A Complete Guide on Contract Lifecycle Management (CLM)

Importance and Benefits

Formal contract management has been around for ages but has significantly evolved as businesses grew more complex and globalized. Contract life cycle management has become integral to optimizing operations, ensuring strategic goals can be achieved. Here are some benefits of contract lifecycle management:

• Increased efficiency – Streamlined workflows (e.g., predefined clause drafting, automated approvals, quick document searches) produce bottlenecks and subsequent administrative burdens. It enables teams to focus on strategic activities rather than manual tasks.
• Better risk mitigation – By having a comprehensive view of all contracts, organizations can promptly identify and mitigate risks associated with specific agreements.
• Stronger relationships – Centralizing contract management facilitates collaborations among internal teams and external partners, leading to smoother negotiations. When everyone involved feels more secure, they become more productive.
• Reduced costs – Since there’s no need for manual intervention, companies can cut down on labor costs significantly. Fewer errors also mean fewer reworks or modifications throughout the contract lifecycle management stages, which takes time and effort.
• Enhanced compliance – Regular audits of contract terms against applicable laws help maintain adherence to regulations. It reduces non-compliance risk, which may amount to expensive fines and grave penalties.

Common Challenges in Managing Contract Lifecycles

Managing contracts has become increasingly challenging for many organizations today. Numerous factors contribute to this problem, and companies must understand and recognize these contract lifecycle management challenges:

• Increased contract volume – Organizations manage larger contracts, overwhelming existing processes. This may lead to inefficiencies that further complicate workflows.

• Contract complexity – Contracts are becoming more intricate, often involving multiple parties across different jurisdictions, and with complex provisions. All these make it difficult to manage and enforce agreements effectively.

• Limited visibility and reporting – Without transparency into contract statuses and risks, companies can’t make the right decisions regarding corrective and preventive actions and renewals or termination.

• Poor collaboration across teams – Disconnected teams that work on different parts of the contract lifecycle will result in miscommunication. Aside from causing confusion and arguments, it could lead to delays, missed deadlines, and lost opportunities.

• Manual processes and inefficiencies – Managing contracts through spreadsheets, emails, and traditional paper documents is time-consuming and prone to errors.

Automating the Contract Lifecycle Management Process

Automating CLM can efficiently address the challenges previously discussed. Leveraging software solutions with features like pre-set reminders for key milestones, centralized repositories, and quick searches can help streamline contract lifecycle management workflows.

Process of Automating Contract Lifecycle Management

Step 1: Request for a formal contract.

Formalizing the request sets the foundation for a successful contract. It involves identifying a specific business need that requires a contractual agreement, defining the scope of work with deliverables and expected outcomes, and identifying those involved in the negotiation and approval process.

Utilizing digital forms and automatically routing this to appropriate approvers streamlines the request process and ensures open communication for efficient decision-making.

Step 2: Create a standardized template.

Often done for common contract types, standardized templates ensure consistency and efficiency in creating contracts and provide a strong starting point for negotiations. Most importantly, this reduces the time and effort spent drafting new contracts from scratch.

Step 3: Author the contract.

The actual content of the contract is drafted in this step. With the standardized template, relevant personnel can easily fill in the blanks, customize clauses, and quickly review and edit for accuracy, clarity, and completeness.

Aside from efficiently populating the template with relevant data, users can easily track the changes and revisions with automated contract authoring tools.

Step 4: Conduct risk assessment and compliance review.

Teams responsible should thoroughly review the contract to identify potential risks and ensure compliance with relevant internal policies and external regulations. Here are some contract lifecycle management best practices under this stage:

• Use AI-powered tools to analyze contracts for inconsistencies, potential risks, and compliance problems.
• Keep up-to-date with changes in laws and regulations.
• Consult with legal experts to address complex legal issues.

Step 5: Secure the necessary approvals.

The contract will be routed through an approval workflow—sent to the authorized personnel in a pre-set sequence and signed. When done manually, this whole task can take several days to weeks. Automation expedites the process, specifically the following:

• Real-time monitoring of approval status
• Automated reminders and notifications
• Enabling e-signatures

Step 6: Finalize the contract.

Once all signatures are obtained, the final copy will be distributed to all relevant parties. This will be stored as a valuable record in a central repository, making it accessible to those with approvals for future review.

Step 7: Monitor the contract performance.

This step is vital for ensuring compliance with terms and conditions. It involves the following:

• Tracking Key Performance Indicators (KPIs) such as delivery timelines, quality standards, and financial performance.
• Proactively identifying deviations from the terms and other potential issues.
• Implementing corrective actions to address risks.

Contract Lifecycle Management in Action

Businesses across industries understand the importance of contract lifecycle management. However, they apply this differently, tailoring the stages of contract lifecycle management to meet unique operational demands and regulatory challenges.

Here are some examples:

• Procurement – Contract lifecycle management benefits sourcing and purchasing teams that manage partners supplying raw materials, particularly when tracking vendor performance and ensuring compliance with internal policies. Unilever employs CLM to validate its partners’ sustainability standards across its global supply chain.
• Healthcare – Hospitals and clinics require secure and efficient contract management to uphold Health Insurance Portability and Accountability Act (HIPAA) laws in protecting sensitive patient health information. Public sector healthcare facilities benefit from CLM, improving their organizational performance and services.
• IT and Technology – CLM is a must-have for software licensing deals, intellectual property rights, and Service Level Agreements (SLAs) in the tech industry. It’s a must-have for software providers, particularly those with extensive global reach.
• Financial Services – Handling loans, investment portfolios, and client agreements can be complex with strict regulations such as the Sarbanes-Oxley Act. Banks, investment firms, and insurance companies can provide services and protect their interests when they complete contract lifecycle management requirements through CLM audits.
• Manufacturing – Companies in this industry rely on CLM to work out supplier contracts, equipment leases, and maintenance agreements. Top car manufacturers maintain their operations by strengthening partnerships through efficient contract lifecycle management processes.