Fortune 1000 enterprises have as many as 20,000 to 40,000 individual contracts in place at any given time. Healthcare organizations coordinate contracts for medical professionals, third-party billing, cybersecurity, cloud storage, medical supplies, and countless other essentials. When you’re dealing with 10,000-plus contracts, even modest efficiency gains, labor reductions, and cost savings per agreement can have an enormous financial impact. Improving your contract lifecycle management capabilities helps you maximize the value of organizational resources.
What Is Contract Lifecycle Management?
Contract lifecycle management involves designing, organizing, tracking, and monitoring business agreements from start to finish. The CLM process aims to streamline every step in the contract lifecycle, making it easier to create agreements, reducing the time and resources required, and improving contract compliance rates. Enterprise organizations benefit from contract management in legal, sales, HR, finance, production, logistics, and many other departments.
Common Types of Business Agreements
Contracts play a massive role in business, with over 75% of transactions or operations involving business agreements, such as:
- Sales agreements
- Employment contracts
- Equipment or property leases
- Non-disclosure agreements
- Purchase agreements
- Vendor service agreements
Industry-specific contracts include Business Associate Agreements for HIPAA compliance in healthcare.
What Are the Phases of the Contract Lifecycle?
The contract lifecycle varies by organization, industry, business size, and contract complexity. In general, the process includes nine steps.
1. Contract Planning
First, organizations must determine the purpose of the contract in question. It doesn’t take long to plan simple agreements, but complex undertakings like multi-phase construction projects, long-term vendor service agreements, or purchase agreements worth millions of dollars require careful alignment with your company’s goals and priorities.
Part of the planning phase includes developing templates for each type of agreement your business uses. This way, you have a baseline with the necessary legal terminology for hiring employees, preparing NDAs, or ensuring regulatory compliance. From there, you can add details such as product descriptions, services required/provided, pricing information, and delivery timelines.
2. Negotiation
Not all contracts require a negotiation phase, but many do. Contracts must be clear and specific, outlining the responsibilities of each party and any consequences or penalties for noncompliance. Effective contract negotiations reduce the risk of noncompliance, help you protect your business interests, and confront potential issues head-on, avoiding business disruptions down the road.
3. Review and Approval
The higher the risk or importance of a contract, the more important executive review becomes. While the legal department needs to sign off on every agreement, it’s also vital for decision-makers to provide input on contracts that impact their operations. For example, a CISO would normally oversee contracts for third-party networking services, but it may also be necessary to get approval from the HIPAA Security Officer or compliance committee.
4. Contract Creation
This phase involves the actual creation, deployment, and storage of contracts. Digital files and PDF tools have made the process easier, but it can still be cumbersome.
For one thing, it’s vitally important to keep track of document versions and changes, ensuring your team uses the correct contract version for the finalized agreement. Otherwise, coordinating with relevant parties inside and outside your organization can cause headaches and eat up valuable time.
5. Execution and Fulfillment
The execution stage involves signing the agreement. From this point, the document becomes legally binding on both parties. New workers begin employment per their contract, your business receives the agreed-upon services or products from suppliers, or you deliver goods and services to new customers.
6. Record Storage
Even though it can seem like a small thing, contract storage is one of the most important steps of the contract lifecycle to get down correctly. After all, how can you manage an agreement if you don’t know where to find it or how to locate the key details?
Companies frequently struggle to know where to store contracts securely after signing. Approximately 40% of business professionals don’t know who is in charge of contracts and almost half are unsure of their company’s contract storage policies.
7. Contract Monitoring
CLM doesn’t stop after a contract gets signed. The process is practically just beginning. A critical aspect of contract management involves making sure your company receives the products, services, or benefits promised.
The monitoring phase means different things depending on the contract and its purpose. For purchase agreements, you need to check order fulfillment timelines and product quality to protect your supply chain and maintain a good relationship with customers.
For IT services or cloud processing, you may need to perform quarterly or annual audits for regulatory compliance. In the case of high-risk data, you may need to require 24/7 monitoring of the vendor’s network infrastructure.
8. Contract Closure
Once the terms of the contract have come to an end — usually based on time, order fulfillment, or project completion — there should be a pre-closure review phase. This involves checking that all requirements were met satisfactorily and goods or services were delivered as agreed. Depending on the nature of the contract, this phase may involve a final quality audit, inspection, or performance review.
9. Renewal and Renegotiation
As business agreements approach the end of their lifecycle, parties must decide whether to renew or extend the arrangement. Some negotiations and amendments to contract terms are common before renewal, but the process is typically much less time-consuming than at creation, especially if the business relationship was advantageous for both parties.
How Do You Implement CLM Solutions?
Modern CLM frameworks provide better results with lower costs. Improvements are worth the investment.
Coordinate With Contract Stakeholders in Your Organization
To be effective, contract management needs to be tailored to your organization’s operational reality. You have to balance risk mitigation and security needs with cost concerns and available resources.
It’s easier to do this with data-driven decisions based on quantitative assessments and qualitative feedback. Create a list of all contract types and their importance to business operations.
Determine where the majority of your time and resources are going currently for contract management. Does this usage match up with your organization’s goals? Many companies are surprised to find that 35% of their time goes toward drafting and negotiating agreements, and just 3% to overseeing contract compliance.
Identify Pain Points and Opportunities for Efficiency Gains
As you engage with stakeholders from sales, cybersecurity, procurement, legal, and other departments, build a map of contract management complaints, pain points, and bottlenecks. Is there confusion over responsibilities? Does it take too long to get approval? Are contract errors costing you money or triggering regulatory penalties?
Once you know where your largest issues lie, you can customize the CLM program to correct them. Sometimes, clearer policies are the answer. Other times, you need technological, governance, or risk management improvements.
Where do you start? High-risk contract compliance issues should come first, like cybersecurity vulnerabilities or regulatory requirements. Next, focus on the improvements that are easily attainable or that overlap closely with your company’s long-term goals, such as eliminating data silos.
Use Contract Lifecycle Management Software
Advanced software platforms improve the contract lifecycle process in several ways:
- Simplifying document tracking, updates, and version control
- Allowing teams to search contracts for specific language or clauses
- Automating contract storage and document workflows
- Streamlining the negotiation, review, and execution phases
- Enhancing cybersecurity with resource monitoring and access logging
- Providing in-depth analytics and compliance tracking tools
CLM platforms allow your organization to take full advantage of the digital nature of modern contracts. Instead of waiting days for each negotiation round, you can send contracts and supporting paperwork in minutes. Workflow automation lets you predefine where newly created contracts should be stored and who receives a copy.
Create a Centralized Repository for Business Agreements
Siloed data is a bad idea for enterprise businesses. It slows down contract management, causes document retention problems, endangers cybersecurity, and risks GDPR violations. When no one is sure exactly where sensitive data is stored, the risk of information theft, breaches, and ransomware attacks is greater.
This doesn’t mean putting your eggs in the same basket. With microservice infrastructure, you can build a centralized repository for contracts while still following data security best practices like segmentation and multifactor authentication. Role-based access control allows each department’s personnel to access the necessary records and stay on the same page with the latest version of documents.
Data centralization reduces the time needed to create, locate, and review contract compliance. Instead of Department A having to contact Department B and wait days to receive a specific business agreement, CLM personnel can navigate freely to the required data. Any document changes automatically track who performed the revision, the revision date, and the latest version.
Standardize the CLM Program
Outdated management practices belong in the past, like leaving contract decisions up to individual department heads. This only increases confusion and makes it harder to find relevant agreements when a manager quits.
A good CLM program needs standardized definitions and clear policies. It should answer the following questions:
- What individual or role is responsible for drafting new contracts in this department?
- Who is responsible for contract revisions and approvals?
- What standards determine that a contract should be approved, modified, or rejected?
- What certifications or minimum standards does our organization require from vendors for each area of business?
- What is the organization’s policy for contract durations, automatic renewals, and compliance audits?
- How should the CLM team respond in the event of contractual violations?
While there are situations where flexibility is appropriate, organizations improve efficiency by standardizing CLM processes as much as possible. Don’t be vague. Provide specific thresholds for actions, such as defining what type of violations warrant contract termination versus minor corrective feedback.
Establish Metrics for CLM Performance Monitoring
Contract lifecycle management provides better results when you have a baseline to compare against. Here are a few key metrics for CLM:
- Legal involvement rate: Percentage of contracts that require legal team intervention
- Negotiation rate: Percentage of agreements that require negotiation
- Redlining rounds: Average negotiation rounds necessary to close contracts
- Average days to execute: Time from contract planning to the execution phase
- Compliance with obligations: Percentage of contract requirements successfully delivered
- Contract milestone completion: Objectives reached and progress toward project completion
CLM analytics can reveal trends that are slowing down contract execution. For example, if too many agreements are complex or require extensive negotiation, perhaps you need a template that better fits this category of contracts. Or perhaps your vendor selection process needs to change so candidates are more closely aligned with your regulatory needs.
Track Adoption of CLM Systems
Internal metrics are just as important for contract management success. CLM tools are only valuable if your staff understands how to use them correctly and follows through.
Why Is Contract Lifecycle Management Important?
Time is money, whether your team is drafting a sales agreement or checking off regulatory compliance tasks. If you’re not careful, the time spent negotiating, reviewing, and approving contracts can significantly reduce the contract’s total value.
According to a recent study, businesses that neglect contact management lose nearly 9% of agreement value over time. Legal teams may spend hours (at $200+ the hour) combing over agreements to find a specific clause or stipulation.
Contract leakage also happens when there’s no oversight or follow-through for enforcement. Are you unwittingly overpaying for services rendered? Is your vendor slowing down your supply chain and contributing to downtime or reduced efficiency? The only way to know is to regularly audit vendor performance and maintain good interdepartmental communication on contract compliance.
For businesses in the healthcare, finance, defense, manufacturing, or other heavily regulated industries, CLM is also important for avoiding costly compliance violations. “It was the vendor’s fault” doesn’t fly with state or federal agencies when there’s a breach of consumer data or privacy laws. Your organization can also be liable for third-party fraud, defects, and similar harms.
It’s not enough to take contracts at face value. You need to verify compliance, but in an efficient way.
How Can Your Organization Improve Contract Lifecycle Management?
If you have any vendor or employee relationships, your organization already uses contract lifecycle management in some form. The problem is that traditional CLM methods are time-consuming, inefficient, and poorly coordinated. Discover the benefits of modern contract management software for workflow automation, regulatory compliance, document storage and retrieval, change controls, and other needs. Learn more about Compyl today.
