Contracts are a big deal in business, but they don’t have to be a headache. Whether you’re dealing with vendors, employees or customers, understanding the stages of a typical contract lifecycle can save you time and stress.
In this article, we’ll break down the 8 stages of a contract’s lifecycle and see how Contract Lifecycle Management (CLM) software can help make each stage of the lifecycle smoother and less stressful for you and the rest of your team.
The 8 stages of a contract lifecycle
1. Contract request and initiation
Every contract kicks off with a need—maybe you’re teaming up with a vendor, hiring someone new, or setting up a customer deal. This stage is all about gathering the details and getting the thumbs-up from everyone involved. On the procurement side, professionals also have to handle incoming contracts, making sure they fit with internal policies and negotiating any necessary tweaks.
Without the right tools, the contract initiation stage can become messy and prone to error. That’s where a solid CLM system comes in handy. With user-friendly forms and automated workflows, CLM platforms keep everyone in the loop and cut down on those confusing email chains.
While automating approval processes used to be a nice-to-have, it’s now a must. CLM platforms enable automation, which cuts down process (and overall contract lifecycle) time, boosts accuracy by eliminating human error, and reduces operational costs.
According to McKinsey research, automating 50-75 percent of tasks can lead to:
- 20-35 percent annual cost savings
- 50-60 percent reduction in process time
- Triple-digit returns on investment
2. Drafting the contract
Next, you draft the contract. This means outlining all the key terms like payment schedules, deliverables, and timelines. Without CLM, this, too, can be a manual, error-prone process.
The best CLM software offers pre-approved and self-configured templates and clause libraries, making drafting faster and more consistent. Plus, version control ensures everyone’s working on the latest document, reducing confusion. Gartner reports that businesses using CLM tools see a 50 percent reduction in contract approval time due to standardized templates and faster revisions.
3. Reviewing and negotiating terms
Contract negotiation can be a lengthy process with multiple rounds of revisions. Both parties need to ensure the terms are fair and meet their needs.
Robust CLM platforms enable real-time editing and redlining, so stakeholders can collaborate directly within the platform. This cuts down on back-and-forth emails and speeds up decision-making.
4. Approvals
After negotiations wrap up, the contract moves into the approval phase. This step needs signoffs from different internal stakeholders across the enterprise like Legal, Finance or upper management. Without a structured system, this stage can easily hit bottlenecks—delays from people forgetting to take action or disagreements over the final terms.
With CLM software, getting approvals is a breeze. Pre-set workflows automatically send the contract to the right people for their sign-off, cutting down on wait times. Automated reminders keep everyone on track, and you can set permissions so only the right folks can approve specific parts of the contract. This automation speeds up approvals and creates a clear audit trail, helping businesses stay compliant with policies and regulations.
5. Contract execution
Once all the necessary approvals are in, it’s time to execute the contract—this is where both parties sign, making it legally binding. Traditionally, this meant printing, signing, and scanning documents, which was a hassle and caused delays. While handwritten signatures (wet signatures) are still needed in some legal contexts, digital signatures (e-signatures) are becoming more popular because they’re convenient and secure.
CLM platforms work seamlessly with e-signature solutions like DocuSign or Adobe Sign, making it easy to sign contracts digitally. According to PwC, using e-signatures can cut down the time spent on contract execution by up to 80 percent, speeding up the whole process and eliminating the need for physical signatures.
6. Obligation and compliance management
Once a contract is signed, the next step is making sure everyone sticks to their part of the deal. This involves tracking performance, monitoring compliance with the terms, and addressing any issues that pop up. Poor management here can lead to penalties, missed opportunities, or strained relationships with partners.
CLM software helps businesses stay on top of contract obligations by providing real-time monitoring of Key Performance Indicators (KPIs). Automated alerts notify users of important milestones, like payment dates or delivery deadlines. For example, if a vendor is late delivering materials for a construction project, the system can flag this delay, allowing the project manager to take immediate action.
7. Contract renewal or termination
As a contract nears its expiration, the parties involved need to decide whether to renew, renegotiate, or terminate it. It’s important to manage the risk of auto-renewals that can lead to “zombie contracts“—agreements that quietly renew year after year without review, often at increasing costs. These unwanted auto-renewals can lock companies into bad deals, create compliance risks, and drain financial resources. (Just ask BISSELL!)
CLM software sends automated alerts well before a contract’s expiration date, giving stakeholders plenty of time to evaluate its performance and decide on the best course of action. Advanced analytics provide data-driven insights to help businesses determine whether a renewal or renegotiation is in their best interest. Additionally, CLM solutions can generate reports on contract performance, highlighting areas that might need improvement or renegotiation before renewal.
8. Record keeping
Keeping meticulous records of all agreements is crucial for future reference, audits, and compliance. Contracts need to be securely stored and easily accessible when needed.
CLM software serves as a centralized, secure hub for all contract-related documents. It allows authorized stakeholders to access contracts anytime, using advanced search features like natural language search or chatbot assistance to quickly find specific agreements. Security features like encryption protect sensitive information, while audit trails track document access and edits, ensuring compliance with legal requirements. CLM software also automates contract archiving, helping businesses stick to data-retention policies and avoid clutter.
Conclusion
Understanding the lifecycle of a contract and leveraging CLM software can transform how you manage agreements. From initiation to record keeping, each stage is crucial for ensuring smooth operations and compliance. By adopting a robust CLM platform, you can streamline processes, reduce errors, and ultimately, make your contract management more efficient and less stressful for everyone involved.
So, why not give it a try and see the difference it can make for your business? Register for the upcoming Tech Tuesday “Contracting Masterclass: Let CLM Handle the Boring Stuff."
Published December 19, 2024.
