Nearly all contracts go through eight essential phases during their life. Collectively, these phases are called the contract lifecycle. The concept comes from the lifecycles that all organisms follow. For a frog, the lifecycle begins with a tadpole. For a contract, the lifecycle begins with a request.
Request a Contract
Before your business makes a contract, someone has to request one. Usually someone within your company makes the request. For example, a sales person requests a contract that he can present to a potential customer (a sell-side contract). Or, an office manager requests a contract so that she can purchase paper and pens for the company (a buy-side contract). Depending on the type of business you run, any type of contract can be requested.
Unfortunately, many companies run into problems at the first stage of the contract lifecycle because they take an informal approach to contract requests. Instead of using a contract management system to enforce their process, gather required information and direct the request to contract managers, they allow individuals to start contracts on their own, often using out-of-date draft contracts as a starting point.
Businesses can avoid this unorganized approach by using a contract management system to field contract requests with a standard set of templates based on common contract types. Automating the process makes requesting a contract easier and makes sure that the requests are reviewed and approved by those responsible for the company’s financial interests.
Generate the Contract
Once someone requests a contract and the request is approved, you need to generate a contract. Unless someone has an unusual request, you should have a template with language already approved by legal to start the process.
As you know, outside lawyers charge a lot of money for their time. Your company’s in-house lawyers’ time is also valuable.
You can avoid expense and delay by using software that automatically generates standard contracts, with pre-approved language, as a starting point. Starting with an approved template saves time and money.
Get Approval within Your Company
Before you can offer a contract on behalf of your company, you have to get approval from the people authorized to grant it. That could mean getting the approval of department managers, finance managers, or in some cases company executives. Your legal team will also want to review the contract when language has been changed, added, or subtracted. All of these steps take time.
You can make the approval process more efficient by using an automated contract management system that alerts the relevant approvers that a draft contract needs their attention. The approving managers can quickly find the document in the contract management system, and the person who needs the contract can see whose approval has been given and whose is still needed.
Negotiate the Contract’s Changes and Terms
Once you reach the negotiating stage of the contract lifecycle, you may need (yet again!) to make some changes to the contract’s terms and language. Each agreement, after all, has its own nuances. More to the point, the counterparty (the person or company with whom you are making the contract) may want changes to the language before agreeing to sign.
Contract management software can be crucial at this stage of the contract lifecycle.
- Negotiation tools allow you to share the draft contract with the counterparty and track the changes made – what language is put in and what is taken out.
- Approval workflows make sure that language changes made during negotiation are reviewed by the people in your company whose approval is needed.
- E-signature allows you and the counterparty to sign the final contract electronically. Nearly everywhere in the world, e-signature is legal, secure, and quick. It saves time and mailing expenses.
Using software that helps you respond quickly is an advantage in negotiations. By tracking every change, you maintain control of the document’s details as they change so there are no surprises later.
Execute the Contract and Put It in a Repository
Approving the contract isn’t the end of the lifecycle. You should store the contract in a centralized location where you and your colleagues can access it in the future. All too often, contracts get stored in file cabinets or departmental shared drives where they become difficult to find and review. If your contracts get sent to a cabinet, you will lose opportunities to refer to the language and report on the obligations your company agreed to.
At this stage, a contract management system can help. A single electronic repository where contracts live after they are signed means that the contract is never lost. Anyone with appropriate permission can find and view the contract.
Search and Report on the Contract’s Terms and Metadata
When you sign a contract with a counterparty, whether a vendor or a customer, you start building a new relationship that can nourish your business for decades. You can manage those relationships best by making your contracts accessible through electronic reporting.
With contract management software, executives can review agreements at a high level to decide whether they benefit the company or to find ways to improve them. Some basic questions that software can help answer include:
- Which purchasing contracts are being employed frequently? Is the company taking advantage of all buying terms and discounts in these contracts?
- Which sales contracts are generating the most revenue? Are there opportunities to upsell or offer more and better products to the customers under these contracts?
- Which obligations are met on time? Which are late in delivery?
Adding metadata to the contracts makes it easier for you to locate the specific information that you need. It also lets you group and compare contracts that share the same metadata. A contract management software makes adding metadata and reporting on it much easier.
- Want to see contracts that are due to expire in six months? An electronic report can list those contracts in seconds provided a separate, related field called Expiration Date holds the information.
- Want to review the performance of contracts with a certain customer? Or in a certain industry? A report can show only contracts with that counterparty or industry (captured in metadata fields Counterparty and Industry) along with the revenue from purchases under those contracts.
Comply with the Contract’s Obligations
Under a contract, your company has to fulfill its obligations and receive payment from the customer. Or, the counterparty has to deliver the goods or services promised in return for your payment. Either way, contract managers have to review obligations and ensure that they are being met.
It takes a lot of effort to determine whether all parties have complied with the terms in a paper-based contract. Deadlines may not get reported, payments may not get entered on time, and other details can become obscure. If you work with government agencies, compliance becomes an even more important matter since they often have strict requirements with stiff penalties.
If you fall out of compliance, you run the risk of losing revenue or the goods and services you contracted for. Failing to meet a contract’s terms can lead to counter actions, or invocation of remediation clauses, or even legal action.
You eliminate those problems when you adopt a contract management system and use it to make sure that every one of the contract’s terms is recorded, reviewed, and fulfilled. Reliable software checks every party’s actions so you fulfill your obligations and the customer fulfills theirs. You can even use the system to mark obligations with due dates and note those that are at risk of non-fulfillment.
Renew, Amend, or Close the Contract
The end of the contract lifecycle gives you the opportunity to amend and renew the document so your company can continue to do business with the customer or the vendor.
Renewing contracts should not be automatic. You will want to review the contract’s terms and performance to see if you want to negotiate changes or renew the contract at all. That takes time. A contract management system can alert you to contracts coming up for renewal or expiration months ahead of time, allowing contract managers to prioritize contracts for review.
When you decide to let a contract expire, remember that its life is not quite over.
People at your company may not know that a contract is no longer in effect. They may still be using the expired contract to make purchases or sales, even though its terms no longer legally apply. A contract management system can remove that expired contract from use and prevent unauthorized actions based on it.
For legal reasons, your company may need to refer to the expired contract or produce it if asked to do so by attorneys or courts. This means storing the contract in an archive where it can no longer be used for business but is available in case it is needed in legal proceedings. A contract management system can provide such an archive. Importantly, the system can also
- alert you when you are no longer legally required to retain the contracts
- enable legal holds to retain documents that pertain to active legal matters
The contract lifecycle is a long journey. Don’t let a breakdown along the way adversely affect your business. With contract management software, you can navigate every step with certainty.