October 18 by Zack Alspaugh
Contract management is more than just taking care of some documents. At its most basic level, contract management software might be little more than an electronic version of a filing cabinet. But a filing cabinet doesn’t help you understand what’s inside it—or help your business get the most value from the processes that fill that cabinet with agreements. To make the most of your contracts, you need to manage the entire contract lifecycle.
The contract lifecycle is a broad discipline that includes everything from managing your contract requests, authoring, negotiation and execution, as well as housing all this in a centralized repository. Effective contract management requires an understanding of every step in the contract process, including any process that contributes, creates or utilizes contract data. Here is a more detailed look at the key functions and process steps a contract undergoes during its lifecycle.
1. Request: A business user asks for a contract
The first step in the contract process is for someone in the company to request a new contract. In many companies, the request process can be very informal and disorganized. Templates are not centrally located or accessible, resulting in outdated contracts being used as ad-hoc templates, exposing the company to financial and compliance risks. A casual contract request process is also slow and inefficient, with the details needed to create the contract often shared by email or verbally.
By automating the contract request process with a guided self-service tool, individual business groups can request the contract types they need and contract creators—usually in the legal department—can respond according to measurable service level agreements they have with their business teams.
2. Drafting: A contract is created
When it comes to actual contract creation, the goal is to eliminate manual work and reduce the time required without introducing unnecessary risk. If legal must get involved to create every single standard contract, your contract management process and even your sales cycle become riddled with bottlenecks, and excessive costs. Lawyers have a very specialized set of skills and their time is very valuable. It’s ideal, wherever possible, to use templates for everyday contracts and common clauses. That way, high-value resources can focus on the exceptions such as complex or one-off strategic agreements that require significant negotiation.
With contract lifecycle management, the drafting process can be significantly automated with centralized templates that are automatically completed with contract details. After your lawyers have approved contract templates once, the software can reuse the templates over and over with almost no intervention. Your legal team lives in Microsoft Word, so finding a tool that integrates with Word is critical to their adoption of contract management.
3. Negotiation: Terms are agreed between parties
The negotiation phase is what most of us typically think of when we think about contracts but be careful that you aren’t limiting the scope of negotiation to price. Everything about the business exchange is included in the contract: service levels, liabilities, options for renewal or termination, intellectual property, publicity and dozens of other factors. Nearly all these terms are potentially open to negotiation. You need to make sure these terms offer the best outcome for your business while remaining agreeable to the other party.
During the negotiation phase, it’s important to have the most up-to-date terms and then track any changes the counterparty makes. It’s easy enough to track changes using built-in capabilities in Word, but these tools aren’t designed for documents that pass through many hands. And it’s easy for the other side to slip something into a Word document without you noticing. With contract management software, all changes can be tracked in real time with visibility to all involved on your side, maintaining accuracy and consistency throughout negotiations. Since most of a contract manager’s or lawyer’s time is spent working with Microsoft Word, it’s important that your CLM system allow users to perform the negotiation tasks directly inside the tool they’re most familiar with using already.
4. Approval: Internal controls ensure the best outcome
Part of the challenge of approvals is finding the right balance between too much and not enough oversight. This is where the speed vs. control conundrum is felt most acutely. Your sales teams’ paychecks ride on getting the contract through, but depending on the importance of the contract, you may need a high level of legal or executive involvement to make sure company interests are protected. It’s critical that your system can facilitate the approvals and controls needed to protect the company’s interests while maintaining the flexibility to automatically navigate the quickest route to executing the agreement.
Approvals must come from all the appropriate internal teams. With an advanced contract management system, this can all be done electronically and even on mobile devices, dramatically decreasing your contract cycles.
5. Execution: The contract is put into effect and placed in a repository
Execution is the stage where the contract goes into effect, at which time the terms become a set of instructions for the different parties who need to deliver against them. This is where having a seamless process for getting contract details to fulfillment is critical. This is also where revenue recognition kicks in.
Once the contract is executed, what happens to the contract document? Ideally, it’s stored in a centralized place where it’s easy to access in case of a dispute or a need to modify it. Unfortunately, for a lot of businesses, contract’s final resting place is a file cabinet somewhere in the legal department or an individual’s hard drive. If you manage your contracts that way, you are missing revenue growth opportunities afforded by contract management, and potentially opening yourself up to increased risk. You can’t manage what you can’t find.
6. Obligations: Ensure both sides meet their end of the agreement
At the obligations stage, it’s time to get to work. Your sales contracts put you on the hook to deliver goods and services, to meet deadlines, to issue reports and to do many other things. On the flip side, your contracts also entitle you to get paid if you live up to your end of the agreement.
But sometimes the implementation of these contract line items is easier said than done. There are a couple of ways companies can approach this problem. Shut their eyes and hope for the best, hire an admin to manage the chaos in an incredibly detailed spreadsheet—or integrate their contract management system with front- and back-end systems, so changes to the contract are delivered to sales, customer success, fulfillment and operations teams for action.
With strong obligation management tied into CRM and ERP, you won’t miss a deadline or lose track of a payment.
7. Compliance: Meet all reporting, search, and government requirements
While you’re handling all the obligations created by your contracts, there are plenty of other things you need to do with all your contract data. You need to provide regular reporting to internal and possibly external parties about the contracts you have and your performance to your obligations. You also might need to locate specific contracts to comply with industry requirements, government regulations, audits and responses to lawsuits.
To meet all these needs, it’s important that your repository have detailed search and reporting capabilities. You want to be able to search for business terms, contract clauses, performance to obligation and—when all else fails—for free text. Without a repository searching for information in your contracts can be costly, time-consuming and distracting.
The quicker you can access the information inside your contracts and take necessary action, the more money you’ll save, the more you’ll reduce overall risk and the less you’ll pull the business away from its key activities.
8. Amendment / Renewals: Contracts are changed and renewed, and the cycle starts over
Before your contract expires, you’ll probably want to send a new version to your customer for a renewal. This will kick off a new round of drafting, negotiation, approvals, and so forth. In short, the contract lifecycle starts over. If you’re managing your contracts without software, it’s easy to lose track of renewals. You might rush to get a contract signed before the last agreement expires, or even let a contract expire by accident.
Sometimes, your contract won’t get to renewal before it needs to be revised—perhaps your company was acquired, or a new law came into effect requiring you to update your existing contracts with new language. In cases like this you need to amend your contracts and notify your customers.
Your contract management software should provide alerts, reporting and search abilities that enable you to stay on top of renewals and handle amendments. Just like in the compliance step, a manual system will make renewals and amendments truly difficult.
If managed properly and easily accessible, contracts can significantly simplify everyday business for your Legal department, Finance department, Executive Team, Sales, and elsewhere throughout your company. They offer explicit instructions to both parties on who is responsible for what and establish clear expectations for both parties in a deal. Having an increased visibility and actionable data around all these terms will allow your business to both streamline sales cycles and effectively manage revenue.