You might see contract management as something that only pertains to legal or finance. But if you’re responsible for closing deals, you’re more involved with contracts than you realize. Every business should care very much what’s inside its contracts, because they are binding, and they govern over 80% of transactions and value.
Contracts are the lifeblood of companies. They outline the rights and obligations of the company and its customers, vendors and partners.
If your Contract Lifecycle Management (CLM) isn’t integrated within a full end‐to-end Quote‐to‐Cash process, you are missing opportunities to streamline sales, standardize terms, increase efficiency, and eliminate risk across the organization.
This article will outline the steps of the contract lifecycle and show how you can maximize the value of your deals with effective Contract Lifecycle Management.
Content Summary
Analyst Insight: Gartner on Contract Lifecycle Management
The Impact of Contracts on Your Business
Navigating the Contract Lifecycle
Key Terms and Contract Process Flow
CLM for Any Type of Contract
Easing the Pain of Contract Management
5 Common Contract Pain Points
Effective Contract Lifecycle Management Accelerates Deals and Eliminates Risks
4 Steps to Achieving Contract Management Excellence
CLM: The Backbone of Quote-to-Cash
Conclusion
Analyst Insight: Gartner on Contract Lifecycle Management
CLM is evolving from an operational record-keeping system, primarily used for legal audit purposes, to an enterprise-level core system addressing business risk, costs and the pursuit of revenue maximization. CIOs and line-of-business management need to identify the right solution for their needs. – Gartner, Market Guide for Contract Life Cycle Management, Nigel Montgomery and Deborah R Wilson, 16 July 2015
The Impact of Contracts on Your Business
Contract Data Determines Revenue and Costs
Contracts are the roadmap to your business deals. They define what someone is paying you, how long they’ll be paying you, if you are responsible for replacing broken products, when the customer is free to leave and much more. Any mistakes in this process can increase your liability and have a significant impact on your bottom line.
The clauses within contracts are inundated with business‐critical legal terms. Start and end dates, payment terms, service levels, customer support levels, warranty periods and agreement values are all conveyed in your contracts. Having insight into these terms is not only critical, but can dramatically simplify everyday business for your legal, finance, sales and executive teams.
Contracts Simplify Business
Contracts outline explicit expectations and instructions for both parties involved in the deal. Companies with the right amount of visibility and foresight can use the data in their contracts to their advantage. Benefits of greater contract visibility include more accurate revenue forecasting, trend analysis to improve selling and negotiation, better risk management and better coordination of sales and legal teams. When you’re managing your contracts appropriately, it’s easy to find places to streamline and optimize both in your sales cycles and your revenue management.
4 Ways Contracts Simplify Your Business
- Establish clear expectations for all parties
- Ensure control of resources
- Optimize revenue and cost streams
- Streamline business processes
Navigating the Contract Lifecycle
Contract management is more than just taking care of some documents. At its most basic level, contract management software might be little more than an electronic version of a filing cabinet. But a filing cabinet doesn’t help you understand what’s inside it—or help your business get the most value from the processes that fill the filing cabinet with agreements. To make the most of your contracts, you need to manage the entire contract lifecycle.
The Contract Lifecycle
The contract lifecycle is a broad discipline that includes everything from managing your executed contracts in a repository to requests, authoring, negotiation and execution. Effective contract management requires an understand of every step in the contract process, including any process that contributes, creates or utilizes contract data. Here is a more detailed look at the key functions and process steps a contract undergoes during its lifecycle.
Key Terms and Contract Process Flow
Step 1: Request: A business user asks for a contract
The first step in the contract process is for someone in the company to request a new contract. In many companies, the request process can be very informal and disorganized. Templates are not centrally located or accessible, resulting in outdated contracts being used as ad-‐hoc templates, exposing the company to financial and compliance risk. A casual contract request process is also slow and inefficient, with the details needed to create the contract shared by email or verbally.
By automating the contract request process with a guided self-‐service tool, individual business groups can request the contract types they need and contract creators—usually in the legal department—can respond according to measurable service level agreements they have with their business teams.
Step 2: Drafting: A contract is created
When it comes to actually creating a contract, the goal is to eliminate manual work and reduce the time required without introducing unnecessary risk. If legal has to get involved to create every single standard contract, your contract management process and even your sales cycles become riddled with bottlenecks—not to mention very costly. Lawyers have a very specialized set of skills and their time is very valuable. It’s ideal, wherever possible, to use templates for everyday contracts and common clauses. That way, high‐value resources can focus on the exceptions such as complex or one‐off strategic agreements that require significant negotiation.
With contract lifecycle management, the drafting process can be significantly automated with centralized templates that are automatically filled in with contract details. Once your lawyers have approved contract templates one time, software can reuse the templates over and over with almost no intervention. Your legal team lives in Microsoft Word, so finding a tool that will integrate with Word is critical to their adoption of CLM.
Step 3: Negotiation: Terms are agreed between parties
The negotiation phase is what most of us typically think of when we think about contracts, but you have to be careful that you aren’t limiting the scope of negotiation to price. Everything about the business exchange is included in the contract: service levels, liabilities, options for renewal or termination, intellectual property, publicity and dozens of other factors. Nearly all of these terms are potentially open to negotiation. You need to make sure those terms offer the best outcome for your business while still remaining agreeable to the other party.
During the negotiation phase, it’s important to have the most up‐to‐date terms and then track any changes the counterparty makes. It’s easy enough to track changes using built‐in capabilities in Word, but these tools aren’t designed for documents that pass through many hands. And it’s fairly easy for the other side to slip something into a Word document without you noticing. With contract management software, all changes can be tracked in real time with visibility to all involved on your side, maintaining accuracy and consistency throughout negotiations. Since most of a contract manager’s or lawyer’s time is spent working with Microsoft Word, it’s important that your CLM system allow users to perform the negotiation tasks directly inside the tool they’re most familiar with using already.
Step 4: Approval: Internal controls ensure the best outcome
Part of the challenge of approvals is finding the right balance between too much and not enough oversight. This is where the speed vs. control conundrum is felt most acutely. Your sales teams’ paychecks ride on getting the contract through, but depending on the importance of the contract, you may need a high level of legal or executive involvement to make sure your interests are protected. It’s critical that your system have the ability to facilitate the approvals and controls needed to protect the company’s interests while maintaining the flexibility to automatically navigate the quickest route to executing the agreement.
Approvals must come from all of the appropriate internal teams. With an advanced contract management system, this can all be done electronically and even on mobile devices, dramatically decreasing your contract cycles.
7 Common Pain Points of Contract Management
- Speed vs. control tradeoffs
- Limited visibility into terms, obligations and values
- Information and process silos
- Manual processes
- Inconsistent legal language used across contracts
- Inability to manage changes or monitor contracts over time
- Lengthy or sidestepped approvals
Step 5: Execution: The contract is put into effect and placed in a repository
Execution is the stage where the contract goes into effect, at which time the terms become a set of instructions for the different parties who need to deliver against them. This is where having a seamless process for getting contract details to fulfillment is critical. This is also where revenue recognition kicks in.
Once the contract is executed, what happens to the contract document? Ideally, it’s stored in a centralized place where it’s easy to access in case of a dispute or a need to modify it. Unfortunately, for a lot of businesses, a contract’s final resting place is a file cabinet somewhere in the legal department or an individual’s hard drive. If you manage your contracts that way, you are missing a lot of the revenue growth opportunity afforded by contract management, and potentially opening yourself up to risk. You can’t manage what you can’t find.
Step 6: Obligations: Ensure both sides meet their end of the agreement
At the obligations stage, it’s time to get to work. Your sales contracts put you on the hook to deliver goods and services, to meet deadlines, to issue reports and to do many other things. On the flip side, your contracts also entitle you to get paid if you live up to your end of the agreement.
But sometimes the implementation of these contract line items is easier said than done. There are a couple of ways companies can approach this problem. Shut their eyes and hope for the best, hire an admin to manage the chaos in an incredibly detailed spreadsheet—or integrate their contract management system with front‐ and back‐end systems, so changes to the contract are delivered to sales, customer success, fulfillment and operations teams for action.
With strong obligation management tied into CRM and ERP, you won’t miss a deadline or lose track of a payment.
Step 7: Compliance: Meet all reporting, search, and government requirements
While you’re handling all the obligations created by your contracts, there are plenty of other things you need to do with all your contract data. You need to provide regular reporting to internal and possibly external parties about the contracts you have and your performance to your obligations. You also might need to locate specific contracts to comply with industry requirements, government regulations, audits and responses to lawsuits.
To meet all these needs, it’s important that your repository have detailed search and reporting capabilities. You want to be able to search for business terms, contract clauses, performance to obligation and—when all else fails—for free text. Without a repository searching for information in your contracts can be costly, time‐consuming and distracting.
The quicker you can access the information inside your contracts and take necessary action, the more money you’ll save, the more you’ll reduce overall risk and the less you’ll pull the business away from its key activities.
Step 8: Amendment / Renewals: Contracts are changed and renewed, and the cycle starts over
Before your contract expires, you’ll probably want to send a new version to your customer for a renewal. This will kick off a new round of drafting, negotiation, approvals, and so forth: in short, the contract lifecycle starts over. If you’re managing your contracts without software, it’s easy to lose track of renewals. You might rush to get a contract signed before the last agreement expires, or even let a contract expire by accident.
Sometimes, your contract won’t get to renewal before it needs to be revised—perhaps your company was acquired or a new law came into effect requiring you to update your existing contracts with new language. In cases like this you need to amend your contracts and notify your customers.
Your contract management software should provide alerts, reporting and search abilities that enable you to stay on top of renewals and handle amendments. Just like in the compliance step, a manual system will make renewals and amendments truly difficult.
CLM for Any Type of Contract
Sell‐Side + Buy‐Side Contracts
Not every contract is a sales contract, and your contract management system should be able to support any type of contract. While the “sell‐side” contracts that your sales team is responsible for are important, “buy‐side” contracts introduce their own set of needs, value and processes.
Buy‐side contracts are important to procurement and finance effort to closely monitor every dollar your company is spending. With contract lifecycle management at the center of their buying process, these teams are able to reach agreements with suppliers faster, negotiate more effectively, and track supplier compliance more accurately.
It’s important to evaluate solutions that can support both buy‐side and sell‐side to avoid siloed processes and duplicate tools. For many businesses, the buying process and the selling process are inherently related so it’s imperative that visibility into your contracts encompass ALL of your contracts. Otherwise you’re just getting part of the picture—and what you can’t see can hurt you.
General Contracts
Finally, many other business teams require contracts to manage employment, intellectual property, real estate and other needs. Such “general” contracts are of interest to HR, operations, IT, R&D and—of course—legal departments. Contract lifecycle management allows individual teams to request, author, negotiate, execute, comply and renew with ease, especially with self‐service functionality.
Easing the Pain of Contract Management
If your contracts are done faster, you’re going to be able to collect on them sooner. If they’re accurate, you’re going to have fewer disputes and fewer time‐wasting contract revisions. Generals counsel and C‐level executives will sleep better at night because they have confidence that the contract management process is working.
The benefits of automating contract management are real. But so are the pains.
Here is a look at the 5 most common pain points of inefficient contract lifecycle management and some of the ways to overcome them.
5 Common Contract Pain Points
Speed vs. Control: The biggest source of friction in the contract lifecycle comes from the balancing act between speed and control. Because contracts are so critical, legal’s preference is to examine contracts with a fine‐tooth comb. Sales often has a different interest, pressuring legal to get out of the way so deals can close faster. The main business challenge becomes moving contracts through quickly but with enough oversight to effectively manage risk.
Lack of Visibility: Part of what exacerbates the speed vs. control dilemma for legal is a general lack of visibility into contract terms, obligations and value. If you can’t see it, you can’t control it. This becomes a major pain point because agreements outline the terms of the value exchanged, and if you can’t ensure you are getting the right value for your deals, money is slipping through your company’s fingers. Lack of visibility is an especially serious problem for expiring contracts and renewals.
Inconsistent Legal Language: It’s important to be consistent in the use of terms and language in your contracts. Gaps in standardized language can introduce risk or confusion. If you can’t determine if your contracts contain accurate language, or what is different between contracts, lawyers might have to get involved in every single deal. This also increases the risk of being non‐compliant or leaving revenue on the table.
Information Silos and Manual Processes: Managing all of the necessary steps in your contract process is hard enough internally across several departments. The complexity of managing contracts increases exponentially when you have to manage contracts across several office locations, time zones or languages. The ability to have everything centrally located with changes tracked in real time becomes critical. Human error, bottlenecked contract cycles and limited process control can increase risk dramatically when contracts are managed manually. Automating contract management helps companies improve control and visibility and significantly shortens contract creation time.
Inability to Manage Changes: Your relationship with your customer only gets more valuable once the deal is signed. It’s important to have a mechanism for managing changes over time. You need to be up to speed on renewal dates, pricing changes, emerging legal requirements and other events that will require you to speak to your customer specifically about your contractual relationship. If you drop the ball on contract‐related communications, you risk blowing up your relationship with your customer—especially if the contract language (or lack of contract language) exposes your customer to new risk. Your ability to manage the contract, particularly changes over time and the renewal process, will have a direct impact on your customer retention rate.
Ineffective contract management costs businesses up to 9.2% of revenue. – Tim Cummins, CEO of International Association for Contract and Commercial Management
Effective Contract Lifecycle Management Accelerates Deals and Eliminates Risks
- +47% Faster Audit Reports
- +45% Improvement in Contract Accuracy
- +43% Increase in Contract Compliance
- +42% Faster Contract Processing
- +42% Increase in Contract Processing Volume
- +23% Reduced Amendments After Signature
- +17% Increase in Contracts Auto‐Renewed
Average Percentage Improvements Reported by Apttus Customers
Source: Apttus Quote‐to‐Cash Impact Study conducted June 2017 by an independent third‐party, Satmetrix on 200+ Apttus customer contacts randomly selected. Response sizes per question vary. Performance metrics are intended as a guideline based upon historical results from a sample set of customers. Results are dependent upon many different factors that are customer‐specific. Therefore, actual results will vary. Response size per question varies.
4 Steps to Achieving Contract Management Excellence
We’ve broken down an effective contract management strategy into four universal steps. As you roll out your strategy, each step will compound your success, capturing more value for your business and getting more of your company on board with the benefits of contract management.
Be sure to select a contract management provider that has the capability to help you achieve excellence across all four phases. Don’t just focus on tool functionality. Your provider should be able to guide you through each step, with the experience, service and peer community to make sure your company is successful not just in its implementation, but also for many years to come.
Step 1: Get Your Contracts in One Place
Contract management at its most basic level is getting your contracts in one digital location so you can start to unlock their value for obligations and compliance. Even though this isn’t all of contract management, it’s a great starting point. So make your first milestone to get your contractual ducks in a row, centralizing and standardizing your contract content.
Once your contracts are in one place, you’ll be able to search and report, control access, get alerts for key events and more. You’ll have gained a business advantage from your contracts—and you’re still only getting started.
Step 2: Define Process and Performance Metrics
For most companies, the next step is to automate the process of how each person in your company interacts with the contract lifecycle. Set up workflows for contract requests and approvals. Create and enforce service levels and other commitments for your company’s teams to work together on contracts. Your goal is to get the organization comfortable with contract management software.
This step offers big gains in contract cycle times, which leads to more closed business and more efficient time use for all parties involved, including sales, legal, finance, and executives.
With these two steps complete, you’ll have implemented a positive top‐line effort for your company. This is where some companies stop—but there’s much more benefit to be had.
Step 3: Build Contracts Smarter
Next you should automate the drafting and negotiation processes using electronic templates, legal playbooks, self‐service contract portals and integration of Microsoft Word with contract management software. This step offers further gains in cycle times, and also gives companies a leg up in negotiations.
By doing this, you will see fewer errors and reduced contract risk, and will maximize the impact of guidance from your legal team. This will also help alleviate the tension between speed vs. control and will further align the goals of your legal and sales teams. Good news; but there is still one last step.
Step 4: Integrate and Accelerate Contracts with Quote‐to‐Cash
Finally, you’ll want to extend the value of contract management to other related systems. Contract management on its own offers a solid ROI, but the investment gets even more impactful as part of an integrated Quote‐to‐Cash solution that encompasses Configure Price Quote, Revenue Management, Incentives, and E‐Commerce. This way, you can ensure that efficiency, visibility and control extend from the start of your sales process, through your contract lifecycle, and into your revenue recognition, allowing data to seamlessly and intelligently flow from step to step, from department to department, and from your CRM solution into your ERP.
To attain this last step, you’ll want to make sure your contract management software is part of a single and intelligent Quote‐to‐Cash solution. You also want to know that your provider is experienced with ERP and CRM.
CLM: The Backbone of Quote-to-Cash
While contracts are important in their own right, they are even more important when you consider their role in the Quote‐to‐Cash process.
What is Quote‐to‐Cash?
Quote‐to‐Cash is the end‐to‐end business process between the buyer’s interest in a purchase and the realization of revenue. It includes creating a quote, responding to RFPs, submitting a proposal, negotiating and managing a contract, fulfilling orders, recognizing revenue, ensuring compliance and tracking payments—all within visible and controlled workflow. Quote‐to‐Cash solutions include Configure Price Quote (CPQ), Contract Lifecycle Management, Revenue Management, and Behavior and Intelligence applications to drive and optimize sales performance over time.
Why Contracts are a Critical Part of Quote‐to‐Cash
If you’ve taken on an initiative to streamline and optimize your Quote‐ to‐Cash process and you ignore contracts, you are seriously risking the success of your initiative. The contract is the physical output of your deal. All of the deal terms established using CPQ are stored in your contract and drive both your customer relationship and revenue management. When your CPQ process feeds directly into your contracts, you achieve significant efficiency, accuracy, revenue velocity and customer satisfaction in a process that is typically manually intensive and riddled with bottlenecks and compliance risks.
Conclusion
Drive Business Benefits with Contract Lifecycle Management
Contracts are essential to your business. To compete in the 21st century, an effective contract management system is now essential. Contract management involves a series of steps that create a full lifecycle, and contract management software can offer massive benefits at every step. As you roll out contract management, you can set milestones at steps to deliver ever greater value to your business. Contract management software increases the speed, visibility and control of your contracts, allowing your business to streamline sales cycles, effectively manage revenue and relationships—and ultimately achieve more revenue and greater competitiveness in your industry.
Source: APTTUS
