Hi-Tech CLM: Contract Lifecycle Management

Contract lifecycle management (or ‘CLM’) is the management of contracts during the complete life of a contract.

From initiation (for example, the moment you receive a request for proposal) through the proposal phase, contract development, and negotiation process via implementation and amendments to extension, renewal, close-out, or termination.

In this post, I will focus on what activities take place in the different phases of the contract lifecycle, and spend some more time on the technology and software solutions that nowadays are essential in helping you to manage the contract lifecycle and add business value.

Where I use the word ‘contract’ this will often also mean ‘proposal’. For me, a proposal is nothing more than the early appearance form of a contract. Just consider a submitted – but not yet accepted – proposal as the ‘contract-to-be, but only lacking the countersignature.

Contract Lifecycle Management in High-Tech

Contract lifecycle management (CLM) in high-tech, high-value, high-risk industries is per definition a complex activity and a lengthy process:

• Many parties and stakeholders are involved
• Contracts are complex and differ per customer or good/service sold
• The technical specifications or service descriptions are often long and detailed
• Sales, proposal, and negotiation processes can be lengthy
• After signature there often are many changes which need to go through the same process again.

If contracts are poorly managed, the top-line (actively pursuing cross- and upselling opportunities), bottom-line (preventing margin erosion) and risk exposure (limiting legal and compliance risk) of your company can be severally impacted.

So the aim of a good CLM process is to create commercial value, retain profit margins, enhance revenues, reduce costs, and mitigate risk where possible for your company.

Poor Contract Lifecycle Management (CLM) Destroys Value

It is therefore the more surprising that I find so many companies out there who think they can store away their proposals, and commercial contracts after signing and leave them unmanaged.

Or to see multinationals still creating and managing their multi-million proposals and contracts manually, capturing approvals that end up in personal mailboxes, storing the documents all over the place in network folders, and monitoring the contracts on Excel sheets.

Unfortunately, the impact of such poor contract management is huge. The negative impact is estimated at around 10% of annual revenues. Additionally, there may be damage to the reputation and legal damages. Especially when contracts are breached (often unintentionally because no one was tracking it). 

If you recognize your own company in any of the above, then please contact me here below. I am happy to hear what your challenges are.

What is the Contract Lifecycle and CLM?

The contract lifecycle consists of all the phases along which a contract is managed – from initiation, preparation of the value proposition and proposal, to contract drafting, negotiation through signature, ongoing performance & compliance management to contract renewals or expiration. 

To extract the full value of your commercial contracts, you need to actively monitor and manage the contracts from the beginning of the contract initiation until the ‘exit’, without skipping any phase or stage in between.

The phases all together form the ‘contract lifecycle’. Contract lifecycle management (CLM) is then the name of the process covering management of all the lifecycle phases of the contract.

Although these stages are always presented in sequence as a closed cycle (see above), they are usually cyclic. Contracts change, are extended or renewed after a period of time in which cases the cycle begins all over again.

Who Needs to be Involved in Contract Lifecycle Management? 

Contract lifecycle management (CLM) is not only something for the contract managers of your organization. Many other departments in and outside your organization should be involved in CLM :

• Sales and procurement – on both sides of the spectrum they drive the need for external contracts and are involved in negotiations, approval loops, and obligation performance and its measurement.
• Operational departments – they are the people actually delivering the products and services, setting up the statements of work or technical specifications in the case of proposals or changes to the contract.
• Legal – always to at least be consulted on most of the terms and conditions to be drafted in any proposal or contract and involve in negotiation, approval loops, and compliance with laws and regulations governing the contract. In compliance-heavy industries (such as healthcare) they probably are even in charge.
• Finance – always to be consulted for tax issues and wording, insurance, IFRS-15 related matters (acceptance) in proposal and contracts, bank guarantees, invoicing procedures.
• Resources – involved in internal negotiation and use performance measures and special clauses in contracts to understand what the business is in relation to its employees. Are new skills needed, do you need to onboard more people to be able to deliver the required services, etc.
• Management – measuring performance and requiring regular reporting; supervising the relevant teams in contract lifecycle management and ensuring that all are working towards the same goals in accordance with company policies.
• Partners – in our industries we often collaborate with partners (for example in joint ventures) setting up proposals, and contracts, so they also need to be involved
• Subcontractors and vendors – the same goes for other stakeholders in your supply chain
• Customers – and finally, the holy grail of contract lifecycle management, your customers could be made part of your lifecycle processes, involving them in all steps and working together. Especially in the case of performance-based contracting – where two parties are needed to tango – seeing contract lifecycle management as a jointly managed process is revolutionary by may add the most value to all parties.

The Phases of Contract Lifecycle Management (CLM)

There are many ways to describe or draw the contract lifecycle. Per company the processes for managing contracts differ and so do their contract lifecycles. Consultants and CLM software and solution providers also all have their own ways of denoting the different stages.

To keep it simple I have narrowed it down to five key stages.

1. Prepare & Propose

Stages in this phase: contract request, customer requirements, proposal writing.

Contract lifecycle management starts with one party requesting, or initiating the proposal and contract development process based on specific requirements as defined by the customer, and subsequently the supplier using that information for drafting the proposal or contract document.

Inputs Prepare & Proposal phase

• Request for proposal or internal request to issue an unsolicited offer
• Customer requirements
• Information on what the proposal and contract should contain and critical dates such as subject matter, prices, contract start date, end date, and milestones. 

The request normally comes from the business side of your company, and is triggered by either the customer (for example with a request for proposal) or the business itself (in which case it is ‘unsolicited’).

The request can be for a new contract or an amendment, a renewal, an extension but also a cancellation. 

The most important activities in this phase are thoroughly understanding the customer requirements (by discussing this with the customer, not by second-guessing what they need), creating a solid value proposition, determining which set of terms and conditions you’re going to use and especially making sure the statement of work is well-written and crystal clear.

Based on the request for proposal all stakeholders in your proposal team provide their views and share what input they will provide on the new contract, amendment, or contract renewal.

After fully understanding them, you write the requirements the statement of work. Preferably the creation of the statement of work is done in collaboration with the customer already in the proposal stage.

In this stage you also put the terms and conditions of what will become a contract into writing in accordance with your internally agreed standard terminology and clauses.  In the proposal stage you can limit this to the most important terms and conditions. The rest will be added when the contract is drafted. You can find more on how to do this in my post about proposal writing.

If you’re working with your own general standard terms and conditions, or if it is an amendement or renewal of an existing contract, you only have to refer to those in the proposal and focus on the scope (subject matter of sale) and related statement of work or technical specification, price, delivery dates and how long the offer will remain valid.

If it is a new contract and you already know that the customer will want to impose its own terms and conditions up the contract, make sure to add that the price of your offer is ‘subject to the terms and conditions of this proposal’. Also look at adding a risk provision in your price to protect yourself when implementing the contract in the event the terms and conditions deteriorate in the negotiation phase. This will certainly be the case if you have to accept the other party’s terms and conditions.

This is also the phase that you need to start thinking about potential risks and (cross- and upsell) opportunities related to the product or service you’re going to deliver, or to the customer or any other aspect related to the contract.

This is also when you and your team start with setting up your negotiating strategy.

This phase ends with all approvals and signatures needed to submit the proposal in accordance with your governance policies.

Outputs Prepare & Proposal phase

• Acknowledgement of receipt of the request, if the customer sent such request for proposal
• Negotiating strategy
• Proposal including statement of work
• Approvals and signature under proposal
• Risk & opportunity register
• Audit trails (tracking all activities related to this first phase in the contract lifecycle, especially notes, minutes of meeting reflecting discussions on the statement of work). 

Automating the Prepare & Proposal phase

This first phase can be speeded up by using contract lifecycle management software, pre-agreed templates, digital approval workflows and electronic signature processes.

2. Draft & Negotiate

Stages in this phase: contract authoring, review and red lining, contract negotiation.

In the next stage of the contract lifecycle management process, your business will be requesting you to start drafting a new contract based on the output of the previous Prepare & Propose phase. 

Inputs for the Draft & Negotiate Phase

• Contract request Information
• Submitted proposal
• Negotiation strategy already set up in the former phase
• Risk & opportunity register created in the proposal phase

Contract drafting is not much different from proposal writing. If you didn’t already include all terms and conditions in the proposal you now add the remainder of terms and conditions.

Again you are using your internally agreed standard terms and conditions and clauses. 

See more on how to draft a contract in my post here. If you’re lucky your contract is going to be signed ‘as-is’. To be honest, this nearly never happens. Especially not in high-value, high-tech industries where sales and contracts are complex.

What happens more often is that your customer imposes its own standard procurement terms and conditions upon you. Which means you now must work with a draft contract worded and sent to you by the customer.

In this case you and your team need to thoroughly review the terms and conditions of the other party and review the negotiating strategy set up in the prepare & proposal phase. Most probably substantial changes have to be negotiated before you can reach an agreement.

Negotiations are likely to cover both commercial, legal and technical terms and involve many people on both sides of the transaction. 

The formal negotiation process then begins when as soon as the first draft of the contract is available for all parties to review. Often, the negotiation of the contract is one of the longest and most challenging stages in the entire lifecycle. And it will certainly not be the only negotiation!

Especially in the case of high-value, high-tech products in which many parties are involved, negotiations can be complex and take time and effort. Make sure you keep detailed records of all discussions and store them with the signed contract.

At the end of this phase, all stakeholders and your management need to approve the contract to be signed. Involving them from the beginning and keeping them updated with accessible, up-to-date information on the results of the negotiations and changes made to the contract compared to the original proposal speeds the approval process up.

The approved contract is sent to the parties for signature either electronically online or using the manual signing process.

Outputs for the Draft & Negotiate Phase

• Contract Approvals from designated stakeholders.
• Negotiated, approved, and signed contract
• Updated risk & opportunity register
• Audit trails (especially notes and minutes of the meeting of the negotiations)

Automating the Draft & Negotiate phase

This second phase can be again – as above for the prepare & propose phase – be improved and speeded up by using contract lifecycle management software, pre-agreed contract clauses and templates, automated changes and version tracking, digital approval workflows, and electronic signature processes.

3. Execute and Manage

Stages in this phase:  contract hand-over and continued management.

The contract signed by the parties involved now needs to be handed over to the departments or people responsible for delivering the goods or services and implementing the contract.

Inputs in the Execute & Manage phase

• Signed contract
• Updated risk & opportunity register  

Once the contract document is signed it is stored permanently – together with related critical business documents and the audit trail from former phases – in an easy to retrieve contract database or repository.

This is an important aspect of contract lifecycle management, in fact, it is so important that the success or failure hinges on organizing this correctly. you have to make sure that your contracts are properly filed, organized, and able to be found easily when needed.

Make sure you have back-up and retention policy enforcement policies in place so that storage of your critical records is secure.

If you have contract lifecycle management software both contractual metadata and critical documents are indexed and saved for future reference.

In this stage business users and people implementing the contract should be able to quickly search, access, filter, and retrieve relevant documents from the contract system.

Another important step in contract lifecycle management is tracking and reporting on obligations, milestones, important dates (delivery, validity, renewal), deliverables, and payment schedules are tracked.

All parties to a contract have to comply with the agreed obligations during the period of the contract.  This means you must continuously monitor obligations and performance and manage problems of quality or claims and disputes.

Business users should be able to quickly and efficiently retrieve contract data and produce in-depth reports whether you’re still working manually or (much more effective and better for you margins) whether you have automates your contract management.

Outputs in the Execute & Manage phase

• Record management in accordance with your back-up and retention policies
• Continuous access for business users to a central contract repository with relevant documents
• Custom reports (for example compliance, risk, KPIs)
• Updated risk & opportunity register
• Audit trails (especially notes and minutes of contract reviews, reports and other important data)

Automating the Execute & Manage phase

You can (and should) automate most of the activities in this third phase by using contract lifecycle management software and (automatically) managing, tracking, and reporting about your contracts from a central repository.

4. Change &Renew

Stages in this phase: Contract Renewal , Amendments and Disposition.

After signing inevitably you will want to make changes to the contract due to a myriad of reasons that could pop up after signing, negative or positive,

Once the contract comes close to its end date, you must decide to renew it or not. If you forget to renew the contract this can lead to financial loss for both the parties involved.

Poorly managed contracts mean that needed changes are not implemented, renewals or expiry dates are missed, amendments are lost which can lead to supply failures or customer claims or even the risk of reputational damage.

Inputs in the Change & Renew phase

• Signed contract
• Updated risk & opportunity register

Contracts can underperform or certain clauses can become obsolete. You have regularly to review active contracts and the performance thereof to see whether changes are needed.

An efficient contract lifecycle management process builds in time for your due diligence, management, and stakeholders to regularly review contacts for compliance and performance.

You can treat a change to a contract similar to writing a proposal or drafting a contract. You often again need to agree with the other party on scope, price, delivery dates. So in fact you’re ‘looping’ back to Phase 1 or 2 and starting all over again.

Also, renewals often lead to changes in contracts. Parties see is an opportunity to revisit the original contract and want to negotiate discounts, renegotiate terms, or pursue other opportunities, like cross-selling or upselling other products or services.

Contracts that are underperforming can be ended or renegotiated into a more favorable agreement for your business.

Outputs in the Change & Renew phase

• The contract changed or renewed to a later expiry date.
• Updated risk & opportunity register
• Audit trails (especially notes and minutes of the meeting of the change or renewal negotiations – if they took place)

Automating the Change & Renew phase

In this fourth phase by using contract lifecycle management software can help you to (automatically) manage, track, and report about renewal dates for your contracts.

5. Close-out and Exit

Stages in this phase: contract close-out, continuing obligations , lessons learned.

In this final phase, the contract is coming to an end. Either automatically, because the products and services have been delivered and paid for and parties or the contract term expired. Or in mutual agreement, because both parties wanted to terminate the contract before the formal expiry date (‘termination for convenience’). Or involuntarily, because one of the parties decided to terminate the contract.

Inputs in the Close-out & Exit phase

• Signed contract
• Updated risk & opportunity register

When a contract expiry date is due or a contract is terminated, there are various actions that can be taken. 

Expired contracts need to be closed-out and all users and stakeholders notified. 

You and the other party will have ‘continuing obligations’ after the end of a contract, e.g. giving back equipment owned by the other party, confidentiality, or intellectual property obligations.

Each party is required to sign the final close-out agreement.

Finally, it is a best practice at the end of a contract to also collect and store all lessons learned. This is something you have already been tracking (‘audit trails)’ during the complete lifecycle, but you can now draw up end conclusions and see what can be done better next time or what as so successful it should be repeated.

Outputs in the Close-out & Exit phase

• Continuing Obligations agreement
• Updated risk & opportunity register
• Audit trails (especially notes and minutes of the close-out meetings and any negotiations that took place)
• Lessons learned

Automating the Close-out & Exit phase

In this last phase using contract lifecycle management software can help you to (automatically) manage, track, and report continuing obligations of your closed-out contracts.

Conclusion

Contract lifecycle management or CLM is essential in high-value, high-tech industries where sales are complex and contracts contain many obligations (and pages!).

Improving the CLM process will allow you to stay better organized and up-to-speed on your company’s contract performance.

Automating the process with CLM software is a must-have nowadays. Especially in high-value, high-tech, and high-risk environments, it has become a necessity for preventing margin erosion and adding business value.

Effective CLM will improve your top-line and bottom-line, your governance and accountability, and help your company to avoid missteps that could affect its future.