ON THE STAND: The Case for Contract Lifecycle Automation
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.
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.
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.
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.
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.
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.
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