A common misconception regarding contract processes is that they are all about contract lifecycle management(CLM). Many organizations consider CLM only about drafting legal contracts, getting legal reviews, counterparty reviews, and approval/signature. Another misconception is that all the processes have to be driven by either legal or contract teams. Apart from this, there are also some core issues related to contract management.
Actual contract work in most organizations is completed through informal means like sending emails, sorting and color coding through excel sheets, and collaboration through calls and meetings. With these manual and outdated practices, there is no real tracking of the changes made in the contracts or keeping the history of the contract process. This also makes it hard for people to clearly understand their roles in the contract process.
“An average Fortune 2000 company has 20,000 to 40,000 contracts under management at a given time.”
– World Commerce and Contracting
Contacts are like mini-projects that need constant management. It involves constant reviews, analysis, and updates that enable flawless work. A clear understanding of contract processes and the best ways to manage them is necessary to alleviate the issues and misconceptions associated with them. Making CLM work efficiently involves some important supporting processes. In the upcoming sections, we will learn in detail about the processes beyond CLM that make contract management efficient and effective.
Counterparty Onboarding Process
Before starting a contract, the counterparty onboarding process takes place. This is primarily done when the stakeholders are getting into a commercial relationship. However, before onboarding, the company needs to run background checks on the counterparty. The checks are done to ensure that the counterparty’s performance on compliance and contractual obligations has been up to the mark.
Besides, the company will also review the RFP response from the counterparty (in case of buying a service or product) or their requirements (before responding to requirements to deliver services or products). Understanding these requirements helps them in devising the optimized onboarding plan. After onboarding, the CLM processes to track the obligations, renewals, etc. will begin.
Contract Negotiation and Renegotiation Process
Before starting contracts with the counterparty, the contract negotiation process takes place. This involves research on standards and principles to reach common ground. Both parties exchange information and data related to terms and conditions. The idea is to get clarity on all the terms as it will decide the obligations of both parties in the contract.
Once the negotiation process is completed, the agreed terms and obligations become part of the contract. Post this the contract is sent for final signature and approval. In most contracts, there is a lock-in period post agreement on negotiation terms where the involved parties can renegotiate on contract terms. After the lock-in period is over, the terms become final and both parties have to abide by them.
Contract Issue Management Process
The contract issue management process is another important supporting process of CLM. It mainly deals with the prevention and management of errors or escalations arising out of any human error or missed obligations. The process mainly involves identifying potential issues in the contract process and flagging any major escalations to the stakeholders. Early detection prevents any potential financial loss or unnecessary delay.
After this, the second step involves planning a strategy to resolve escalations or remove errors without disrupting the entire contract management process. The stakeholders and contract ops managers generally work together to resolve such issues. The contract issue management also involves standardizing the contract process to prevent any future escalations or errors.
Reviewing contract terms and provisions as per compliance norms is another supporting process that helps organizations in staying up to date with regulatory requirements. It also becomes necessary when the compliance norms are being updated by the regulatory authorities. Considering that, the companies also have to update the terms and conditions of the contract as per new compliance rules.
Although compliance-related rules are set for the long term, the practice of consistently keeping track of compliance laws and regulations is still followed by most organizations. This ensures that the companies do not miss out on any newly introduced norm and avoid being penalized. The companies also have to take follow-ups with the counterparties regularly on meeting compliance requirements.
The CLM process is mainly related to managing the contracts and related updates. But lately, the companies have started focussing more on utilizing contract data and related financials to plan their growth strategies. Thus, reviewing the financial performance of contracts and generating insightful reports on them has also become an important contract process. New-age firms have started using AI-based software that can generate such reports quickly.
The average contract teams still use outdated methods like using spreadsheets to generate contract performance reports but it has been observed that using automated CLM software with report generation capabilities is the optimum method for performance monitoring of contracts. With insightful reports on contract performance, organizations can devise sharper strategies to scale their business growth.
Contract Reporting Processes
The contract reporting process is not all about generating reports on the financial aspect of the contracts. Different teams in the organization need different types of reports based on their core working area. Thus, tracking and recording contract activities become an important contract-related process.
Earlier, only legal teams were interested in the contract performance and activity-related reports. However, in the past few years, other teams like Sales, Procurement, IT, Business users, and even different industries like Energy, pharma, and healthcare have shown interest in understanding specific contracts and their performance. These teams and industries need contract reports with specific insights related to their areas.
The sales teams are more concerned about sell-side contracts and activities, whereas procurement teams are interested in supply-side contracts. Energy industries are more interested in compliance-related activities and specific contracts like power purchase agreements, technology transfer agreements, etc. The same is true for other industries like pharma and IT.
Contract Amendments and Updates
Once the contract is signed, during its lifecycle one or all involved parties may want to add amendments to some terms or provisions. They may also want to update an existing term. The process requires the contract ops managers to identify areas that need updates or adding amendments. Sometimes, due to compliance reasons, certain documents are needed to be attached to the contracts.
Informing other teams or stakeholders on any amendment, update, or adding additional documentation is done by contract ops people or one of the parties involved in the contract. Post this, all the involved parties discuss the update or amendments. Once everyone agrees on the said amendment, then it is approved and implemented. This process is important for contracts where terms require review and updates after a certain period or compliance norms ask for amendments to be made every year(in a few years).
All the processes mentioned above are essential for a smooth contract management process. Most contract teams struggle today as they don’t emphasize the importance of these supporting processes. This is especially the case with contract teams using outdated manual contract management processes with emails and Excel sheets.
To streamline the contract management process where a team can manage CLM and all associated contract processes on one platform, the organizations can use an automated CLM tool. To understand in deep about automated CLM tools with AI capability, click here.