Contract management – or contract lifecycle management (CLM) – is a software solution that provides full-time, automated contract monitoring and helps optimize each stage of the contract lifecycle. Pretty straightforward.
The bigger question is, why do you need one? That’s also pretty straightforward: Because contracts are the lifeblood of every organization. They manage risk, relationships, even revenue to a degree. They exist to be used – leveraged – in the best interests of your organization, as well as those it does business with.
But consider, even a mid-tier company could have tens of thousands of active contracts stored in computers, servers, flash drives and, of course, file cabinets. Do you know what’s in all those contracts?
Probably not. That’s why every organization needs an effective contract management solution to manage the full contract lifecycle, pave the way to greater risk and spend management, and ultimately, drive bottom-line impact.
Contract management is a full-time, automated contract monitoring system
While it is a commonly held belief that contracts are static “documents that are frozen at a point in time and represent rights and obligations that are to be delivered over a future period,” that’s not the full story.
They are in fact living documents that need to be actively managed from cradle to grave to make sure they are doing what they’re supposed to be doing. Contract lifecycle management (CLM) is the constant process of ensuring that a contract is structured properly and reviewed appropriately, its provisions enforced and intent realized, and its weaknesses recognized and corrected.
Contract management solves problems at each stage of the contract lifecycle
According to IACCM (the International Association for Contract & Commercial Management), at a minimum a satisfactory contract lifecycle management solution must include:
- A central repository and an enterprise-wide, structured process to manage contract creation and execution
- The ability to effectively manage contract milestones via automated alerts
- Automated workflow for contract review and approvals
- Obligations management capabilities and key performance indicators to improve contract compliance and performance
Beyond that, there is no precise, universally accepted model of the contract lifecycle. Our model views the lifecycle through the lens of business challenges, and we’ve divided it into nine stages: request, authoring, negotiation, approval, execution, obligations management, amendment, audit and reporting, and renewal. This makes it easy to identify a subset of challenges for each stage, discuss their business impact, and examine how technology can meet those challenges and capitalize on opportunities for improvement.
With those entry-level requirements in mind, let’s take a look at what a full-featured CLM solution does in the context of what challenges it’s trying to solve for.
Challenge: Slow cycle time is the number one enemy of contract efficiency. And it begins with how simple or difficult it is to request a new contract, get it into the queue, and route it to the right people with all the required information. This is especially true when an organization has a centralized approach to contracts. Slow cycle times can push revenue into the next quarter and make procurement a roadblock.
Solution: A well-designed contract management solution integrates seamlessly with an organization’s line-of-business (LOB) systems. This makes it easy for anyone in an organization to initiate contracts from within familiar applications and devices, and search for contract-related information they require, eliminating system access as a process bottleneck.
Challenge: New contracts don’t use the latest, approved templates or language, which makes it difficult to enforce standards without costly and time-consuming legal review. This creates bottlenecks, or worse, renegade contracts.
Solution: A contract management solution should recognize the fact that most contract professionals like to use Word, and incorporate its formatting capabilities. From there, using a selection of templates users can simply drag and drop language from a library of approved clauses and terms, often with the help of guided tools, to create a contract request, amendment or renewal. In addition to collaborative authoring and redlining features, advanced CLM solutions automate many tasks, like dynamically inserting required language for specific clauses and terms, tracking clause- and provision-level changes, setting alerts, and configuring approval workflows. The goal is total compliance with minimum effort.
Challenge: The natural give and take of reaching consensus on contract provisions means that negotiation inevitably occupies a large percentage of contract cycle time. But communication glitches via fax and email as well the manual comparison of redlined versions to identify what has changed with each iteration and why those changes occurred can add delays that are easily avoided.
Solution: By reading changes in structured metadata and unstructured language, a contract management solution allows users to receive redlined contracts electronically, which can be routed and tagged for review by contract stakeholders. It also enables redlined versions to be compared side by side, often in Word or PDF renditions. A compelling feature of more advanced solutions identifies changes between versions that have not been redlined, which discourages “stealth” changes that can undermine contract integrity. Research by IACCM found that companies which leverage a CLM solution can cut their contract creation costs by 50% or more.
Challenge: Complex, highly-negotiated contracts frequently require multiple approvals from different functions in an organization. Rules governing industry segment, contract type, dollar amount, number of contracts in force with a particular vendor, and so forth can also add variables to the approval equation. Usually, the more complex approvals become the longer they take.
Solution: More sophisticated contract management solutions provide a dynamic approvals process based on multiple criteria. Through the solution interface, users can tailor parallel and serial approval workflows to match the idiosyncrasies of any contract, which eliminates bottlenecks and minimizes costly delays. The most sophisticated solutions support approvals via mobile devices. This flexibility helps the organization optimize the approval process as business conditions change while maintaining control and enforcing standards.
Challenge: Compared to negotiation and approvals, execution should be very simple. Yet incomplete approvals and missing signatures often delay this basically straightforward step.
Solution: A contract management solution can control and shorten the signature process through integration with third-party electronic signature applications, which eliminates the need for routing hard copy documents. A solution should also be able to upload hardcopies as part of an essentially automated, electronic process.
Contract Obligations Management
Challenge: No matter how well negotiated, no matter how favorable the terms, the benefits of a contract can be quickly and completely undone by a “file and forget” mentality. Remember, a contract is more than a point-in-time agreement whose constructive—or destructive—life goes far beyond execution.
Solution: Contract management technology can consistently provide two things during the life of a contract: visibility and control. Solution features such as fulfillment tracking, automated alerts linked to expirations, renewals, and key events, post-execution workflows, and sophisticated analytics and reporting help administrators maximize contract value.
Challenge: Contract renewal should be a time of opportunity—to refine, improve, and, if necessary, terminate existing contracts. But for many companies, renewal windows simply come and go unnoticed; resulting in opportunities lost and risk created.
Solution: A contract management solution can help companies take advantage of each renewal opportunity by identifying contract renewal candidates, alerting managers in time to act, and automatically creating new contract drafts based on the contract in force.
Contract Auditing and Reporting
Challenge: There is no business document more in need of an audit trail than a contract. But ad hoc, manual processes rarely support the event logging that audit trails demand. Likewise, contract performance reporting requires the systemic capability to aggregate data over time.
Solution: Contract management solutions should give organizations a range of audit and reporting options such as contract compliance alerts, audit tracking at the field level, on-demand report generation, one-click access from reports to contract records, and easy integration with third-party reporting tools.
Challenge: Contracts rarely escape amendment. The give and take of commerce ensures that most contracts will undergo modification to reflect changes in the marketplace and in the relationships of their signatories. Without a consolidated view of a contract and all its amendments, it’s difficult to keep track of what has been done and why, particularly in long-standing relationships. This is especially true of master agreements that may have hundreds of amendments, with varying application to different parts of the business.
Solution: As it was in the obligations management stage, a 360-degree view of a contract relationship is essential to managing the amendment process effectively. A contract management solution should provide a single source of integrated data truth, providing an effective view of a business relationship that makes clear the prevailing language and terms across multiple contract amendments and associated documents.
Contracts aren’t static documents; they’re leverageable assets.
To sum up, a Contract Management solution helps an organization gain visibility into and control over all contracts, making day-to-day searching, authoring and contract administration easier, more effective and productive. Managing contracts with one comprehensive tool:
- Cuts contract cycle time and boosts productivity—easy-to-use tools speed authoring and approvals while reducing the need for line-by-line legal review.
- Gives greater visibility into deals—properly structured contracts recognize revenue sooner, reduce leakage, and increase opportunities for follow-on business.
- Ensures compliance—audit and analysis features address the three aspects of compliance: contractual, operational, and regulatory.
- Optimizes shared data, giving all contract stakeholders new insights into their commercial counterparty relationships.
To learn more about what contract management is and what it can do for your organization, download the CLM Starter Kit from Determine, a Corcentric company.