Businesses operate at peak efficiency and consistency when they follow clear, well-defined business processes. That principle applies to virtually any function that must be executed on a repeat basis. Because legal agreements play such an important role in conducting business in today’s global economy, it is vitally important that organizations have a sound contract lifecycle management process in place, as well as a robust set of tools to support that process.
To achieve that, and to provide clarity with respect to the roles, responsibilities, and the series of events necessary to manage your organization’s contracting processes, many experts recommend developing a contract lifecycle management process diagram. After all, a picture is worth a thousand words.
Flowcharts and process diagrams have been used for many years to outline technical procedures, computational functions, and manufacturing production processes. To ensure consistency, efficiency, and completeness, companies should consider developing similar process diagrams for contract management.
Let’s look at the various stages of contract lifecycle management and consider how those would fit into a contract lifecycle management process diagram.
The stages of contract lifecycle management
Various types of legal agreements require different levels of attention throughout the contract lifecycle management process. Standard, non-negotiable “contracts of adhesion,” for example, do not require a separate review and approval process for every new customer that signs up to buy your company’s products or services. It is nevertheless important to manage these “high volume” contracts in the context of a well-defined, structured process.
Complex, high-value contracts, in contrast, call for much closer attention throughout the negotiation and drafting processes. Multi-tiered reviews and approvals will often be required in these cases, for example. As such, it is fitting to develop a distinct contract lifecycle management process diagram to handle these more complex contracts. Additional variables may suggest the need for separate contracting process flows. International contracts, agreements relating to construction projects, or strategic alliances, for example, may require their own distinct process definitions.
Here are the stages of contract lifecycle management that you should consider including in your contract lifecycle management process diagram:
Depending on the nature of the agreement in question, contract initiation might range from a fully automated process (for standardized, high-volume contracts) to a simple request from line-of-business personnel or executive management. Such requests should capture the business requirements, documenting why a contract is needed, and what the organization intends will result from the business relationship.
Very often, contract initiation will call for an “RFx”. This abbreviation encompasses a range of “request for” documents, including a “request for proposal” (RFP), “request for quote” (RFQ), “request for information” (RFI), or “request for bid” (RFB). These RFx processes define the steps that must happen in order for your organization to find and select suppliers for the goods or services needed to operate your business.
In many organizations, the contract initiation stage also encompasses an initial draft agreement. Whether you’re dealing with a complex, one-off contract or a standard high-volume scenario, your organization can benefit from using a contract template library to develop initial draft language. Similarly, clause libraries can be helpful later on when parties to the agreement request specific provisions during the negotiation process. By drawing from templates and clause libraries, organizations can manage contract risk more effectively and can accelerate contract turnaround.
Icertis Contract Intelligence (ICI) provides smart template authoring, enabling designated business users to add clauses, enter custom text, and tag metadata or other information such as exhibits and annexures. Rules ensure that any new templates go through an approval process before becoming available in the contract creation process.
The contract review process ensures legal agreements ultimately contribute to your company’s commercial objectives. Traditionally, contract review and redlining have been a tedious manual process. Human involvement will always remain important, of course, but advanced technology now makes it possible to automate some elements of the contract review process.
The Icertis platform offers intelligent, automated contract review processes to help companies optimize the value of their negotiated contracts through better enforcement of commercial terms. Icertis’ contract lifecycle management (CLM) solution captures the commercial terms of products and services, prices, discounts, rebates, and incentives; renders those provisions as structured data; integrates that information into enterprise systems; and assists business users in making sure those terms and conditions are fully enforced.
Following automated review, contract managers, executives, and other stakeholders can render decisions and lay out a strategy for the next stage of the contracting process, negotiations.
Contract negotiation requires specialized skills. The ultimate goal should be to achieve a balanced agreement to which all parties can fully comply. By the time negotiation is complete, contracts should clearly define expected outcomes and should lay out remedial actions to be taken if one party or another should fail to meet its commitments under the agreement.
Typically, the negotiation process begins with the presentation of a draft contract to the vendor. The supplier will review the contract and return it with questions, comments, and concerns. Further discussions may take the form of face-to-face meetings or back-and-forth communications via email, phone call, etc.
Many organizations may choose to establish time limits within which an agreement must be reached, and after which negotiations will be suspended as the company seeks out alternate suppliers.
Approval and execution
At the conclusion of the negotiation process, most organizations will trigger a round of approvals to ensure that key internal stakeholders have had the opportunity to sign off on the final draft before the agreement is executed.
Execution of the contract – that is, the commitment to the agreement in form of a wet signature or digital signature – is usually best handled by someone other than the negotiator, approver, or original requester. This reduces the likelihood of fraud by internal company personnel.
In most jurisdictions, electronic signatures will be acceptable provided that all parties to an agreement concede to that format. In some countries, however, or for specific types of agreements, a hard-copy or “wet” signature may be required.
Startup and operation
The contract startup process encompasses documentation of all key features of the contract, communicating key provisions to internal stakeholders, outlining roles and responsibilities for ongoing management of the commercial relationship, and preparing various internal systems to handle the transactions and commitments outlined in the agreement.
In order to operationalize a contract, its various terms and conditions must be clearly organized and communicated to internal users. If a contract stipulates that payment terms are net 30 days, for example, there should be a mechanism for notifying the accounts payable department of that fact. Purchase orders, volume agreements, and acceptance criteria must likewise be clearly communicated to relevant stakeholders.
Storage and management
In many organizations, contracts are filed away shortly after they are executed, only to be pulled out of the files and dusted off if a problem arises with the business relationship. It’s especially important that contracts be accessible in these cases, so storage is actually a critical element of the overall contract lifecycle management process.
Unfortunately, many organizations rely upon hard copies of contracts, which may easily be lost, stolen, or damaged. By storing contracts digitally using a CLM solution, they can be more easily retrieved in the event that they are needed.
Many organizations fail to review contracts and monitor performance on an ongoing basis. In fact, this is the stage of the contract lifecycle in which most organizations stand the best chance of improving business results.
Monitoring compliance involves tracking supplier conformance with contractual terms and conditions, key deadlines, adherence to all relevant laws and regulations, formal standards, and agreed processes. When vendors are found to be out of compliance, your company should provide written notification, determine the root cause of the non-compliance, and request that the issue be remedied. Internal stakeholders should also be notified whenever such action is taken.
Supplier performance monitoring may extend beyond simple black-and-white compliance issues, though. Your company should measure each supplier’s operational performance relative to expected service levels, internal stakeholder satisfaction, and an overall view of the business relationship.
It may also be prudent to review contractual terms periodically, especially in the case of agreements that extend beyond 12 months. If external conditions have changed materially, it may be necessary to trigger a deeper review of the business relationship and determine the company’s options for changing course.
Finally, there comes a time when contracts are open for renewal. In many cases, this presents opportunities to lock in prices, renegotiate terms, or otherwise effect positive changes in the business relationship. Unfortunately, contract renewals often fall through the cracks, leading to missed opportunities.
An enterprise grade CLM solution will trigger review processes by alerting key stakeholders whenever contracts come up for renewal. Armed with contract analytics that quantify vendor performance and overall contract value, decision-makers will be better equipped to determine the best path forward.
Icertis Contract Intelligence (ICI) is the leading contract management solution in the cloud. ICI’s easy-to-use, intelligent, enterprise-wide contract management software transforms the foundation of commerce by turning contracts into valuable corporate assets. As the undisputed leader in contract management according to Spend Matters, Icertis delivers transformational business value for Global 100 clients such as Airbus, Daimler, Johnson & Johnson, and Microsoft. To learn more about contract lifecycle management, please schedule a contract management software demo today.