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What is contract lifecycle management (CLM)?

What is contract lifecycle management (CLM)?

Brendan Tuytel

Contracts formalize agreements and commit both parties to their part of the bargain. They might feel more like a formality rather than an essential part of your business operations.

But if you aren’t paying attention to how you’re drafting up, managing, and fulfilling contracts, you may be losing out on time and potential deals.

When it comes to trying to improve the process of taking a contract from draft to agreement, businesses use contract lifecycle management. Here’s what you need to know about it.

Key takeaways

CLM is about managing contracts from start to finish, ensuring everyone fulfills their promises. It helps businesses know what works and what needs fixing.

Contracts go through 7 stages—from requesting and creating to negotiating, approving, executing, monitoring, and deciding to renew or end.

Using CLM makes contracts clearer, speeds up processes, and reduces mistakes. It helps businesses stay legal and keeps things running smoothly.

Definition of contract lifecycle management (CLM)

Contract lifecycle management (CLM) refers to the process of creating, executing, and reviewing a contract. It includes the technology and workflows your business uses to maintain a contract and measure its effectiveness.

Think about CLM as a framework or lens that you are evaluating your contract process through. It’s a structure so you can conclusively say what is and isn’t working beyond a gut check.

Through CLM, you start to understand:

  1. What contracts are benefiting you or should be terminated
  2. What parts of your process are slowing you down or costing you money
  3. Whether a contract should be renewed or amended
  4. Whether you are staying compliant with internal policies and local regulations

Over time, you’ll be able to define what makes a successful contract, streamline your processes, and ensure you’re building solid vendor relationships and customer relationships.

The stages of a contract lifecycle

To understand contract management, you first need to understand each stage of the contract lifecycle. Let’s break it down into its 7 steps.

Request stage

Before a contract is drafted, an initial request is submitted. 

This stage is composed of assessing your needs and identifying the parties that will be participating in the contract. You may also draft up some preliminary terms and conditions that will come to define the agreement.

With the goals and expectations loosely defined, you can move on to the initial stages of drafting a contract.

Creation stage

The creation of a contract involves formalizing the terms and conditions into a proper, first-draft document. Anything that has been discussed must now be put into legally binding terms.

Before getting the other party’s input, the contract should be reviewed internally to ensure it is in line with your business’s policies and goals. The contract should have an internal preliminary approval before being shared with the other party.

Negotiation stage

The first draft of the contract is provided to all parties to review and suggest alterations.

The review process is often called “redlining,” a reference to taking a red pen to underline any sections that need revision.

This is also when all terms and conditions are hashed out until everyone agrees.

The negotiation phase could take a long time or be done extremely quickly. Contracts might go through multiple phases of revisions before being finalized, but in some cases, the first draft might have all parties involved happy.

Approval stage

Once everyone is in agreement on the terms, the contract goes through a formal approval phase.

The formal approval phase is more than saying yes and signing the dotted line. The contract needs to go through a full legal review to ensure compliance with all relevant laws and regulations.

Even if their signature isn’t part of the approval process, all relevant stakeholders from both parties should give the contract a seal of approval.

Once the contract has gone through those steps, it gets formalized with the signatures of the representatives.

Execution stage

Upon obtaining signatures, the contract comes into effect. Work on fulfilling the terms and conditions begins and must be completed ahead of any due dates that were defined in the contract.

Make sure you’ve clearly communicated the deliverables and deadlines internally. Everyone should be in the loop to fulfill the contract on the requested timeline.

Monitoring stage

As you’re executing what’s outlined in the contract, you should be evaluating whether it successfully achieved what it was intended to do.

Make note of any of the terms that hindered your performance or were not compliant with your internal policies.

For example, you may not receive the necessary documents to meet your standards of record keeping. If not, you need to alter the terms of any future contracts to ensure that they are being provided.

If you’re experiencing any pain points or inability to comply with regulations, think about how you can implement a solution in the contract to prevent it from happening in the future.

Renewal or termination stage

When the contract comes to its end, you choose to:

  • Renew the contract: Maintain the terms as they are and repeat the agreement
  • Modify the contract: Modify select terms and then come to a new agreement
  • Terminate the contract: Choose not to continue the working relationship any longer

This final step in the process should be informed by the monitoring phase. By evaluating the contract throughout the time it’s in effect, you’ll know what decision you want to make.

The benefits of a CLM process

The contract lifecycle management process is the framework of creating, managing, and evaluating contract performance. If you’re doing it effectively, you’ll reap the rewards of these benefits.

Improved visibility into obligations

Without a set CLM process, you might find yourself rushing to deliver contracts or overlooking a key detail in the terms and conditions. When this happens, you could find yourself unknowingly agreeing to something you then fail to deliver on.

Part of defining and implementing a CLM process is to ensure that sufficient time is dedicated to each step in the journey. This lets you document and understand your obligations on a deeper level.

Compliance with regulatory requirements

All contracts must be compliant with the applicable laws and regulations. Incorporating a thorough review by a legal team or expert makes sure you aren’t making a wrong step by accident.

Your CLM process includes how you store past contracts for reference. How you store contracts affects auditability, something you’ll value if any disputes arise from an agreement.

To make compliance easier, start with templates that have already been reviewed. Then the review process can be limited to only the terms that have been altered from the template.

Reduced contract lifecycle times

Clearly defined processes keep workflows running smoothly. After one person’s work is done, they know who takes over from there and loop them into the process.

With a seamless progression through each step of the CLM process, you go from inception to approval faster and minimize the time before a contract comes into effect.

If you’re in competition with anyone, delivering a drafted contract first makes a good first impression. An expedited process also turns work into cash flow at a more rapid pace.

The challenges of manual contract management

While a manual contract management process might be sustainable in the early stages, it becomes untenable as the number of contracts increases.

Potential errors and mistakes

The more you depend on manual inputs, the more you open yourself up to human error.

Contracts require keen attention to detail. The potential impacts from both a legal and business standpoint can massively disrupt your operations.

There’s also the impact on the relationship between the two parties. An error in the contract might sour the relationship and have the other party looking elsewhere.

Any way to automate the process will not only save you time, but give you peace of mind that you are being compliant with laws, regulations, and internal policy. 

Inefficient turnaround times

You want to minimize the time between knowing a contract is needed and having one that is approved, signed, and ready to act on. The time in between could impact your operations and cash flow.

But rushing a contract process could end up causing the first challenge: errors and mistakes.

To combat this, you want to minimize the manual work involved in drafting, reviewing, and approving contracts. Beyond that, smoothen communication with automated notifications that prompt stakeholders who are responsible for the next work to be done.

Lack of compliance

Contracts are subject to state statutory, common law, and private law. You need to be mindful of all three when drafting a contract.

Beyond local regulations, businesses have their internal policies and procedures that need to be adhered to. Manual creation and review processes risk a lack of compliance that can cause financial and operational disruptions.

Think about how you’re storing contracts as well. In case you want to audit past contracts or refer back to a contract that you can build off of.

The more you can template a contract or specific phrasing to cover regulations, the more contracts become a plug-and-play solution.

How to optimize your CLM process

Improve your contract experience by investing in the following changes to your CLM process.

Standardize your contract template

Instead of drafting a new contract for each situation, have templates that are a starting point you can build off of.

It’s best practice to have a template for each of the types of contracts you’re dealing with regularly. The more niched down a template is for a given situation, the less it needs to be altered before it’s ready to be delivered.

Keep these templates in an accessible place to be referred back to and revised as needed. Maintain a feedback loop between the keeper of the templates and the ones making changes so edits can address any pain points experienced throughout the process.

Automate approval workflows

Contracts are collaborated on by multiple people within your business. When work is being passed from one set of hands to another, efficiency and clarity are key to keeping the workflow streamlined.

This is where automated approval workflows come into play. Automated approval workflows trigger a notification for the next person as soon as one stage of the process is complete and it’s ready for their attention.

Implementing this change minimizes the time between steps in the process and prevents work from getting lost as it’s handed off from one person to another. You’ll shorten processing times and turn negotiations into a contract faster.

Measure performance and track costs

For some, the success of a contract is whether it accomplished what it was intended to or not. But there are other ways to measure performance and understand the costs that impact your business.

Consider tracking the following metrics to better understand how effective your business is at managing contracts:

  • Time to signature: The amount of time between the initiation of a contract and the agreement
  • Contract administration time: The amount of time hands-on work is being done on the contract
  • Cost of contract administration time: An estimate of the financial value of the administrative time spent on a contract
  • Number of revisions: How many rounds of edits were required to get the contract to its finished state
  • Percentage of renewals: How frequently are contracts renewed without amendments

As you track these metrics, you can start to establish success criteria to measure whether changes to your process are working as intended.

For example, if you move to using templates you should track the impact on contract administration time to get an idea of just how much time the templates are saving you.

Centralize your contract repository

All contracts should come through a single channel and have a centralized place of storage.

If you have contracts coming through multiple channels, there’s a higher likelihood of something slipping through the cracks.

Then all completed contracts should be kept in the same spot for easy and convenient reference. 

Referring back to contracts is essential in case there are any disputes regarding the agreement. Diagnosing where conflicts arise helps you avoid them in the future.

It’s also necessary to access all past contracts as part of evaluating your contract lifecycle management performance. Having the complete picture of the contract and its process helps you understand where there’s friction that’s slowing you down or hindering performance.

Implement new technology

Contract lifecycle management is becoming increasingly efficient through new tech-based platforms that help improve every stage of the experience.

At each step in the process, CLM software enables smooth collaboration, ease of templating, and effortless performance monitoring. Plus all contract work is centralized in the same platform to ensure everyone has access and knows where to go for working on contracts.

If you’re still using a manual process, compare the costs of various CLM software to get an idea of whether the return on your investment will be enough to warrant the switch.

How technology is shaping CLM processes

Contract lifecycle management has transformed radically with the introduction of new technology. New introductions are focused on increasing efficiency and improving accuracy which saves you time and provides better results.

The biggest changes in the space are:

  • Automation: Templates autofill with the specific information to quickly turn a draft to a completed contract while automated approval workflows notify stakeholders when their input is required.
  • Artificial intelligence and machine learning: AI can analyze contracts for potential risks or compliance issues before a draft is finalized.
  • E-signatures: Digital signatures are allowed as legally binding which cuts out the time waiting for a physical contract to be signed and returned.
  • Cloud storage: Centralized, cloud-based storage gives everyone access to digital copies of contracts no matter where they are in the world.
  • Compliance checks: Some software checks contracts for potentially breaking rules or regulations, both internal and external, to ensure compliance.
  • Analytics and reporting: Essential metrics are automatically tracked and formatted in a way that’s easily digestible so you can understand your CLM process performance at a glance.
  • Mobile access: Smartphone-friendly formats allow for contracts to be read, revised, and signed on mobile devices allowing for greater flexibility and quicker response times.

Don’t forget to evaluate how technology can impact other aspects of your contracts, including the accounts payables or accounts receivables associated with the contract. With BILL, taking and making payments is a breeze with automated workflows, one-click payments, and customizable templates to save you time without losing a personal touch. Reach out to set up a demo.

Brendan Tuytel

Brendan Tuytel is a freelance writer, who writes content for BILL. He draws from his studies of economics and multiple years of bookkeeping experience where he helped businesses understand and measure their financial health.

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