What is Contract Lifecycle Management (CLM)?

What is contract lifecycle management and why is it important? Explore more with Tipalti’s procurement solutions today!

Traditionally, buyers and suppliers relied on paper contracts to conduct business. While this is still practiced, referring to physical documents for updates and compliance takes a lot of work. Both sides are bound to make mistakes, leading to costly disputes and potential losses.

This is why modern times have seen the emergence of technology for streamlining contract management, also known as Contract Lifecycle Management (CLM).

In this post, we will explore the basics of CLM and how it can help procurement companies simplify their contract processes. We will also discuss its benefits, challenges, and factors to consider when choosing CLM software.

What Is Contract Lifecycle Management?

Contract lifecycle management is the process of managing every stage of a contract’s life, from initial drafting to final execution and post-contract management. This includes tracking all stakeholders involved in the agreement, monitoring contractual obligations, and ensuring compliance with applicable laws and regulations.

CLM helps organizations maximize the value they derive from their business contracts while minimizing the risk of non-compliance or failure to meet contractual obligations.

The Difference Between Contract Lifecycle Management and Vendor Contract Management

Contract lifecycle management is a comprehensive approach to managing all aspects of contracts, from initiation through completion. It covers the entire contract process, including drafting, negotiation, and execution.

CLM software systems automate many of these processes and provide visibility into performance metrics, allowing for better decision-making throughout the contract’s life.

Vendor contract management focuses more on developing and maintaining relationships with vendors – the organizations or individuals who supply goods or services to an organization.

Vendor contract management covers everything from researching potential vendors to negotiating terms and conditions in contracts, monitoring vendor performance, resolving disputes, and renewing existing agreements when needed.

The primary purpose of vendor contract management is to ensure that the organization gets the best possible value for its money when working with vendors.

Essential Steps In the Contract Lifecycle Management Process

The specific steps for a contract management process may vary depending on the type of contract and industry, but there are essential steps to every contract lifecycle. Let’s explore them in more detail to understand how the process works:

1. Contract Request

Contract requests involve identifying and defining the purpose of contracts, as well as determining who will be involved in creating or signing them. The goal here is to accurately describe what needs to be done and by whom.

This means that all stakeholders should be consulted to ensure everyone agrees on what must happen for a contractual arrangement to take place.

Additionally, a clear understanding should exist between all parties regarding potential risks and benefits associated with entering into the agreement. Once these details have been established, a formal request can be drafted for approval from the necessary signatories.

2. Authoring

Authoring or contract creation is the second critical step in the contract lifecycle management process. This stage involves drafting a new contract or amending an existing one. During this phase, all parties agree on key terms and conditions of the agreement, including pricing, payment methods, delivery timelines, and more.

The legal team takes over to ensure that all clauses comply with applicable laws, regulations, and internal policies while protecting their interests as well as those of other stakeholders. They check for any potential risks associated with entering into a contractual relationship before it is finalized. 

3. Negotiation

Negotiation involves both parties of a contract discussing and agreeing on terms, conditions, and prices before signing off on an agreement. Negotiations can be conducted either face-to-face or online via email, video conferencing, etc., depending on the preference of both parties.

During the negotiation process, each party needs to understand their own interests and those of the other party to reach a mutually beneficial outcome. The point of this phase should be to create win-win outcomes that are satisfactory to all involved parties by finding common ground and compromising on specific terms.

Negotiations can be long and drawn out, with both parties making their respective cases and negotiating different points to arrive at an agreement that works for both sides.

4. Review or Approval

After negotiation is the approval process, which involves having both parties of the contract review and approve the agreement before it can be executed. The purpose is to ensure that everyone involved in the contract understands, agrees to, and supports all terms outlined in the document.

This contract approvals stage allows any potential issues or discrepancies that were not noticed during negotiations to be addressed before signing so that there are no misunderstandings once it has been signed.

It helps avoid future disputes between parties by making sure everyone is clear on what exactly they agreed upon before moving forward with executing the contract.

Depending on the type of agreement, both parties may need to provide proof of their ability to deliver on their contractual obligations before the signing is completed. This could involve providing a bond or other security measure for each party to feel confident that they will receive what has been agreed upon in writing.

5. Execution

We’re now in the fifth step of lifecycle management, where the actual execution of the contract takes place. During this step, all parties involved sign and exchange copies of the agreement to make it legally binding.

Furthermore, any payment terms are also finalized at this stage, such as deposits or down payments that may be necessary to secure services rendered or goods purchased.

6. Storage

Contract storage involves securely storing a signed copy of the executed contract and associated documents for safekeeping in an organized manner. By archiving contracts, businesses can keep track of their contractual obligations and ensure compliance with legal requirements.

This is typically done using CLM solutions or document management systems, which are designed to store contracts and other documents in a central repository. Storing contracts in such allows for easy access to all relevant information when needed for reference or review purposes.

Storage helps facilitate smoother operations, as well as reduce time spent on manual searches for pertinent files and documents. It can also provide valuable contract data that can be used to improve efficiency and optimize future negotiations with partners and vendors.

7. Search and Retrieval

For contracts in storage to be easily accessible, the appropriate search filters and retrieval methods must be implemented. It requires setting up a system that allows users to find contracts quickly, either through keyword searches, key dates, or other filtering criteria. 

Furthermore, this step typically includes an audit trail so that changes made during the search or retrieval process can be tracked.

Searching through physical documents manually is time-consuming and inefficient; hence, implementing the appropriate software for digital storage of contracts with built-in search functions will make locating documents much easier and faster.

Ensuring accurate searching capabilities and a secure retrieval process is essential to protect confidential contract information.

8. Reporting

Once contracts are approaching the end of their lifecycle, they must be reported on to ensure that all parties comply and that there are no outstanding issues. 

Reporting is critical because it provides an accurate picture of the current state of each contract. This allows organizations to quickly identify any problems or opportunities for improvement, as well as track how effective their contracts have been over time.

Reports can also provide visibility into where resources need to be allocated more efficiently or if additional services need to be included within existing contracts. Ultimately, reporting helps organizations make informed decisions about their contracts and ensures that everyone is operating under the same set of expectations.

9. Renewal or Disposition

In this step, management teams decide whether to renew or terminate an existing contract. 

The decision should be based on the analysis of the performance of both parties, as well as their ability to meet all contractual obligations going forward. If contract renewal is chosen, any necessary changes should also be negotiated at this stage to ensure that both parties are satisfied with the new terms and conditions.

On the other hand, if termination is decided upon, then efforts must be taken to ensure that all remaining obligations are met, and any necessary financial arrangements are made. 

Benefits of Contract Lifecycle Management

The use of contract lifecycle management has become increasingly necessary in today’s business world, and it’s easy to see why. Here are the benefits CLM can provide to your business, from streamlining contract processes to enhancing visibility.

Streamlined Procurement Processes

With an effective CLM system, organizations can automate and streamline tedious manual tasks associated with contracts, such as document creation, review, approval, execution, and archiving. Automating these processes reduces paperwork and eliminates errors that can occur when manually processing documents.

Streamlining the process also saves time for both buyers and sellers because it allows them to quickly review proposals, approve contracts, and execute them promptly. 

Furthermore, by digitizing contract processes, a company can better track all activities related to managing procurement, which provides greater visibility into operations while ensuring compliance with laws and regulations.

Improved Compliance

CLM systems have built-in features that ensure legal and regulatory compliance, such as pre-approved templates, clauses, alerts for expirations/renewals, automated audit trails, customizable reporting capabilities, and more.

This helps organizations stay on top of their contracts throughout the entire lifecycle while reducing the risk of non-compliance or penalties due to missed deadlines or overlooked regulations.

Additionally, CLM systems provide access control to limit who has access to specific contracts and information within them – a key element in maintaining secure data management practices. 

Cost Savings

Having a streamlined and organized approach to managing contracts allows companies to reduce their overall expenses. They can avoid unnecessary costs by easily reviewing where they are underspending and overspending. 

Also, through automated processes like automatic reminders for expiration dates and renewal dates, businesses can avoid costly mistakes associated with late payments or missed invoices or deadlines.

Lastly, contract automation tools help management teams negotiate better terms with suppliers by providing them with data-driven insights into the current market rates for specific goods and services. This helps them get more favorable prices from vendors, which can further lead to significant cost savings across the board.

Improved Negotiations

CLM software gives negotiation teams real-time access to information about their suppliers’ pricing and terms for each specific product or service being negotiated. This transparency allows buyers to more accurately assess value and make better decisions during negotiations.

Automation capabilities such as an automatic request for proposal routing also help ensure that everyone involved in the agreement is made aware of changes during negotiations so that they can be addressed quickly and accurately.

This can help keep all parties involved in the agreement satisfied with their negotiations, resulting in better contracts for everyone.

Enhanced Visibility

Contract lifecycle management enables organizations to gain greater insight into the entire contract process and its associated data, from inception to completion. This gives procurement teams a holistic view of their contracts and helps them better track the contract milestones of each agreement.

Enhanced visibility also increases transparency between stakeholders, allowing for improved communication and collaboration throughout the contract process. 

Moreover, it reduces manual processes by providing real-time updates on changes or developments related to contracts, helping organizations respond quickly to any situation that may arise during negotiations or execution. 

What to Look For in a Contract Management Solution

Choosing the right contract management solution in procurement can be an overwhelming task. With so many options available, it’s important to understand what you’re looking for and how to evaluate different solutions.

This section will provide guidance on what features to look for when selecting a contract management solution to ensure your organization is getting the most out of its procurement processes. 

  • Usability: Look for a system that is intuitive and easy to use, with an interface design that is intuitive and user-friendly.
  • Comprehensive Features: Ensure the software covers all contract lifecycle management processes, from drafting or negotiating contracts through performance monitoring, reporting, and archiving of contracts after completion.
  • Automation Capabilities: Look for software that can automate key processes, such as contract renewal notifications or auto-populating data fields. 
  • Security Protocols: Make sure the software has robust security protocols in place to protect confidential data related to your organization’s procurement activities.
  • Scalability & Flexibility: Consider whether the software can scale as you expand operations or needs change over time; ensure it can accommodate any changes.
  • Integration Capabilities: Look for a system that can integrate with other applications that you use, such as accounting software, enterprise resource planning systems, and more.
  •  Cost & Support Services: Evaluate the cost and support services associated with the software; ensure it fits within your budget and provides adequate customer service or technical assistance when needed.
  • Vendor Reputation: Research the vendor’s reputation to ensure they have a good track record in delivering quality products and services.

Common Challenges Encountered in CLM

While CLM solutions have their advantages, common issues may also arise. Let’s dive into these challenges to help you understand how you can better manage your CLM systems and processes.

Unclear Roles and Responsibilities

Organizations often struggle with assigning the right personnel to manage contracts and maintain oversight over the entire process. This can delay contract negotiations and cause compliance issues. 

Inconsistent Processes

Without a unified approach to contract management, organizations may experience inconsistencies in how they create, execute, monitor, and maintain their contracts. This can lead to confusion among parties involved in the contract lifecycle process. 

Improper Contract Storage

Organizations need to store their contracts in an organized and secure manner. Without proper storage, organizations may not be able to access or update their contracts when needed, leading to delays and potential risks associated with outdated documents.

Poor Communication Between Stakeholders

Contract lifecycle management systems often involve multiple stakeholders, including internal teams, external vendors, partners, and clients, which increases the complexity of the process.

It’s difficult to ensure that everyone understands their roles and responsibilities regarding the contracts without proper communication among all parties involved.

Contract Errors Due to Miscommunication

Due to the complexity of contracts, there is always a potential for errors due to miscommunication between parties involved in the contract lifecycle process. These inconsistencies can result in problems such as contractual disputes, financial losses, and legal action

To prevent miscommunications from causing contract errors, it is important that both parties clearly understand all terms of the agreement before signing, including any changes or amendments made during negotiations. 

Risk Management

Organizations need to be able to identify potential risks associated with their contracts so they can take proactive steps to mitigate them before it’s too late. Without proper risk assessment tools in place, organizations may miss opportunities to reduce exposure or prevent problems from occurring in the future.

Security Issues

Contract lifecycle management systems often involve sensitive information. Giving access to too many business users or failing to implement proper security protocols can lead to data breaches, which can be costly and damaging to an organization’s reputation.

Bringing It All Together

In summary, contract lifecycle management is an essential tool for businesses of all sizes and industries. By automating contract processing and providing increased visibility into the contracting process, CLM can save time, money, and resources while reducing risks associated with manual contracts.

Aside from streamlining processes, CLM can help ensure compliance with industry regulations and provide valuable insights into contractual data. 

With the right implementation and support from a trusted provider, businesses can also experience improved efficiency in their contract management processes while gaining better control of their agreements.

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