Businesses enter into contracts for certainty. But did you know that all contracts - no matter how well written - involve a degree of risk? Contracts, in fact, may actually create risk in business transactions. From initiation and negotiation to award and renewal, contracts involve complex actions that can and do go wrong. The goods news is that contract Lifecycle Management (CLM) software can help to mitigate that risk. In this article, we review the nine stages of CLM and offer ideas on best practices to ensure that your business runs as smoothly as possible.
An Introduction to CLM
Understood as a methodical process for managing contracts at all lifecycle stages, CLM is essential for business operations. Rarely is it the case that executives sign contracts only to put them away in a drawer for reference at some uncertain date in the future. Several aspects of running a business rely on contracts, including: having clarity on the terms of service, establishing deadlines, providing means of effective dispute resolution, and administering human resources. It is important, therefore, that legal teams manage contracts and automate where possible.
This is where CLM comes in. To manage a contract well, the key contract stages - such as issuance, negotiation, implementation, and renewal - must execute on time. Lawyers must also control contracts with efficiency. Contracts are expensive, and expending more resources on them than necessary dwindles the company’s bottom line.
Moniker aside, then, CLM is actually about much more than ‘managing’ contracts. CLM is also about ensuring that such management is as efficient as possible. This efficiency is imperative. Indeed, stakeholders recognize that managing contracts without an underlying system is burdensome. A Gartner report on CLM found that:
“Procurement, sales and legal teams are always pressured by the business to speed up contract development and execution. Without a CLM solution, contract negotiators struggle to execute contracts within the expectations of the business.”
The ultimate responsibility for the effective management of contracts falls on a company’s general counsel. General counsel are, after all, in charge of ensuring the company’s compliance with relevant laws and facilitating beneficial relationships with vendors, customers, and competition. Clear agreements are the essence of both of these core responsibilities. In this regard, good CLM can make a considerable difference to the day to day workload of a company’s legal department.
Some of the core benefits of CLM include:
- Accurate time management for each contract stage
- Appropriate workload allocation for each contract stage
- Creation of documentation and records for audit and compliance matters
- Establishment of rules and processes for company operations
- Performance indication and measurability of deliverables
- Ability to spend more time on high-value activities
- Better allocation of expensive resources, like general counsel time
What does CLM actually look like in practice, though, and how can lawyers use it to ensure smooth business operations?
The 9 Stages of CLM and Best Practices
CLM is a process that necessitates a view of the individual stages of the contract lifecycle. Management activities fall under each lifecycle stage. CLM software can assist in the effective execution of each of these activities.
Knowing that CLM software can help, though, may not be enough to achieve the best management efficiency and performance. Management must include best practices to achieve effective CLM across the entire enterprise. Read on to discover not only what CLM software does, but how to get the most out of it.
Contracts serve a certain purpose, and usually one party proposes a contract to the other. The purpose may be evident in the circumstances, such as the creation of a contract to sell an asset. The purpose may also be evident because of an existing agreement, for example, the end of a current employee's employment contract. Either way, the request and any supporting documentation are critical to the negotiation of the contract terms. Accordingly, lawyers need to place a high degree of focus on the early stages of contract request. CLM software may not only formalize the process, but also serve as a repository for relevant information and material.
Any general counsel knows that the negotiation of terms is one of the most critical stages of a contract’s lifecycle. Productive and efficient negotiations rely upon good preparation. One aspect of good preparation is having the positions, documents, and intended outcomes in one place. CLM software can serve as a repository for these purposes, as well as facilitating the request and approval of amendments. With a powerful CLM solution, general counsel can save considerable time on administration. This, in turn, frees up resources for the more valuable substantive aspects of the negotiation.
Well-drafted agreements must include regular opportunities for review and approval. Depending on the agreement created, both internal and external reviews may be necessary. Each individual involved therein may be privy to different types of information - some of which may be confidential. This is especially the case with companies that have over 500 employees. In large companies, the sheer number of stakeholders with varying degrees of authority introduces considerable complexity. CLM software enables general counsel to set up internal and external review processes and assign the requisite permissions for designated stakeholders. Introducing conditional logic into the review process enhances speed further. Such logic may include introducing a base number of approvals before the contract may progress to the next lifecycle stage.
Once approved, the contract is ready but will remain unsigned. Contracts require signatures for execution. Getting a contract signed is not, however, as straightforward as it may seem. While some contracts are printed and signed in person (‘wet signature’), more and more companies are relying upon electronic signatures. Obtaining an electronic signature requires compliance with any applicable laws on signatures. These laws vary considerably between jurisdictions. CLM software can assist in this regard: not only does CLM ensure that signatures are compliant, but it also sends requests for signature automatically upon approval.
Having executed the contract, legal departments must keep contracts somewhere for easy reference. Here, effective CLM requires both the availability of the requisite storage facility and the indexing of the contract, any supporting materials (such as appendixes), and corresponding metadata for fast and accurate search. CLM software creates collections with standard and custom search terms for each record. Such software can also generate reports for a variety of purposes.
Storing records in one place is only half of the battle when it comes to managing many - often complex - business agreements. Good CLM requires that the storage is secure, reliable, backed up to local or off-site servers, and safeguarded with appropriate retention policies. This is to avoid common mistakes like accidental deletion and incorrect modification. Furthermore, key events should be assigned for automatic reminders or requests for relevant parties, helping to smooth out the process of day-to-day management. Each of these core functions can be operationalized with CLM software. This helps general counsels and other contractual parties to cut risk. In turn, this allows lawyers to focus on high-value activities that impact the company’s performance.
Contracts need to be accessible to be useful in everyday business transactions. This is imperative not only for speeding up record management, but also for ensuring solid business relationship. Leaders can also make informed and accurate business decisions if contracts are easy to access. For that, a robust search and retrieval system needs implementing within a CLM solution. Lawyers should grant the appropriate access to various parties. This includes setting permissions to ensure proper handling of the data (some of which may legally-protected).
CLM involves reporting of several different types. Key staff members - like general counsel - need to be able to get reports on the number and type of contracts in storage. Knowing who accessed the records and made changes to them and when is also key information. Critical to general counsel is being able to get reports on the state of compliance with obligations in those contracts. Issues like late payments, non-delivery of products, ultra vires changes to the contract, and other potential breaches need flagging for prompt attention. CLM facilitates in-depth reporting. CLM also allows lawyers to set up tailored notification systems to complement a business’s internal processes.
Contracts are operational for the time specified therein. Upon reaching the end date, general counsel must decide whether to renew the contract or dispose of it. Many overlapping factors play into this decision. Lawyers must consider: completion of obligations, adequacy of deliverables, receipt of competitive prices, and the stability and benefit of the underlying business relationship, among other factors. Renewal or disposition need not be a lengthy process, though. CLM software can ensure the amendment, renewal, or disposition of the contract even well in advance of the end date.
It is clear that CLM principles and the CLM software that implements them can have innumerable benefits for general counsel. Other key figures who have responsibility for ensuring effective management of contracts within a company also benefit from CLM. As contracts are the lifeblood of any business, CLM is necessary to ensure the health of the company and its ability to thrive.
With over ten years’ experience and thousands of satisfied users, Corridor Company can take your business’s contract management to the next level. Get in touch today for a no-obligation conversation about how CLM software can enhance the efficiency of your business.