Managing commercial contracts is becoming an increasingly complex activity. The volume and variations involved can be overwhelming. Left unmanaged, contracts often fail to achieve their objectives of managing costs and limiting legal and compliance risk.
An organization can only extract the full potential of its contracts if they actively manage them. It is no longer possible for even a medium size organization to track and manage its key contracts manually or even on an Excel spreadsheet if they want to get the best results.
A good contracting process aims to create commercial value and mitigate risk for your business.
What is contract lifecycle management?
Contract lifecycle management (CLM) is the management of an organization’s contracts from initiation through the award process via implementation to termination or renewal.
The 5 stages of the contract lifecycle
Each organization has its own procedures for managing contracts and contract lifecycles, but the process can be narrowed down to five key stages.
A contract is often based on an original request from the business to engage in a working arrangement with a supplier of goods or services. This stage could be requesting a new contract, an amendment, a renewal, or even a cancellation.
Contract documents should be drafted using internally agreed standard terminology and clauses. This early stage can be sped up with pre-agreed templates, creating better quality final documents.
2. Contract collaboration and negotiation
Negotiations are likely to cover both commercial and legal terms and involve many people on both sides of the transaction. One best practice is first to agree on a strategy to manage the negotiations, including selecting team members, knowing what concessions are allowed and what is the “walk away” position.
Complex negotiations take time and effort, and situations change, so detailed records should be kept of all discussions.
3. Contract award and execution
Each party must sign the final agreement, either on paper or digitally. Most enterprises have rules about who may approve each contract depending on the risk, value, and other factors.
These rules are typically set out in a “delegation of authority.” Contract commitments need to be communicated to all users to avoid issues and conflict.
4. Contract administration
Each party must comply with its rights and obligations during the contract period. This includes continual monitoring of performance and managing problems of quality or disputes.
Poorly managed contracts mean that renewals or expiry dates are missed, and amendments are lost, which can lead to supply failures, customer claims, or even the risk of reputational damage.
5. Contract close-out or renewal
When a contract expiry date is due, various actions can be taken. The contract can be renewed with the same conditions, re-negotiated, or terminated. Expired contracts need to be closed out and all users notified.
In some instances, the supplier has continuing obligations after the end of a contract, e.g., land rehabilitation after mining operations.
Contract management systems
Lack of online access and visibility into contract terms and obligations are two main challenges for users. Most organizations struggle to manage their contracts database effectively without using technology.
Best practice in contract management requires the application of software tools or a CLM packaged solution that provides both efficiencies and visibility while minimizing risk.
The IACCM identifies five best practices in contract management facilitated by the use of technology:
Use a central repository for all contracts for best access
Use standardized templates for consistency and ease of use
Standardise the negotiation process
Build in compliance at every step of the process
Measure performance and track costs.
Key features of contract management software
There are hundreds of contract management software solutions (CMS) suppliers in the market, each offering a wide range of benefits and features. It is essential to select the right solution with only the functionality you need at a price you can afford. Some of the most valuable features are:
Document management: a central repository for current active contracts, templates, contracts history
Contract search: Indexed search facility to find terms within a contract
Contract drafting: using a pre-approved clause library, digital signatures, and industry-specific templates
Alerts and notifications: advice on milestones, including escalation, renewal, and expiry dates
Compliance: version control and audit trail; tracking adherence to regulatory and statutory requirements and any deviations
Reporting: customized reports on supplier performance and contract status on a visual dashboard
Trends in contract management
Innovations and technology are turning contract management from a process into a source of added business value. Here are key trends that are impacting contract management.
Increasing focus on collaboration
A contract is an agreement between one or more parties. A mutual commitment to the ongoing success of the relationship during the contract term is a must. Early stakeholder engagement has been identified as a success factor.
Automation and data analysis
Cloud-based solutions now offer sophisticated analysis tools to evaluate supplier performance, track regulatory compliance and provide calendar management. Artificial intelligence (AI) can sift through similar contracts from the past, identify patterns and proactively recommend suitable clauses and standard definitions for new or revised contracts.
Reducing risk and governance
In contract management, governance is about legal and policy compliance, engaging in fair transactions, and being honest and transparent in contract negotiations. Failure to follow these steps is a high-risk behavior that can impact profitability and reputation.
There is no doubt that contract management is a time-consuming but vital activity in every organization. Automating major parts of the process can avoid loss of documents and data, provide improved access, and limit errors, providing reliable and efficient service to the business.