Contract Lifecycle Management. Best practice and benefits of CLM
This is the ultimate guide to contract lifecycle management, where you’ll find out everything about:
• Contract lifecycle management and why it’s important
• The CLS process
• Contract lifecycle management benefits and best practices
• How contract lifecycle management can be improved using software
What is Contract Lifecycle Management?
Businesses of all sizes and sectors have many moving parts, covering processes from sales to recruitment. How they execute these will determine the overall success of the company.
Contracts are something that every business has in common. They play a crucial role in the day-to-day running of an organization, and if they are going to deliver a positive outcome, they must be effectively managed from start to finish.
Contract lifecycle management is the process in which a contract goes through various stages: drafting, reviewing, negotiation, signing, execution, and then renewal or expiry. It is a continuous (and sometimes complex) process with multiple stages and it plays a vital role in businesses that leverage contracts.
The management process begins when a contract is proposed and finishes when the contract is up for renewal. The lifecycle is a model that provides understanding of a contract’s journey throughout its life.
Why is Contract Lifecycle Management Important?
Every business will sign contracts - they are the legal agreements that define commercial relationships and ensure parties meet their requirements. Although a crucial aspect for a company, they are often time-consuming, complicated, and challenging to keep track of. Contract lifecycle management is the process used to track and manage each stage of a contract, to monitor its performance and compliance through every stage.
Contract lifecycle management is essential because it allows a business to minimize the risk associated with a contract while ensuring compliance with regulations and encouraging performance auditing. By implementing a contract lifecycle management process, businesses can expect to see significant cost savings and an increase in efficiency.
What is the CLM Process?
Contract lifecycle management starts with the request for a contract and ends when the obligations have been fulfilled – with the option for renewal. The number of stages in the process will vary depending on each business and its size and existing processes.
To make this easier, we’ve broken down the seven most common steps you may come across in a standard contract.
The first stage of contract lifecycle management is the request for a contract. In this step, goals are set for what the contract should achieve. This may include factors such as the length of the contract, fees, and each parties’ obligations.
The second stage, also known as contract writing, requires that the involved parties draft a contract establishing the terms and conditions, clauses, dates, and other key information.
The negotiation process starts once the contract has been drafted and the parties involved are ready to review its contents. Frequently, this stage is the longest because the parties will go back and forth on terms to get the best agreements for their business.
For the approval stage, the parties will review and then sign the contract to show their approval.
Once the contract has been signed, it becomes legally enforceable, and the parties are then obliged to meet their agreed terms.
The auditing stage is one of the most crucial for the successful delivery of the contract. This stage enforces the regular review of a contract to ensure that the terms are still relevant and provides an opportunity to spot any potential compliance obligations.
7. Expiry & renewal
The final stage of the process is the expiry of the contract. The parties are then presented with the opportunity to renegotiate a new contract and relationship or terminate the contract. By conducting regular contract audits, the parties can identify areas for improvement and spot new opportunities when it comes to the expiry and renewal stages.
What are the Benefits of Effective Contract Lifecycle Management?
Nowadays, businesses are required to create and manage vast amounts of contracts. A study from the Institute of Supply Management found that 60-80% of all B2B (business-to-business) transactions are conducted by a form of a written agreement, with a typical Fortune 1000 company being governed by 20,000 to 40,000 live contracts at any given point.
Contracts present both opportunities and risks. Effective contract lifecycle management of such vast agreements is crucial but also challenging. Businesses that ignore the process will be exposed to significant financial and operational risks.
We have included some of the key benefits to CLM that can be seen across a standard contract.
• Minimize risk and ensure compliance
Compliance is a major issue in contracts, even more so in larger agreements involving multiple parties. Contract lifecycle management provides better visibility into active contracts, by ensuring constant compliance and decreasing litigations from incomplete obligations.
• Build better relationships
A contract defines a minimum set of obligations that parties need to reach. Being a business, fulfilling and exceeding expectations increases the financial returns. An effective contract lifecycle management plan will enhance contract performance and value, leading to repeat and increased business opportunities.
• Reduce costs
A streamlined and effective process can directly reduce the labour time and costs involved. Secondly, effective contract management will save time and money by avoiding non-compliance.
What are Best Practices for Contract Lifecycle Management?
If a contract is left unmanaged, it will often fail to achieve its intended goals. Businesses lose up to 9.2% of their revenue due to poor contract management. With some businesses having up to 40,000 live contracts, they must have an efficient contract lifecycle management process to maximize the rewards.
An effective contract lifecycle management process can be confusing. That’s why we’ve listed 3 simple things when it comes to best practice that every business can use to improve their current contract lifecycle management process.
• Automate and digitise
It’s becoming increasingly challenging for businesses of all sizes to effectively track and manage their contract portfolio manually. Digitising and automating the process with tools like Summize saves businesses time and money alike by simplifying and speeding up the entire process. Our software is designed for the whole contract lifecycle, from creation to review, and there are plenty of others available that will focus on a specific area too.
• Set KPIs
Like any project, KPIs are key to tracking a contract’s performance and identifying areas that may be underachieving. Set KPIs and conduct regular reviews to ensure that the contract is on track to achieving its original goals.
• Run regular reports
Conducting regular contract analysis is crucial. Many businesses simply store their contracts once they have been signed and won’t see them again until they are terminated or renewed. When businesses fail to meet the agreed obligations, the risk of termination and litigation from the involved parties increases. Companies can make better-informed decisions by conducting regular contract analyses, spot inefficiencies, and ensuring the obligations are met.
How Can Legal Tech Improve the Contract Lifecycle Management Process?
For most businesses, contracts are just another time-consuming burden and they are unaware of the benefits they can bring. Effective contract lifecycle management is crucial for businesses to implement if they want to see benefits across the wider industry. Still, with some businesses having up to 40,000 active contracts, it can be a complex and daunting task.
Good contract lifecycle management will result in a reduced financial and operational risk to the business, and increased profits, supplier relationships and cost savings of up to 50%. However, poor contract lifecycle management exposes the business to increased costs, lost revenue, and the potential to face legal action from non-compliance.
Legal teams everywhere are turning to digital solutions like Summize to automate their contract lifecycle management process. Summize allows teams to instantly create summaries, identify key dates and important clauses, and display each contract’s contract lifecycle management stage. The tool is an efficient and accurate digital process for any legal team looking to save time, money, and resources, allowing your team to focus on the future of the business.
And that’s Summize’s Ultimate Guide to Contract Lifecycle Management!
Did you find it useful? Or perhaps there’s something we missed? Get in touch with us at [email protected] to let us know.