A contract is more than just an outline of your rights and obligations in a deal. It is a corporate asset that requires management and review. Moreover, correctly managing the contract lifecycle can open opportunities for savings and improvements in how your organization conducts business.
What is the contract lifecycle, and how should your company implement contract lifecycle management (CLM)?
What goes into managing a contract’s creation, management, and renewal cycle? Let’s look at some key aspects:
- The benefits of implementing a contract lifecycle management solution
- The steps of the CLM system
- How technology can make this process more efficient
What is contract lifecycle management (CLM)?
Contract lifecycle management refers to a system that streamlines the contract development and approval process, codifies document storage and retrieval, and establishes a process for evaluating and renewing contracts according to accepted criteria.
Implementing CLM improves the administration of the contract process and ensures that every contract your company enters into meets high standards and receives appropriate approvals for cost and risk.
6 growth-minded benefits of implementing CLM
Maintaining a contract lifecycle management system isn’t just about storing documents. With the right system in place, businesses can enhance their procurement function, make better decisions, and increase profitability, while ensuring they have the right vendors to address company needs safely and effectively.
There are several benefits to implementing a CLM system:
1. Streamlined purchasing: Implementing a process to follow contracts through their lifecycle also creates a repeatable, scalable purchasing process. It eliminates bottlenecks and other issues associated with email-based purchasing processes.
2. Improved cost savings: A contract management process takes a collaborative approach to purchasing, putting every transaction in front of departmental approvers. With more visibility into the process, your organization will make better purchasing decisions and ensure that each transaction meets high standards for cost-efficiency and security.
3. Support for strategic sourcing: Gaining control of CLM allows teams to continually evaluate the effectiveness of their vendor relationships and optimize their vendor pool into a preferred list of high-quality suppliers.
4. Lower third-party risk: vendor evaluation and strategic sourcing have the secondary benefit of lowering external risk. Knowing your vendors well and closely monitoring contract performance creates conditions that reduce the likelihood of issues or fraud.
5. Legal compliance monitoring: By keeping an eye on the performance of each vendor, you also monitor compliance with essential contract terms and conditions. Regular vendor evaluations ensure that vendors stick to all the clauses in their agreements. Automated management removes the manual elements of compliance tracking, saving your legal team’s time for higher-level tasks.
6. Better spend analysis: With all your contract data and vendor information collected and categorized, the wealth of data contained within your purchasing system is available for use. Spend analysis can help you make better spending decisions, align budgets, and reduce cash leaks.
9 key steps in the contract lifecycle management process
A contract lifecycle management system should be simple, effective, accessible to all necessary stakeholders, and informative enough for all your departments to benefit from.
Here are the 9 steps in the CLM process, from inception to conclusion:
1. Purchase request
A stakeholder identifies a need for the business. After researching the options and making a preliminary assessment, they put forth an intake form or purchase requisition for the required items. The request kicks off approval workflows. With a procurement management solution, this process can happen within the software platform—the system routes the form to the correct department heads and decision-makers for approval. Once the purchase is approved and a vendor is selected, the finance or procurement department moves on to the contract phase.
2. Contract creation
Based on the research and requisition, the procurement team will create a contract for the purchase. The contract should outline all key specifics about quality, quantity, and timeline. It should also include departmental non-negotiables, from legal department requirements to security and finance guidelines. A CLM system can generate contract workflows that utilize artificial intelligence (AI) to make authoring new contracts easier.
The buying team and vendor will hash out the acceptable terms of the contract, making any concessions or changes necessary to meet each party’s needs. Once all the parameters are finalized on the vendor side, the contract is ready for approval.
4. Approval and order completion
Finance and purchasing sign off on the purchase as agreed to and transmit the purchase order to the vendor for processing. The vendor receives the order and fulfills it. After the buyer receives and reconciles the order, the accounts payable department conducts three-way matching, approves the invoice, and tenders payment.
5. Contract management
Once the purchase has been approved and completed, the contract enters a central repository for coding and tracking. Putting each contract into a notification system allows the team to prepare for upcoming contract milestones, track progress, and conduct due diligence before the contract renewal date.
If questions arise during the contract period, internal stakeholders can access and research the contract. A contract lifecycle management system will create a searchable database of all vendors and contracts, making it easier to implement audit trails and review agreements.
7. Analysis and reporting
Finance and procurement teams conduct spend reporting, budget analysis, and utilization reviews on all contracts. Reporting and analysis help improve budgeting and purchasing and inform future vendor and product selection decisions.
8. Compliance and risk
In the event of issues, or as a matter of regular internal auditing, contracts within the system are evaluated to ensure contract compliance and reduce the likelihood of third-party procurement risks such as fraud. Every contract within the platform is available for ongoing review.
9. Renewal or offboarding
As the renewal date for a contact approaches, the procurement team conducts research about the renewal. This may include compliance reviews, updating prices, or noting changes in the way the buyer uses the product or service. This review period allows the team to make informed decisions leading to contract renewal, adjustments, or termination. If the buyer parts ways with a vendor, the reasons and specifics of the contract termination can be documented in the system to provide a historical record for future analysis.
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How CLM software makes management easier
Companies may deal with hundreds of vendors and thousands of vendor contracts each year. Organizing and tracking all the associated data can quickly overwhelm a legal or accounting department with a constant influx of renewal dates, new purchases, and changes to existing service tiers.
Contract lifecycle management software can take the chaos out of the CLM process by centralizing digital data, creating a streamlined notification system, and providing robust analysis and reporting.
Using the right CLM software will enable your team to streamline their workflow:
- Automatically generating and transmitting contracts and purchase orders
- Using templates for repeat contracts
- Tracking the progress of internal approvals for new contracts
- Searching for specific vendor and contract information within the system
- Creating notification and due diligence systems for renewals
- Monitoring for compliance or risk issues using technological tools
- Managing vendor onboarding, management, and offboarding
A vendor management software or CLM solution makes it easy to scale your contract management practice as your business adds more vendors, grows its procurement function, and increases spending. Using a total procurement solution like Order.co, teams can buy and pay for the services and products they need, manage vendor relationships, and reduce manual tasks and processes, all through one system.
Bring Order.co to your CLM
By centralizing your purchasing and order management into a proven procurement system like Order.co, you can automate your processes, centralize your data, and reap the benefits of an easy-to-use, dynamic platform. To learn more about Order.co, request a demo.
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