous payments and increasing renewal revenues.
Features to look for in a CLM system
Now that we’ve looked at what CLM systems are and what good ones can do, let’s discuss some of the features to prioritize when searching for a CLM system.
1. Centralized, automatic intake
Having a centralized hub for contract requests means everyone knows where to go to initiate contract workflows. Automating request intake standardizes the data collection process, so there’s no more delays from incomplete information at the outset of the contract lifecycle. This also means requests are tracked right from the very beginning — no more confusion because a request got lost in an inbox.
2. Integrated risk scoring
Digital CLM systems can assess risk as intake is completed and trigger different workflows as appropriate: automatically email parties for approval of low-risk contracts or escalate requests to experts when needed or specified. This allows a contract’s risks to be managed proactively from the outset instead of responded to down the road.
3. Document generation
Contract templates ensure that standard elements are included every time, and automated document generation features ensure all the right clauses are added from clause libraries based on the data collected at intake. This reduces manual effort and means necessary clauses aren’t excluded.
4. Integration with your other digital solutions
Digital CLM solutions that sync with the other tools you use amplify efficiency. Syncing information and working seamlessly between platforms means you hold onto the time these tools save you. You should be able to pull data from sales platforms automatically, generate documents or email reminders with the click of a button, and send contracts for e-signing without switching between applications.
5. Dashboards and tracking capabilities
Every contract generated and all relevant information can be recorded in a database and displayed using custom dashboards and trackers. Use your CLM system to see the state of your organization’s contracts at a glance, easily assign ownership of tasks, and seamlessly share information with other stakeholders.
6. Centralized contract storage
Solve contract visibility issues by keeping contracts in one searchable location that serves as a single source of truth for all of your organization’s agreements. When questions arise, everyone knows where to find the answers, and they know the information is up to date.
7. Customization
Your CLM solution should adjust to your workflow instead of you adjusting your workflow to your solution. Customization ensures workflows, processes, dashboards, and templates are tailored to your unique needs. A customizable solution also means you can quickly adapt to external regulatory or internal policy changes with minimal disruption of your contracting workflows.
Start proactively managing your contracts today
The pains of contract lifecycle management grow right alongside businesses. Luckily, digital CLM solutions not only alleviate those problems but also carry other significant advantages:
- Minimized manual effort — Automated intake, document generation, and handovers allow resources to be diverted from repetitive, low-value tasks to the things that matter most.
- Streamlined workflows — Close deals faster and decrease time to value by making sure contracts end up in front of the right person at the right time.
- Increased agility — Quickly adapt as business and regulatory circumstances change to keep your contracts and business humming along.
- Managed risk — Automation ensures necessary clauses are always included, and tracking features keep contracts moving while preventing target dates from slipping by.
The technology to effectively manage your contracts’ lifecycles is already out there, and there’s no reason to stick with ad hoc or piecemeal solutions. The good news is you don’t have to navigate this transition alone, and there are experts who can help.
If you’re interested in modernizing your CLM workflows, book a demo session with us. We’d love to show you how BRYTER empowers you to customize your CLM efforts from end to end!
Or if you’re interested in other ways to improve your processes, check out The General Counsel’s Guide to No-code.
