Contract Lifecycle Management (CLM): Stages, Tips And Best Practices
The Corporate Legal Operations Consortium reports that 68% of contract professionals search for a completed contract at least once per week. Even if it only takes you five minutes to find the document you need, that’s more than four hours per year spent searching your hard drive and looking under piles of paper to find critical information. Fortunately, contract lifecycle management streamlines the processes involved in not only finding, but creating and executing contracts.
At The RevOps Team, we’re passionate about helping businesses maximize their revenue potential, but it’s tough to increase your revenue if you’re wasting time on tasks like looking for contracts and following up to make sure all parties are meeting their obligations. So, we put together this guide to help you implement your own CLM process and avoid some of the most common bottlenecks in contract management.
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What Is Contract Lifecycle Management (CLM)?
Contract lifecycle management, commonly known as CLM, involves tracking a contract through its entire lifecycle, from the proposal stage to the expiration or renewal stage. CLM is one of the most important aspects of contract administration, as it ensures that every party to a contract follows through on their commitment.
Contract lifecycle management also minimizes risk by making it easier to comply with government regulations and stay on top of important deadlines. Almost any company can benefit from CLM, especially firms with in-house legal teams or procurement teams.
Stages Of The Contract Lifecycle Management Process
The contract management lifecycle starts with content creation, also known as authoring, and ends with contract renewal. All stakeholders should understand what happens at each stage, even if they’re not directly involved in every aspect of contract creation and execution.
Contract Creation and Authoring
Contract authoring is the process of getting the terms and conditions of an agreement down on paper—or on your screen if you plan to use e-signatures. What you include in the contract depends on what you discussed with the other party. A strong contract typically includes the following:
- Names of the parties to the contract (individuals or businesses)
- Pricing (total cost, price per unit, price per hour, etc.)
- Milestones
- Payment amounts and due dates (e.g. four payments of $2,500 due on May 1, June 1, July 1, and July 31)
- Expiration date
- What happens if any of the parties breach the contract (e.g. late fees, termination of the contract)
Contract Negotiation
After you draw up a contract, you need to negotiate the terms to make sure everyone is on the same page. Every party to a contract wants to minimize their risk and negotiate terms that are favorable to their interests, so you need to be on top of your game during this stage of the contract management lifecycle.
For example, you may want to pay a supplier 25% upfront and wait to inspect the quality of their goods before paying the remaining 75%. The vendor is probably going to want a deposit of at least 50%. Contract negotiation is when you haggle over these terms and try to come up with a contract that pleases everyone.
During the negotiation process, you may need to make some concessions. If you want to pay a deposit of 25% and the vendor wants 50%, maybe you can agree on 35%. It’s also important to have a "walk away” point in mind. This is the point at which you’re no longer willing to negotiate with the other party.
Contract Approval
Now that you all agree on the terms and conditions of the contract, it’s time for contract approval. Each person involved in the approval process should review the contract data carefully and make sure it matches what you all agreed on during the negotiation stage.
The contract review process may include redlining, which is the practice of reviewing a contract and making edits as needed. Redlining is usually a collaborative process, so be prepared to work with other stakeholders to get the new contract ready to sign.
Contract Execution
If you don’t have a CLM solution in place, you may need to print out multiple copies of the contract and have each party sign. An alternative is to print a hard copy, scan it, and then email it to everyone or use a service like DocuSign to collect electronic signatures.
Contract lifecycle management software makes this process much easier. Instead of printing or scanning multiple copies, you can easily create the contract and send it to all parties for their e-signatures.
Contract Monitoring
During the contract monitoring phase, you have to make sure everyone is complying with the terms of the agreement. In many cases, this is the toughest stage of the contract management lifecycle—even tougher than negotiating!
The monitoring process varies from one company to another, but it usually involves comparing the other party’s performance to the terms outlined in the contract. For example, if you enter into a contract with an IT company, the agreement is likely to include terms related to system reliability and availability. If the company doesn’t perform according to these terms, it might result in a null and void contract, qualifying you for a credit or some other remedy.
Monitoring is especially difficult if you don’t have a contract management system, as you’ll have to spend time searching for the contract and flipping through it to find the information you need. With a robust software solution, you can find the contract in a matter of seconds and use the search function to find key milestones and amendments.
Contract Renewal
When you get to the end of a contract, you may want to continue doing business with the other party. You can either keep following the terms of the original contract or negotiate new terms. In some cases, the contract renews automatically.
CLM Bottlenecks To Be Aware Of
As you know, bottlenecks are problems that slow down or put a stop to your workflow. When you’re trying to maximize your revenue potential, you need to eliminate as many bottlenecks as possible. Here are some of the most common problems associated with the contract management lifecycle.
Counterparties Taking Time to Review
Remember we said everyone has to review the contract carefully? The review process is important, but it can also create a bottleneck in your process. If you don’t have a CLM system, you may have to send copies of the contract via postal mail or email it to multiple people, both of which can slow things down.
Delays From the Legal Department
Although contracts are important, corporate attorneys have many responsibilities. They may be involved in protecting a company’s trademark, negotiating an acquisition, or managing outside counsel. When they’re handling these matters, they’re not reviewing your contracts. As a result, the legal department is a common bottleneck in the contract management process.
Difficulty Storing Manual Contracts
Without a contract management tool, it’s difficult to find important documents when you need them. If you have a central repository for hard copies, someone needs to go to there and search through boxes or file cabinets to find the right contract. Even if you have a digital contract repository, it may be a little disorganized, forcing team members to search through thousands of electronic files.
Ineffective Presentation Methods
Many companies make the mistake of creating lengthy contracts and emailing them to everyone for review. This creates a bottleneck for a few reasons. First, some of the recipients may not see their email notifications right away, delaying their review of the document. Second, reviewing such a long contract can be a little daunting. One or two recipients may see how long it is and decide they don’t have time to review it for a few days.
Lack of Insight Into the Contract Process
Many people are involved in the contract management lifecycle, but not all of them are contract experts. For example, your lead salesperson may be a wiz at using Salesforce and figuring out how to meet a variety of business needs, but they may not have any formal training in reviewing contracts or negotiating favorable terms.
Even if everyone involved in the process has extensive experience with contracts, they may not know the status of each contract due to a lack of insight into the process. For example, if the contract is sitting on your in-house attorney’s desk, other business users won’t know what’s happening with it until the attorney finally finishes the legal review.
Contract Lifecycle Management Best Practices
Effective contract management is critical for organizations of all sizes. You can make the process a little easier by following these best practices.
Automate Workflows
As we pointed out above, manual processes take up a lot of time that could be better spend on revenue-generating activities. To save time and increase efficiency, it’s important to automate workflows as much as possible. A robust contract lifecycle management solution can help you eliminate cumbersome processes and make sure everyone is on the same page.
One way to automate workflows is to create a clause library with common contract terms. Instead of writing up the same terms every time you create a new contract, you can enter standard terms from your custom library.
Standardize Templates
You don’t need to reinvent the wheel every time you enter into a new contract. Just use contract templates that are pre-filled with standard information, such as your company’s contact information, the names of key personnel, and standard milestones.
Seamless Collaboration
Manual processes also get in the way of effective collaboration, as they slow everything down and make it difficult for more than one person to review and monitor a contract at the same time. Improve collaboration by implementing a cloud-based CLM solution that team members can access from anywhere with an internet connection.
Transparency Through Stages
A lack of transparency can wreak havoc on your organization, especially if it causes a contract breach. To prevent this from happening, commit to transparency at every stage. A CLM system can help you accomplish this goal by making it easy to determine which version of the contract is the most recent or finding the last person to edit the document.
Proper Aftercare
Many people believe that signing a contract is the last step in the lifecycle, but as you know, it isn’t. You need to follow up regularly to make sure that everyone is complying with the terms of the contract. It’s also important to check expiration and renewal dates.
Legal Certainty and Security
Governments are always passing new laws or amending existing ones, making it even more difficult to comply with legal and regulatory requirements. Unfortunately, having signed contracts stuffed into overflowing file folders isn’t the best way to manage your compliance efforts.
One way to make sure your company stays in compliance is to use CLM software for legal certainty. With this type of software, it’s easy to manage access authorizations and discover who made changes to a contract.
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CLM Software Can Help
Contract lifecycle management software can solve many of the problems addressed in this guide, increasing efficiency and making it easier to maximize your revenue potential. This type of software allows businesses of all sizes to create a centralized repository for contracts and other documents, eliminating the need to print hard copies and find somewhere to store them.
Cloud-based CLM software also enables collaboration by allowing stakeholders to view and sign contracts from anywhere in the world. Some systems even have mobile applications, making it easy for team members to review contracts on the go.
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