Successfully handling contracts is not only a strategic cornerstone but a fundamental requirement for companies across all industries. This centralized strategy is known as contract management or contract lifecycle management (CLM) – and it can lead to substantial savings in both time and money for your company.
What is contract management?
Contract management is a company-wide approach to streamlining and managing all aspects of a business’s contracts. This includes establishing a uniform process for negotiating, approving, executing, organizing, and either renewing or terminating contracts.
These days, CLM can be digitized and automated. This allows legal teams to save time in their contract workflows by rapidly generating contracts and obtaining signatures in bulk, in addition to setting automatic reminders for upcoming contract renewals and renegotiations.
Starting at the drafting stage, strategic digital contract management within a CLM tool promotes the use of a universal library of templates and contract clauses, ensuring all contracts across departments have clear and consistent wording. This approach also enhances negotiations through efficient editing workflows and ensures contracts are reviewed and approved promptly.
The e-signature process becomes seamless and legally sound. Once signed, contracts are stored securely, making them easily accessible and compliant with regulations like SOC2.
And after agreements are signed, effective management of contracts includes policies for tracking deadlines, as well as performing regular audits. These practices help highlight value opportunities and cost savings, and offer insight into broader organizational performance.
Why is contract management important?
Contract management is important because it streamlines the entire contract lifecycle, ensuring obligations are met and risks are reduced. It also provides businesses with a clear overview of their contractual obligations and commitments, helping in informed decision-making and resource allocation.
CLM also empowers businesses to maximize the value of agreements while minimizing risks and inefficiencies throughout their duration. What is more, poor CLM costs businesses an average of 9 percent of their total revenue every year. A lack of close contract supervision can also result in a loss of 40 percent of a contract’s value.
The cost of manually creating and managing a single contract can run from $6,900 to $49,000, depending on employee work hours. Without contract lifecycle management, as much as 40 percent of an employee’s time is spent on low-value contract tasks. This adds up to $2.7 million in lost productivity every single year.
That’s why it’s essential to adopt a company-wide methodology governing every aspect of contract processes. Your strategy should run from initiation all the way to fulfillment, and beyond, developing consistent policies for discussions, approvals, implementation, organization, and renewal (or termination) of each contract. This can greatly mitigate risk, reduce contract management mistakes, and enhance operational efficiency as your organization continues to scale.
Examples of contract management
What does contract management look like in real life? Let’s take a look at some specific examples of cases where organizations would use CLM:
- Vendor contracts: Contract management might involve negotiating the terms and conditions, keeping track of delivery dates, managing disputes, ensuring compliance with the agreed terms, and renegotiating or terminating the contract as necessary.
- Employee contracts: Managing such agreements can involve defining terms and conditions of employment, making sure that both parties understand and agree, keeping track of dates for performance reviews or raises, and handling any modifications to the contract such as changes in job responsibilities or compensation.
- Real estate contracts: This type of CLM could involve negotiating lease terms, tracking lease renewal dates, ensuring compliance with lease conditions, handling tenant or landlord disputes, and coordinating lease terminations or extensions.
- Software licenses: Managing agreements here would involve monitoring the terms of software licenses, making sure that usage complies with these terms, keeping track of renewal dates, and handling any necessary upgrades or changes to the licenses.
- Government contracts: For government contracts, CLM would ensure that all terms are clearly defined and understood, deadlines are met, deliverables are submitted as required, all reporting is completed accurately and on time, and any contract modifications are handled appropriately.
- Construction contracts: In a construction scenario, companies might manage agreements by negotiating project terms, tracking the completion of project milestones, handling any contract disputes, managing changes to the contract due to changing conditions or requirements, and ensuring compliance with all contractual obligations.
- Sales contracts: For sales contracts, CLM might involve defining the terms of the sale, ensuring that delivery and payment terms are met, handling disputes, and possibly negotiating extensions or modifications to the contract.
What are the stages of contract management?
There are seven main stages of contract lifecycle management that you should familiarize yourself with.
Contract management begins in the initiation phase where the objectives of the contract are outlined and roles are designated to key individuals. This stage forms the bedrock of the agreement, and it’s crucial to get it right.
In the drafting stage, the first version of the contract is created, either from scratch, or from a template. Using pre-approved templates and standardized clauses helps to speed up the process and maintain the consistency of contracts. This ensures all important aspects are covered and potential risks are minimized.
An internal contract approval process is a set of steps that need to be followed before the agreement is negotiated and signed. Usually, it involves different parties from an organization reviewing and approving or rejecting the contract. It’s best to carry out this process in a central location rather than through disjointed email threads. This ensures the contract doesn’t get lost in the shuffle and helps to expedite the approval process.
During contract negotiations, the parties involved try to find common ground in a legal agreement. A good practice is to track all changes and comments within the contract document in a CLM tool. This keeps the communication clear and contained within the contract itself, ensuring everyone has the same understanding of the terms and conditions.
The execution phase concerns obtaining signatures from all parties to the contract. The use of electronic signatures can make the signing process simpler and quicker while still keeping the contract legally binding. This way, the contract can be executed promptly and with less hassle for all parties.
6. Storage and tracking
Proactive contract management involves keeping track of all important contract dates. It’s best to set notifications and reminders for when contracts are nearing their renewal or termination dates to allow stakeholders to act in a timely manner and make necessary decisions.
7. Reporting and analytics
Lastly, in the contract reporting and analytics stage, an organized contract management process should include the ability to generate insightful reports and analytics. This allows organizations to gain a comprehensive understanding of their contracts, supporting informed decision-making.
As we’ll see in the sections below, each of these phases affects the next one. That’s why it’s crucial to train all team members on the key points of contract lifecycles. This will help them understand how their responsibilities enable other stakeholders to manage contracts more effectively.
The role of contract lifecycle management in modern business
Contract management has never been more important. Let’s take a closer look at how CLM benefits modern business organizations:
- Saving time
- Reducing repetitive work
- Keeping terms and language consistent
- Keeping customers happy
- Avoiding legal problems
- Reducing human error
- Reducing misunderstandings
- Helping close deals faster
- Providing insight into performance
- . Managing many agreements effectively
What is the purpose of contract management?
The purpose of contract management is to properly oversee all of an organization’s contracts, which positively influences the overall business operations. For example, using standard contract templates means legal teams don’t have to write every agreement from scratch each time, making the process more efficient. This also makes sure that other teams use the correct legal terms and the right common language, and reduces the time to signature.
Why is contract management important?
Contract management is important because it provides a systematic approach to overseeing every phase of a contract, ensuring compliance and minimizing risks. Additionally, it streamlines administrative processes, promotes transparency, and aids in maximizing the value and performance of agreements throughout their duration.
A consistent review chain, for example, helps catch and prevent problems with contract language due to human error. An organized approach to collecting signatures can streamline the signing process. Improvements like these can free up the legal team to focus on higher-value tasks.
How does contract lifecycle management help a growing business?
As a company grows, so do the volume and complexity of its agreements with suppliers, clients, and employees. A comprehensive approach to contracts management helps keep all agreements and supporting documents organized, and prevents stakeholders from missing important deadlines for renewals. Plus, by keeping an eye on how contracts are doing and making reports, you can find costs that aren’t needed and ways to obtain greater value.
How does contract management help legal teams?
Contract management saves legal teams time, and helps free them up from low-value work. For example, a comprehensive approach to CLM can help legal experts anticipate challenges like compliance issues, missed deadlines, upcoming renewal or cancellation dates, and breaches of contract. But with clear contract-facing roles and processes, even a relatively lean legal team can manage thousands of agreements efficiently.
For all these reasons, contracts are at the heart of every business. They govern relationships with partners and suppliers, which are necessary for the business to function properly. In short, for a modern business organization, contract management is no longer optional.
Key 6 priorities in contract lifecycle management
Although a comprehensive approach to CLM requires operational adaptations throughout all stages of an agreement’s lifecycle, you’ll begin to notice immediate time savings and performance improvements if you prioritize the following six important action items.
1. Standardize your contracts
Every agreement your organization creates should be standardized, to prevent the risk of mistakes due to human error, lack of legal compliance, and contract language ambiguity.
You can make this process easier and more efficient by generating contracts from pre-approved templates, and using a library of clauses written and reviewed by your legal team.
Keep templates internal
If employees are using random contract templates they find online, and copy-pasting language from third-party websites, then they’re exposing your organization to significant legal liability, and could even be creating contracts that aren’t legally enforceable.
Use standard clauses
A clause library, by contrast, eliminates inconsistencies, and ensures all outside contractors are bound by similar terms. Start by having your legal team put together a list of non-negotiable clauses
After you’ve created a central library of boilerplate clauses and templates, train employees to copy these templates and modify them as appropriate. Make sure they know not to remove or change the non-negotiable wording.
2. Assign contract-facing roles
Agreements can easily slip through the cracks when your organization deals with hundreds of them at once.
Choose contract managers
Without designated contract supervision roles, you run the risk of repeatedly sending out agreements that contain the same errors – or, on the flipside, using inconsistent contract clauses from one department to the next.
Assign contract duties
To connect contract data and get your agreements centrally organized, you’ll want to identify key stakeholders whose roles involve contracts, and assign them specific duties in relation to agreements.
Make responsibilities clear
For example, one contract manager should have high-level ownership of all contract processes, while team leaders should be made responsible for the accuracy and accessibility of all agreements used by their departments.
3. Automate your contract review process
In addition to high-level oversight of contract templates and deal pipelines, you should also create standard approval processes.
Create department-level approval workflows
Have department-level contract approval workflows in place to review and approve individual documents. Without a required approval process for every single contract, mistakes and inconsistencies can slip through at any point in the communication chain.
Set up automatic approval chains
To avoid accidentally sending out unenforceable contracts, the smart move is to set up an automated review workflow for all agreements. You can do so by using CLM software that includes a functionality for automatically routing drafts to approvers in the correct order, then reverting changes back to the person who drafted the agreement.
4. Negotiate contracts in real time
Attaching contract files to emails can be risky. Files can get misplaced, and email chains can get mixed up. Also, negotiating via email can take a lot of time.
Avoid negotiating via email
Messages can sit in inboxes waiting for people to okay them, review them, or sign them. This can cause big delays. The more time a contract is not signed, the higher the chance it gets lost, deleted by mistake, or forgotten.
Negotiate inside each contract
To avoid these problems, it’s best to talk about contracts in real time, right in the contract document, for example in MS Word or Google Docs. You might also consider using CLM software to share and discuss all your contracts in one place without having to use email.
Remember to track changes
When working with contracts online, people can make changes and add comments directly in the document. By doing all this in one place and in real time, you can save a lot of work.
5. Create a central contract repository
Everyone in your team should keep their agreements in one central contract repository because it makes them easier to find when needed. This helps companies stay in compliance, by enabling stakeholders to check operations against contract terms. A repository is not just for storing, however – it’s also the main source for all contract details.
Use one platform for contracts
If every department keeps their contract data in their own platform, it’s hard to use it for analysis. What’s worse, contracts kept in different places can get lost. Paper contracts kept in physical filing cabinets take up a lot of space, and are very difficult to find when needed. It’s also tough to keep track of who can access them, which is a security problem.
Use a consistent filing system
This is why it’s so important to keep all contracts in one secure digital filing cabinet. This method allows you to sort contracts into groups and mark them for easy finding. That way, anyone in your team can find them when needed.
All important documents should be kept safe with top-level security, like two-factor authentication (2FA). This can help prevent accidental (or purposeful) breaches.
6. Track and analyze contract performance
Every agreement stored in your digital filing cabinet represents a valuable source of business intelligence, if you leverage it.
Generate reports regularly
If key contract stakeholders aren’t regularly pulling reports and analyzing contract performance, teams risk missing deadlines, forgetting about recurring costs, and leaving external obligations unfulfilled – resulting in significant financial and legal liability.
Analyze contract data
A modern CLM approach can help prevent all these problems. This approach should include generating reports on contract dates, durations, deadlines, and many other values.
Review audit trails
Managers should also review audit trails for individual contracts, to pinpoint delays in approval and signing processes. Analytical insights derived from this data can help you eliminate bottlenecks and discover new opportunities to capture value.
Top 10 benefits of contract lifecycle management
Contract lifecycle management provides many important benefits for business organizations. Here’s a list of 10 CLM benefits that are particularly central:
- Centralized data: Contract management practices help centralize all contract-related data in one place, reducing the risk of misplacing important documents and improving access for all involved parties.
- Improved efficiency: By standardizing and streamlining workflows around agreements, these practices can significantly reduce the time and effort required to create, negotiate, and finalize contracts faster.
- Reduced risks: By maintaining a central repository for all agreements, strategic contract coordination can help ensure compliance with regulatory requirements and reduce legal risks.
- Better collaboration: A consistent contract pipeline can promote real-time negotiation, which can improve the negotiation process and result in more favorable contract terms.
- Increased security: Company-wide security ensures all contracts and sensitive data are stored safely, minimizing the risk of data breaches.
- Enhanced visibility: Reporting and analytics can provide an overview of all contracts, enabling better management and monitoring.
- Financial optimization: With all contract details available centrally, it becomes easier to analyze data for cost-saving opportunities and better financial planning.
- Improved compliance: Oversight can help ensure all contracts are in compliance with relevant laws, regulations, and organizational policies, thereby avoiding potential fines or penalties.
- Automated processes: Software can help automate various contract-related processes, like contract renewals, reducing manual effort and the chance of human errors.
- . Better decision making: With comprehensive and up-to-date contract data, organizations can make informed strategic decisions, from vendor selection to resource allocation.
Conclusion: bringing best practices together
Consistent adoption of contract lifecycle management best practices leads to consistent contract performance. The improvements outlined above are unlikely to have much impact in isolation – but by training teams throughout your organization on effective CLM policies, you’ll soon begin to achieve measurable results as the pieces click together.
Centralize and automate
For example, establishing a centralized contract repository will give you a place to keep the standardized templates your legal team creates. Implementing automation and real-time negotiation will also be much easier when all your agreements are in one place, and you can bring them all into the same workflows.
Assign roles and responsibilities
Meanwhile, assigning contractual oversight roles will streamline adoption, by helping hold everyone accountable for using standard templates and following the same negotiation and review processes. And by making key managers responsible for tracking and analyzing contract performance, you’ll derive greater benefit from the data in your repository.
Train your team members
In short, tools are only as effective as the training that accompanies them, and the level of adoption they receive. As teams throughout your organization grow more comfortable using your CLM workflow, continue to look for opportunities to iterate and improve by automating or eliminating unnecessary steps. Team members will thank you – and so will stakeholders who notice ongoing upticks in your company’s bottom line.