If you work with contracts, you know how important they are to the overall structure of your company. They affect sales relationships, employment, and timelines for various milestones and obligations that must be met.
That’s why all involved parties review each one and make changes before they’re executed. Because of this, companies ensure the entire review process, pre- and post-execution, is clearly documented so all parties are clear on their obligations throughout the relationship.
While this seems like a way to make sure that the process flows without hiccups, it leaves room for errors that can be costly to a company down the line. In the past, contracts were written, reviewed, and approved manually through email or physical handling. But as contracts made their way through the approval process, they could reach delays, bottlenecks, or squeak through with unapproved legal language.
To avoid these mistakes, more and more companies are investing in contract lifecycle management (CLM) tools in order to streamline the process and create transparency for everyone involved. These tools keep the contracts in a central repository where everyone can see where the contract is, what changes have been made, and who the next reviewer is. In fact, research and advisory company Gartner found that the added transparency and efficiencies are contributing to an 18% market growth rate for CLM tools.
You might be looking to have your company adopt a CLM tool as well, but know that some decision-makers might be on the fence. Our whitepaper Making the Business Case for a CLM Solution shows how to make a business case to demonstrate how a CLM solution will help your organization improve operational efficiencies, reduce risk, and optimize profits throughout the contract lifecycle.
Contract lifecycle management steps
From initial requests through execution, there are a number of areas that present the potential for bottlenecks and the introduction of risk:
Requests and authoring: Contract creation represents the starting point for potential contract risk. Lack of guidance and standardization opens the door to non-compliant legal language and exclusion of crucial clauses for adequate protection from legal repercussions. Manual processes result in inefficiency and long lead times for potentially non-compliant documents.
Negotiations, approvals, and execution: A manual path to contract execution is often chaotic and disorganized. Attempts to navigate through several negotiations and approvals without transparent adherence to business rules tend to result in lost edits and failure to capture all required approvals.
These inefficiencies contribute to:
- Extended cycle times that can slow the flow of revenue
- Lack of audit trails necessary for evidence of contract management compliance
- Disorganized storage of executed contracts, leading to difficulty in future contract discovery and obligation management
Obligation management and renewals: Post-execution contract obligation management represents several obstacles. A vast contract portfolio requires a tactical solution and the resources to identify and track an overwhelming number of obligations. If mismanaged, each carries the potential for noncompliance-based fines, unintended renewal impacts, or legal repercussions.
CLM tools address risks and offer solutions
For each hurdle above, a CLM tool offers a solution:
- An integrated clause library, in conjunction with templates configured to fall in line with unique business rules, ensures the use of preapproved language. Edits to any clause are applied to all appropriate contracts where the clause is in use.
- A configurable, rule-based workflow engine that automates compliance with organizational policy to ensure contracts process through each required step for review, creating transparency about current and upcoming reviewers. This avoids bottlenecks and hold-ups throughout contract negotiations.
- The automated capture of contract metadata paired with the follow-through of actionable, right-person, right-time alerts helps avoid fines, meet deadlines, and optimize the contract. This helps avoid several issues, including:
- Money left on the table due to overlooked incentives
- Penalties for late delivery or noncompliance with contract obligations
- A lacking contract repository requiring a lengthy and potentially costly contract discovery exercise
ROI for a CLM solution
When talking about adopting a CLM tool with the decision-makers in your organization, make sure to inform them that on average, it will:
- Improve productivity and efficiencies by reducing cycle time by 25% - 50%
- Save costs by reducing the risks of penalties
- Optimize profits by reducing the amount of revenue spent on ineffective contract management costs by 9.2%
Preparing for implementation
First, you’ll need to start documenting key contract details, a start-to-finish workflow, and contract portfolio details:
- Total number of contracts and location(s) in which they are stored
- Total value of all contracts
- Total number of vendors and their associated contract value
- Contracts up for renewal within the next three months by end date
- Contract summary by department
- Key contract milestone dates and upcoming obligations in the next quarter
- Breakdown of buy-side vs. sell-side contracts
Also, document the workflow process
- Who has the ability to create a contract?
- How are standard and approved terms, clauses, and conditions selected based on contract type?
- How are deviations from the standard terms, clauses, and conditions approved?
- How many people handle the document from point of creation to execution? Which departments are they in, and in what order do they fall in the process?
- What is the average cycle time? Are there bottlenecks in a regularly recurring part of the process?
- How do all relevant parties know where the approval process stands as a contract progresses through to execution?
- What is the process for tracking obligations and compliance-related milestones to avoid penalties for late delivery?
- How is the organization preventing incentives or bonuses in multiple contracts being offset or contradicted by other clauses elsewhere in the documents?
- Are redundant systems in use for filing and managing your present contract volume?
Don’t assume you will be able to answer each of these questions. In cases where you are unsure or discover missing processes, you have uncovered CLM process weaknesses that can ultimately support your case for a CLM solution
CLM solutions are not one-size-fits-all tools that can be used by anyone. You’ll need to work with key personnel in each department to see what specific features you’ll need at your company.
Click here to read Making the Business Case for a CLM Solution. Then contact us to learn more about how Wolters Kluwer’s ELM Solutions can help you make the business case to transform your contract management processes.