Contract management guide: The contract lifecycle explained step by step

It is the process that determines all the stages that a contract goes through, from the moment it is requested until it is terminated or renewed. Many companies do not understand the importance of properly defining this process in order to manage their contracts efficiently. The loss or dispersion of contracts, as well as errors and failures, are often due to little knowledge about their stages, their relevance and communication at each of the phases.

An optimally managed contract reduces costs, saves time and resources, and facilitates the business relationship inside and outside the organization. Therefore, a technological solution for the CLM (Contract Lifecycle Management) is key to automate the process of creation, execution and management of this important asset for your company.

Today, there are a wide variety of contract types and these are increasingly being governed by government requirements. This makes the demand and management of these documents increasingly complex and crucial.

• Most organizations handle between 20,000 and 40,000 contracts.
• More than 10% of them are lost.
• Ineffective contract management costs about 9,2% of the company’s annual revenue.
• 54% of companies spend more than a million dollars on contract-related litigations. 

The large volume of contractual documents handled by companies requires that legal managements are able to properly manage their contracts, this means that they are able to centralize, automate and order their documents. This can only be achieved with careful and efficient control of the contract lifecycle. Learn about contract lifecycle optimization step by step.

There are many circumstances in which a certain company may require the drafting of a new contract. The purchasing area, for example, may require hiring a supplier through a buy side contract, or the sales area using a sell side contract, formalizing a business with a new client. It is at that very moment in which a new contract is required, this is when the contract lifecycle begins.

In many companies there is no properly established process for the request of new contracts; thus, creating a challenge for legal management. To whom is the drafting addressed? Should they necessarily direct requests to the legal area? And in that case, under what circumstances should the contract be requested from this department?

Without a standardization of the channel, of the information received and the way each area generates its requests, the legal department cannot make the appropriate assignments and these end without a clear resolution due to the impossibility to conduct an adequate follow-up. Therefore, the automation of the process for requesting new contracts is crucial.

A contract lifecycle management software (CLM) centralizes and standardizes the requests:

• The technology enables the unification of the channel through which the requests are generated, resulting in the formalization of this process. This allows the legal department to have all requests centralized, be able to allocate its resources according to the level of complexity and priority each request represents. 
• Formalizing this process demands that requests include all the information that legal professionals may need in order to draft new contracts which results in a drastic reduction of the time spent on administrative tasks outside the legal area.

The preparation phase is where the first version of your contractual document is created or written. The first draft can be done with worksheets and base clauses. However, from the initial stage, it must be adapted using a precise language and be discussed about with the corresponding collaborators, that is, in conjunction with the area or department of the company that requires it.

A CLM Software has key functionalities in the preparation in order to carry out a follow up on the contract:

• It has the appropriate functionalities for the drafting of contracts, with its own integrated text editor and Microsoft Office online edition. 
• It has spreadsheets and functionalities to write the text. 
• It is capable of generating mass contracts. 
• It contains and can create libraries of contract templates as well as clause libraries. 
• It contains information forms to create contracts, without the need to request information from different people. 

According to the WorldCC (World Commerce & Contracting), companies lose the equivalent of 4% of their turnover each year due to extensions of the negotiation period of a contract. In addition to the usual difficulties in reaching an agreement, inefficient document management often leads to even longer delays. How can that be avoided in your company?

• Clearly establishing who is in charge of negotiating during the contract process will allow your company to have full visibility of what are the relevant stages and timelines of the negotiation. 
• With the appropriate technology, using CLM, your company can take proactive measures to ensure that contracts are produced on time and do not create bottlenecks that unnecessarily delay new contract negotiations. 
• It is important to note that the person who requests the contract is the person who actively participates in the negotiation, therefore, a deadline should be defined for this. 

Negotiate the content and communicate effectively through a CLM:

• Ensure collaboration between parties on contract terms and content. 
• Control and record changes, versions and edits for each area.
• Structure and standardize the process.
• Define roles within the document. 
• Compare document versions during the process. 
• Edit and collaborate online. 
• Discuss through an internal online panel.
• Collaborate with external counterparts via email.
• Assign responsible parties in case of important questions.
• Assign pre-established deadlines for each stage.

Getting final approval from the decision-makers of a contract is vital to decide on one that reflects well the intent and agreement that is being established. At this stage, it is very important to involve the approvers in the process, whether it is someone in finance who approves values, amounts, expenses, fees, etc., or a lawyer who verifies a company's compliance or internal rules. These should be assigned at this stage so they can provide their observations or simply their approvals. If there are observations, these are generated to feedback the contract and add what is important for the counterpart to be aware of these changes. This phase generates the following benefits:

• Ensures a standardized approval process.
• Scalability in approvals. 
• Assignment of responsible parties by area. 
• Generates irrefutable records. 
• Contract approval flows, with complex approvals and decisions.
• Approval watermarks for relevant areas.

Nowadays, a large part of the procedures and processes related to contract management is digital. From the drafting in an electronic word processor to its storage in a library or digital repository. However, there is still a loophole from the past that plays an important role in the contract approval process: the handwritten signature.

Currently, the aim is to streamline document management processes in the case of Chile, for example, with the implementation of the electronic signature, whose use and promotion is governed under Law No. 19,799, and which offers benefits such as:

• Time savings: a process that can take up to 5 days is reduced to 30 minutes on average.
• Lower costs: the cost of processing a signature incurs expenses in printing material, sending the physical paper, return, expenses for normal or private mailing, etc. All these associated costs are reduced to zero when the signature is processed digitally.
• Easy access to information: the document becomes available more quickly and easily. In addition, by means of contract management software, its search in digital format is also facilitated. In addition, by means of contract management software, searching a document in digital format is also facilitated.
• Gives legal validity to the electronic exchange between the parties: the use of an effective digital solution helps to reduce uncertainties and distrust between the participants in the process.

One of the best options for incorporating electronic signatures in the contract lifecycle is the use of a simple electronic signature validated with a digital certificate, which, depending on the supplier, may include other validation criteria that make it possible to validate the signatory's identity.

This certificate allows companies to validate multiple digital documents, such as pdf, doc, e-mails, among others, thus being able to formally sign their contracts within the company and also with suppliers, among other varied uses.

The contract search process can be very tedious if the repository is completely manual. How to review, control and manage a high volume of contract documents if the mere search becomes a headache?

A CLM means a process of contract digitalization, leaving a repository with contract search by metadata. Thus, order, structure and control of documents is achieved. Desks no longer accumulate loads of papers or store tons of old signed contracts in warehouses. A repository allows you to access all your contracts digitally in the cloud, wherever you are, as long as permissions and access to these documents are properly assigned.

Having a digital contract repository involves:

• Ability to create sub-repositories. 
• Navigation by folders that are controllable inter-organization. 
• Search by content (Full Text Search).
• Search by attributes. 
• Auto-classification of contracts. 
• Forms repository.
• Search by OCR, by associated requests or by templates.

The management of milestones, prohibitions, obligations, documents, and other related aspects can be made easier if it is possible to constantly monitor the validity and relevant conditions of your contracts. How to do it in a timely manner?

With Webdox, the tracking solution lies in a smart system of alerts and notifications where you can be notified days, weeks or even months before some important dates stipulated in your contracts. It is even possible to follow up by document as well as the people indicated or related to the contract. This generates multiple tangible benefits for companies, including the following:

• Avoiding fines for fixed deadlines.
• Avoiding or remembering contract self-renewal.
• Follow-up and management of contract milestones.
• Generation of contract annexes.
• Management of obligations.
• Individual and mass alerts on contract milestones.
• Alerts on a contractual element. 

In the reporting and analysis phase, any kind of analysis of the process as well as the content of the contracts is performed. With a CLM it is possible to review reports in real time:

• Individual contract analysis.
• General portfolio analysis.
• Analysis and SLA of the contract process.
• Automatic, updatable and customizable reporting.
• Specific reporting on requests (quantity, type, areas, etc.), the progress of the contract process and the status of contract signatures.
• Display and management of active and inactive contracts. 

The last stage of a contract continues to be critical. This is the renewal or termination of the agreement, phases where unforeseen events such as the expiration of the contract term occur. This is mainly due to the fact that those responsible do not remember the expiration date. According to the WorldCC, only 44% of companies have implemented some kind of system to get an alert regarding key contract dates and milestones. This mistake can easily be avoided with a system that automates these processes.

A centralized system should be able to record key contract expiration or renewal dates. CLM software such as Webdox allows you to set alerts based on key contract dates, such as the expiration date or a relevant document milestone, such as the expiration of a warranty document associated to a contract. It is also possible to define the users who should receive the alerts, the number of notifications to be received, and the warning time for each one. This functionality is fully configurable. It also has a dashboard that allows you to visualize the status of contracts; thus, keeping everything under control.

Traceability is the possibility of identifying the origin and the different stages of a contractual process. It implies the alternative of keeping a record and, through it, a control on the evolution of a document.

In a company, each employee generates relevant information on a daily basis from different areas: commercial, financial, technical, administrative, and contractual. In each area, the information produced generates implications for both internal and external customers of the company. Company managements need to be certain about who is involved in the creation and processing of a given document.

If there is no adequate validation process and contract lifecycle check, a simple document can become a serious problem for legal management. A contract has multiple processes that must be constantly monitored to avoid wasting time in searching for responsible parties. Starting from scratch because of an objection in the drafting or the lack of an approval in the version is very common. This problem, deemed as inefficiency for legal management, occurs due to a poor visibility of the process or inefficient standardization of a task protocol to track each phase of creation, drafting, editing, discussion, and subsequent validation of a document.

A CLM contract management system is a technological solution to improve the management by allowing its cycle to run smoothly. Its purpose is to make visible each phase and process with its due information and follow-up. Thus, traceability is achieved in any procedure within the contract.

Typically, the largest volume of contracts in a company is concentrated in the legal and purchasing departments. However, general and finance managements, besides human resources and sales also manage a variety of contract documents. This translates into a huge volume of contracts circulating throughout the organization that, if not managed jointly and through a centralized system, increase different risks, such as renewals without the review of clauses, penalties, loss of revenue and generation of costs associated with invisibility, such as a break in the supply chain.

A problem that organizations can solve by jointly managing contracts through a centralized system to increase the visibility, accessibility and monitoring capacity of each of the contracts signed by the company.

Standardized control and stakeholder collaboration during contracting processes - and the subsequent monitoring of clauses and milestones - allows for analysis across departmental boundaries, providing complete visibility into all of the organization’s contractual obligations. This information is extremely useful for senior management and corporate governance in the development of their tasks. 

A CLM software in the Human Resources area impacts the organization of the contracting process by avoiding setbacks with people. In addition, this process can be done simultaneously for multiple people and thus complete the contracting of staff in a shorter time. The result, in the long run, is a significant time-saving.

An area of the company needs to hire an Analyst. It executes the selection process that results in a shortlist, from which the candidate is chosen. The person in charge accesses an application form and fills in the fields to request the elaboration of the employment contract. The HR Area receives the request for an employment contract, verifies that the background of the person to be hired is correct, and activates a process for hiring the employee.

The process includes the drafting of the contract by an HR analyst, review by the head of HR, correction of these observations made by the head of HR, and then review by the head of the applicant's area. Then the legal area makes its review, gives its approval in watermark and an eventual correction of the observations of the legal area is made. Finally, the document is signed electronically. Once signed, the parties receive the document, it is classified and the process is closed.

The document is affected by a set of general alerts, which will allow the HR Analyst to be informed in a timely manner both of the termination of the employee's probationary period (in order to transfer him/her to the permanent payroll or terminate him/her, depending on how he/she has performed) and of the date of salary readjustment, in order to communicate it to the employee and to the company's systems.

As we have seen, there are many processes that must be constantly monitored in order to avoid wasting time in finding responsible parties, such as contractual, certification or quality control processes. Often, it is necessary to start from scratch because of an objection in the drafting or the absence of an approval in the editing. The problem is generated by the lack of standardized processes or a task protocol to follow up on each phase of creation, drafting, editing, discussion, and subsequent validation of a document.

A workflow is a technological solution that improves document management by allowing documents to flow smoothly. It consists of a study of the operational aspects of a workflow, including the structuring of tasks, their method of completion, their correlative order and synchronization, allowing a glimpse of the information flow and the monitoring of the fulfillment of tasks. Thus, traceability is applied to any procedure within the organization.  

In a document management software, such as Webdox’s, the workflow works from the same platform and allows the creation and management of processes in a simple, flexible and autonomous manner, facilitating the connection and collaboration in each phase of the process with the responsible agent. Thus, workflow allows a panoramic view of the performance in each area and the monitoring of effective protocols in order to see, in the long term, whether it is possible to improve a certain process. In both large and small companies, workflow as a digital tool contributes to control the status of information and data, reducing costs by reducing man-hours in tasks that can be automated and monitored.