The contracting process is the bedrock of every business relationship. It directly affects the revenue and expenditure budget of any organization. However, it’s regrettably one of the most neglected processes in most firms.
Most organizations are yet to automate the binding contracts management approach. Many are stuck with the traditional paper and ink-based methods. However, companies like ContractSafe.com are changing the playing field.
Contracts are constantly reviewed, templates outdated, and language modified to meet prevailing circumstances. However, these factors inherently pose a security risk for the organization in question.
What informs the need for an automated contract Lifecycle Management process? The business space is a rapidly changing area with dynamic customer expectations, volatile market trends, and a disrupted supply chain.
These features inform the dire need for business entities to change their view of contracting management. An efficient contract lifecycle management leaves no room for ambiguity. Ambiguity may lead to significant company loss and liability.
What is CLM?
CLM stands for Contract Lifecycle Management process. CLM refers to the effective management of contracts, agreements and relationships between companies and other entities. It covers the proper planning of six stages. It realizes reduced legal, financial, and procurement risks that may compromise the profitability of a firm.
The unstructured contract management process exposes an organization to financial and operational risks.
There exists a set of frameworks in CLM. However, the need for each stage can differ from one organization to another. The difference depends on their procedures and unique challenges. The following are the critical stages in the contract lifecycle management process:
Stage 1: Contract request/initiation
First, identify your business objectives and gauge the risk appetite for all the involved parties. If you’re comfortable with your findings you can initiate or accept the request by the concerned parties.
Contract Lifecycle Management begins when one of the signing parties requests the other for the contracting process. One party may also initiate the contracting procedure and later use that information for drafting the document. This is termed the birthing of Contract Life Cycle Management and is the first step to the process.
What are the inputs?
The contract should have critical information about its initiation, contract beginning, and ending date. It also captures any milestones realized by the parties that inform the contract initiation process.
What are the outputs in the contract request?
CLM request information is received and saved in software form. It is located in the management dashboard for visibility by the management team to usher the next stage.
It also involves audit trails.
Stage 2: Contract authorization
The contract drafting stage is also known as contract authorization. It is a crucial step because it spells clear expectations for the parties involved.
Here, the contract document is generated and packaged under clauses, terms and conditions. At this stage, the contracting parties and approvers are defined and determined. The contract signatories’ details and the signing parties’ crucial details are included in the document.
The most critical input in stage two is the contract request information. Inconsistency in the language used in the contract can potentially lead to significant revenue loss and other related liabilities when explored for loopholes.
Contract authorization document is presented in Adobe PDF or Microsoft Word. It is also saved in the company’s document management solution for visibility and formatting purposes.
Stage 3: Negotiation
The negotiation stage is characterized by a lot of back and forth communication between the contracting parties. To realize mutual consensus, there must be a simultaneous comparison of the redlined document.
An efficient contract management solution comes with in-built red-lining properties and a side-by-side version for clear comparison. It also allows for review by all the stakeholders.
Stage 4: Approval and Legal review
A contract document must receive multiple approvals from all relevant functions in the organization. It’s a time-consuming process that makes the contracting process longer and tedious.
However, effective CLM software comes with dynamic approval functionality that helps to shorten the process. Users can create series or parallel approval workflows using tools such as contract type, dollar value, and industry of operation.
When the approvals are done, contract execution can begin immediately.
Stage 4: Contract Obligation
Contract execution does not characterize the closure of the contract lifecycle management process. Post-execution is essential to ensure the undersigning parties meet their deliverables and fulfill their obligations are bound by the contract.
The deliverables are judged against performance index scores, timelines, and payments. A critical component in post-execution is contract tracking because it ensures compliance to the binding document.
Using contract management tools allows visibility and control using features like dynamic workflows, milestone tracking, automated alerts, and analytics.
Stage 5: Audit and reporting
Auditing is a crucial element in the contracting management process. Contract audit reports are needed to ensure compliance and mitigate exposure to any financial or operational risk.
Traditional manual audit and reporting is prone to error and does not offer the best performance index. Applying an automated audit procedure allows one to track the audit report and generate real-time, on-demand reports.
Stage 6: Termination and renewals
The contracting process has an opening and closing date. When the closing date approaches, the termination and renewal phase offers the opportunity to confirm revenue maximization. The contracting party can generate automated alerts with reliable CLM solutions. A newer version can be derived from an existing contract in lesser time.
Various stakeholders are involved at different stages of a contract lifecycle management process. The stakeholders involved include legal, sales, finance, and procurement/supplies. Each of these has a significant place in the contract lifecycle management process.
Business challenges characterized with manual contract
There are several challenges linked to the
- Poor visibility and control
- Inability to manage change
- Lack of standardization
- Low process efficiency
- Contract non-compliance
A contract lifecycle management process provides the ability to deliver more revenue, streamline contract drafting, negotiations, and signing. Forward-thinking many companies are embracing online e-signatures and redlining to help reduce costs, maximize profit and mitigate risks.
Cloud-based solutions are enabling users to create, collaborate, sign, store and manage their binding documents. As businesses grow contract management helps save time. This saves time spent on administrative tasks allowing more on profit maximization.