April 3rd, 2020
Most companies, regardless of their size, outsource a significant part of their operations. Yet, contract lifecycle management remains as one of the under-invested disciplines amounting to less than 1% of total spending. Unfortunately, the impact of poor contract governance is huge. For starters, the quantitative impact is estimated at 9% of annual revenues. Additionally, there are risks such as reputational loss and legal damages when contracts are breached (even unintentionally).
By introducing a close and meticulous focus on contracts, contract lifecycle management ensures that companies comply with agreed clauses and maintain limited liability if conditions are not met. Moreover, it helps to bring down the administrative costs associated with ad hoc management of contracts, keeping the entire process efficient and cost-effective.
What is Contract Lifecycle Management?
Contract lifecycle management (CLM) is the end-to-end management of all tasks and activities involved in the creation, execution, and management of contracts. CLM streamlines contract-related workflows and processes. It eliminates inefficiencies, identifies potential issues and bottlenecks on time, and minimizes risks due to contract terms not being met.
For instance, the GDPR (General Data Protection Regulation) requires even a company’s vendors to strictly adhere to its privacy policies. Violation of the regulation can incur heavy penalties. In such cases, contract lifecycle management is crucial to proactively resolve issues and thereby avoid companies facing any lawsuits or fines in the future.
A few examples of the types of contracts include:
- Lump-Sum: One price is agreed for the entire project in advance; risk assumed by the contractor.
- Cost Plus: Payments to contractors are based on reimbursements; risk assumed by the buyer.
- Time and Materials: Payments based on the actual time spent and materials procured; Often used when the scope is undecided.
- Unit Pricing: Priced based on work units where one unit includes several sub-costs such as labor, material, and time; Combines the principles of cost-plus and time and materials type contracts.
Contract Lifecycle Management Stages
Organizations tend to manage contracts in their own unique way. While some spend a lot of time in the negotiation phase, some lay emphasis on compliance enforcement. Due to the fluidity of the process, the number of stages in contract management tends to vary—usually between five to nine.
In general, most contract management workflows fit into one of these five stages:
- Continued Management
Although these stages have been mentioned in sequence, they are usually cyclic; whenever contracts are renewed after a period of time, the cycle begins again.
Let’s take a detailed look at what goes on in each of these stages:
As a fundamental block of the contract lifecycle, it’s important to draft a new contract accurately with no loopholes or missed clauses. Since the legal process to vet a contract document may take up to weeks, an efficient way to create a foolproof contract is to build reusable templates. Other than reducing the time and expenses involved in creating a contract, this process— often referred to as template authoring—also minimizes the financial, legal, and procurement risks.
A central repository that stores templates and past contracts for reference allows for self-service, where a contract can be created automatically by a user. Most organizations leverage a contract lifecycle management software that has pre-configured rules on which templates to pull out from the repository based on the context (e.g., contract type, geography, or service).
Negotiation, while inevitable, often ends up increasing the overhead costs in contract execution. An IACCM study involving 700 organizations reports that, in order to reach the approval stage, the average business spend on a low-risk contract has increased 38% over six years to $6900. For a mid-complexity contract, this number is $21,000+, and for highly complex ones, this can stretch further up to hundreds of thousands of dollars!
Longer negotiation schedules may delay project kickoff. This results in indirect costs. To reduce this cost, organizations have turned to templates and a generalized approach to negotiations rather than applying an individualistic, manual approach to each contract. It’s also important to have sufficient transparency on the agreeable terms to avoid wasting time during negotiations.
Once all parties agree on contractual terms, the approval process kicks off formally. Approval workflows require sign-offs from stakeholders such as legal and executive management.
This step is ideal for automation—by configuring workflows and a list of approvers for different scenarios, the approval process can be completely streamlined into just a button-click.
Contract lifecycle management solutions help expedite this process by auto-approving standard parts of the contract. These solutions can also dissect the contract into different sections that require to be signed off by different stakeholders. This alerts them of any discrepancies. Technology solutions are also useful to track and store historical records, which help from an audit and regulatory perspective.
At the finalization stage, approved contracts are signed for them to be officially effective. Digital signatures are more common today with manual signatures becoming rare. These signed contracts are tagged with relevant keywords and metadata to be stored in a central digital library. Every document repository should have two key attributes: faster retrieval of data and secure access available only to selected roles.
At the end of this stage, a contract becomes active and its terms are in effect. From then on, the focus shifts to executing the terms of the agreement.
Managing contracts often takes up the bulk of the contractual lifecycle, because it has many facets to it. Some organizations tend to split this stage into several steps for ease. Here are a few areas that come under the purview of continuous management:
- Ensuring compliance towards regulatory policies and contractual terms is the primary goal of continuous management. Risk due to non-compliance can be financial or a trust breach that hinders the possibility of a future relationship. It’s necessary for organizations to put in place systems that can proactively determine gaps in adherence, and alert for timely action.
- Renewal management is also an integral part of this stage of contract lifecycle management. Getting an alert before the contract expiry date, for example, helps to renew contracts at the right time to avoid any unexpected loss or consequence to stakeholders.
- Continuous monitoring ensures that there is no unrealized performance value or revenue leakage in contracts. For instance, a company’s commitment to its customers may be hindered by its vendor missing deadlines. Such missed performance opportunities can result in a 10% to 20% increase in indirect costs.
- Data integration across multiple stages enables viewing contracts in a holistic manner rather than looking at each stage as a silo. This helps identify and fix any inefficiencies, adapt to changes faster, make corrections based on past data, and reduce administrative costs.
The Need for Contract Lifecycle Management Software
Contract lifecycle management is a nuanced area with many moving parts to it. It involves complex processes with data dependencies that are hard to track manually. Given the varied terms and clauses, the success of CLM depends on automatic triggers and alerts that can bring down errors.
It is very hard to achieve this manually. Think about large cabinets with multiple contract files, and someone actually having to pore over the terms to guarantee compliance. This is almost impossible, not cost-effective, and includes several unexpected risks.
Software that supports contract lifecycle management is the answer to this. It helps achieve close governance over contracts, without which businesses stand to lose 40% of a deal’s value. Compliance deviations can result in losses, which you can avoid by meticulous monitoring and reporting by software.
Moreover, technology enables efficient contract management. You can complete tasks faster and expedite workflows — all this with more accuracy while achieving cost savings.
However, the key to a good solution is its ability to integrate with the rest of your project world, and not treat contract management as an isolated discipline. For instance, a portfolio has several projects and contracts under it. The ability to visualize all of this as one big picture and report data in a cohesive manner is important to make critical decisions.
Enterprise Project Performance is the way forward. It offers a seamless way to manage contracts as part of your organizational goals. Learn more about how EcoSys can help with your Contract Management and Project Delivery.
For additional resources on contracts, see:
- EcoSys Contracts
- Ball Aerospace case study
- The Business Case for Enterprise Project Performance eBook