ON THE STAND: The Case for Contract Lifecycle Automation
Updated: Dec 14, 2022
Here's The Brief
From insurance policies to vendor agreements, contracts take many forms. They establish partnership and accountability between parties and often require considerable negotiation before being finalized.
The time it takes to approve a contract can be as significant as the content of the contract itself, and slow, manual contract processing reflects negatively on an organization’s ability to provide excellent service.
So What is Contract Lifecycle Automation?
Contract lifecycle management (CLM) refers to the way a business handles contracts through their various stages. An effective CLM solution streamlines and simplifies the contract management process while minimizing errors.
Of course. Every contract has to go through a thorough process before it is ratified. In some cases, when a contract is renewed, we usually say that its goes through another lifecycle.
There are nine stages in a typical lifecycle. These are:
Contract request
When a business agreement is imminent, the parties discuss terms and gather data to draft an acceptable contract.
Authoring
Contract authoring is the actual drafting process. The author puts the terms and clauses of the contract in writing. Contract owners/authors usually collaborate with peers during this stage.
Approval
After drafting the contract, the contract owner sends the document to internal stakeholders for approval. This process ensures stakeholders are aware of potential risks and opportunities early on.
Negotiation
Both parties discuss the terms and clauses in detail to reach a consensus. Contract negotiation can go through several rounds and is often the most challenging part of the contract management process.
Execution
The parties sign the contract document, and the contract comes into effect. In the digital CLM process, secure e-signature software is used for this step.
Obligation and compliance
Every promise made in a contract is an obligation. The contract owner assigns obligations to directly responsible individuals (DRIs) and ensures they are fulfilled. Unfulfilled obligations can lead to legal, financial, and reputational damage.
Amendments
Sometimes, parties mutually agree to make changes/amendments to existing clauses. Contract amendments usually go through the approval, negotiation, and signature cycles.
Renewals/extensions
When the involved parties decide to carry out an existing agreement beyond the chosen end date, they either renew the contract or extend the term period.
Reports
A company's contracts contain critical information that can be used to refine the contract management process. An appropriate analytical model can help derive valuable insights, while providing contract managers an opportunity to impact company strategy.
The State of Contract Management in Malaysia
Small businesses and startups might manage to get through the CLM process manually. But as a company scales and deals with more contracts, a digital CLM solution becomes indispensable. With business landscapes becoming highly volatile and increasingly regulatory (not to forget pandemic-driven supply chain disruptions), the emphasis on risk mitigation and compliance is high.
Workflow inefficiency results from not knowing that something must be done or by whom. Time spent creating contracts and resolving disputes incurs administration costs, opportunity costs, and a perception of poor customer service.
- PricewaterhouseCoopers study: Contract Management: Control Value and Minimize Risks
Several signs point to a subpar contract management system. Before you
decide to automate any contract processes, it’s important to articulate
and assess the pain points. Here are seven indications that the need for
automation has become critical.
1 Missing or Lost Contracts
With so many contracts and drafts moving through the enterprise, it’s easy to lose track of them in a manual system. An employee might even find himself asking a business partner for her copy of a contract when his has gone missing. This seemingly harmless error sends a message of disorganization that can be damaging to an organization. An automated contract management system doesn’t just save face—it keeps your organization prepared for any contract request, whether it comes from a colleague, a third party or an auditor.
2 Inconsistent Versions of Contracts
Another sign of disorganization comes from poor version tracking. Without a
systematic approach to contract drafting and storage, it becomes exponentially
more difficult to know which version is the most recent. According to the PricewaterhouseCoopers study, “Storing paper contracts in a variety of locations makes it difficult to track down the contract and associated data, and can create problems over version control.”
3 Limited Visibility into Obligations
When contracts are not stored in a central location, it is up to individuals, rather than the organization, to monitor contractual obligations. This becomes especially problematic when employees depart and take their knowledge with them, leaving the organization unsure of the employee’s abandoned accounts. Without central oversight of contracts, customers might be undercharged while vendors overcharge you. Perhaps this is why the Aberdeen Group study found that 53% of participants focused on contract management to improve revenue from service.
4 Missing Contractual Milestones and Deadlines
Revenue also leaks when organizations don’t comply with sell-side contracts. For example, if a supplier fails to deliver correct services or quantities to customers, it can be forced to issue refunds, discounts and other means of compensation to resolve the issue.
On the other hand, organizations can overspend when they pay unnecessarily for
products or services, such as unused software licenses or maintenance fees on
abandoned items. All these losses stem from a lack of contract awareness.
5 Unsustainable Operational Costs
Paper contracts result in storage, printing and mailing expenses that only grow over time. Destroying obsolete records seems like an easy way to mitigate the costs of paper, but without an organized system for retaining records, organizations have no way of knowing when an old contract can be destroyed. Instead of sacrificing work space for storage space and watching the paper costs increase, organizations can store contracts as digital files in an easily accessed repository.
6 Costly Disaster Recovery
The cost of storing paper is high enough—imagine what happens when those documents are damaged or destroyed due to a disaster. Floods, fires and other emergencies can irreparably damage hard copies, and without a master contract list or system for tracking contracts, it can be nearly impossible to assess what has been compromised.
Shared network drives also add risk to the organization. When employees store contracts locally, they become susceptible to hardware malfunctions, network crashes and other system failures. Backing up digital files or storing them on a remote server helps mitigate this risk.
7 Legal Disputes
Business relationships reach a peak of distrust when legal battles ensue. According to one figure from the Journal of Contract Management, 71% of companies couldn't locate at least 10% of their contracts. But losing track of a contract can create major problems, particularly when it comes to satisfying regulators during an investigation. And if you can’t produce a vital contract during a merger or acquisition, it’s possible the deal could be slowed down or even scuttled altogether, even exposing the organization to risk that can be avoided.
Enter Contract Automation
In addition to delivering efficiency in legal operations, a contract management software should also facilitate better business outcomes. To be able to achieve this, any contract management software should comprehensively address the following aspects of legal operations:
Streamlining the entire contract lifecycle
Improving governance
Mitigating business risks
Promoting cross-functional integrations.
What are the capabilities of digital CLM software?
CLM software should boast a wide range of capabilities, including:
Contract management
Contract authoring and collaboration
Contract negotiation
Contract execution
Obligation management
Post-execution management
Analytics and reporting
Auditing and governance
Data protection
What are the CLM metrics to measure?
CLM software provides the following metrics to give you a clear picture of the health of your contract management process:
Average contract cycle times
Approval turnaround times
Contract negotiation cycle times
Number of contracts executed within a period
Annual contract value
Gain/loss from terminated contracts
How should you choose a CLM for your business?
Choosing the right CLM software for your business depends on a number of factors:
User experience: CLM software that offers a simple and clean user interface improves user experience and streamlines the implementation process.
Scalability: A CLM system with tools to adapt to your organizational needs as it scales is a necessity.
Customization: Good CLM software should support customization to accommodate your organization's needs.
Analytical capability: By choosing a CLM system with advanced analytical capabilities that derive business insights from contract data, you can transform your CLM investment from tactical to strategic.
Automation with Zoho Contracts
Easy contract authoring Most CLM software solutions offer both predefined and custom templates. This drastically reduces the time it takes to author a contract. A sophisticated CLM software solution comes packed with a full-blown word processor with real-time collaboration features to improve the quality of the contract language and reduce errors. Advanced document assembly allows clause selection and switching between alternative clause languages under the same clause, eliminating duplication of templates.
Seamless contract negotiation CLM software eliminates the need for sending contract documents as email attachments throughout the negotiation process. Contract owners can provide controlled access to contract documents by sharing password-protected links with counterparties. Counterparty contacts can collaborate with their peers, leave comments on the document, suggest changes, and track them. If needed, both parties can quickly access or revert to older document versions.
Simple signature process Physical documents no longer need to be passed between companies for signature. Most CLM software solutions come bundled with secure e-signature software so documents can be signed digitally. Contract owners can set the signing order. High-quality e-signature software solutions offer military-grade encryption and are compliant with e-signature laws, such as ESIGN and eIDAS.
Effortless obligation management Failing to fulfill contractual obligations can impact your business legally and financially and potentially damage your brand reputation. CLM software enable contract owners to extract, track, and manage contractual obligations at an individual contract level. They can assign task and non-task obligations to business owners and track their progress without leaving the CLM platform. This level of granular obligation management mitigates business risk.
Advanced analytics Reports transform your contract data into business insights. These insights can help you refine your strategies. Clause-based reports help admins quickly identify and amend clauses to comply with changing government regulations. Similarly, performance-based reports offer insights that help admins understand what is impacting/delaying the contract management process so they can take impactful actions. Sophisticated CLM software comes with a dashboard that presents key performance indicators to help users prioritize tasks.
Faster auditing Auditing is a time-consuming and sometimes painful process that requires digging through pages of data and tracking all activities within the system. A CLM software solution stores all activities performed by users in a central audit system. Logs provide information about CLM system access, downloads, activities (such as approvals and signatures), and more. These logs give admins better control over the system, fast-tracking the auditing process and improving compliance.
Improved governance Admins can configure approval workflows to keep stakeholders aware of potential risks. With its advanced search and filter options, the central contract repository in a CLM system enhances visibility. Modern CLM software also have advanced data protection settings to help your business comply with data protection regulations.
Better change management The current business landscape is constantly changing. CLM software can help your business stay abreast of changes with intuitive features, such as smart letter templates that are generated automatically in the event of a contract amendment, renewal, extension, or termination. This ensures that all contract stakeholders are aware of any change made to the contract at any point in time.
Mobile CLM Keep track of your contracts on the go with mobile applications. Modern CLM software allows you to approve contracts, track and manage obligations, and gain insights with a personalized dashboard right from the palm of your hands.
Getting Started
Get hands-on experience with how Zoho Contracts can positively transform your legal operations by signing up for our free trial. To know the details about pricing, chat with us and get a free 60mins consultation!
+603 2935 9804 | sales@fintechrakyat.com
FINTECH RAKYAT is a Business Process Automation (BPA) Technology Consultancy based in Kuala Lumpur, Malaysia. We implement, support and manage software & hardware, covering our client's software journey from IT consulting to business automation and localized support, helping them avoid implementation failures and high opportunity costs, so they can focus on innovation & growth.
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