The CLM Guide: Understanding and Establishing Contract Lifecycle Management

For example: Low-value contracts like ones for mobile phones are often extended by accident – and without checking the conditions, causing people to miss the chance to get different rates, new smartphones, etc. When companies have such great numbers of contracts, low values become high values very quickly – and CLM software would have provided the information needed well before the contract was extended unintentionally.

In this somewhat lengthy article, you will learn how this works..It describes the different phases in the lifecycle of a contract and how contract lifecycle management software supports the various departments involved in the lifecycle.

• What is CLM?
• Contract creation – the start of the contract lifecycle management
• Contract review in CLM
• Contract approval in CLM
• Contract execution – the step to contract conclusion
• Contract fulfillment
• Contract expiration

Since contract processes are an elementary part of the value chain, companies always depend on exact and accurate information about contracts. A CLM solution is the key tool for simplifying procedures in the contract lifecycle. At the same time, a professional CLM tool also makes it possible to meet the requirements of various stakeholders – whether employees in the various company units or external customers. This article and the linked Contract Management Guide give you the answers to such questions as “What is CLM?”, “What are the phases in the contract lifecycle?”, “Which business processes and company units benefit from CLM?”, “How do you implement CLM software in the company?”

Why CLM?

If you follow the well-known analyst firm Gartner Research, it quickly becomes clear that the claims made about CLM in the intro above are more than just generic assertions. In 2021, Gartner Research found (Magic Quadrant) that companies cite risk minimization and the acceleration of business processes as the main reasons for implementing CLM software.

And frankly that’s no surprise. After all, transforming business processes into digital ones simply makes things run better, especially when it comes to contract processes. Of course, the analog or partially digitized process must already be in a reasonable state.

Just one process among many? Yes, but a major, cross-departmental one

Contract creation is part of an extensive, multi-faceted process for most companies. Many company departments and stakeholders are involved. Unfortunately, experience shows that each department in the contract process has its own ideas and practices when preparing or exchanging contracts. This leads to friction losses. According to a study commissioned by Docusign and conducted by Forrester (2020), 98% of companies primarily see problems in the efficient preparation, signing, implementation, and management of contracts. While some individual sub-processes have already been digitized, this usually results in information silos. So, it’s time for a carefully conceived and well thought-out CLM process.

What is CLM?

Contract lifecycle management takes a holistic perspective. As such, CLM software supports the complete lifecycle of a contract, from its creation to its end. Everything starts when we create a contract (extending party) or receive one (accepting party). These can be simple, one-page agreements or framework contracts covering many pages, all the way up to specifications and amendments. This is followed by further negotiation processes and approval procedures, which take place within the CLM solution. Finally, you need to carefully manage all contracts over their entire lifespan. Meanwhile, advanced CLM software assists you in reviewing and enforcing contract terms as well as in reporting, including data reporting. But if contracts have different life cycles, what are they and what distinguishes them?

The contract lifecycle consists of extensive processes, and there are seven different lifecycles which a contract goes through. The different CLM phases are then associated with various tasks to be performed by the relevant user groups. The following passages shed some light on the contract lifecycle from the perspective of the extending party and the accepting party.

Contract creation – the start of the contract lifecycle in CLM

CLM software is already a huge help, even at the very beginning of the lifecycle. Whereas contracts used to have to be painstakingly compiled and created from various and scattered sources, modern contract lifecycle management provides you with a contract template library. CLM employees can find reviewed (ideally by the legal department) contract templates in this library. The templates range from simple text blocks (for clauses, etc.) to complete contract templates. Everything has undergone legal review and can be used at lightning speed across different sites of the company. A template library is an essential function for the CLM: no more troublesome, time-consuming searches, and contract creators still stay on the legally safe side. It is also useful for the CLM software to enable easy collaboration on draft contracts. A further benefit of the contract template library is the consistently high quality of the contracts created. Since contracts follow the same structure thanks to the text blocks from the template library, this also improves their readability – making it much easier for users/readers to find their way around.

As soon as the contract has been drafted by the extending party, the people working in-house on the draft may already want to share it with the other party. Ideally, the CLM software then has options for collaboration. Collaboration tools like Microsoft Office 365 lend themselves to this. This significantly simplifies CLM.

Who benefits from CLM during this phase?

Small and medium-sized companies and startups benefit in particular from the advantages of CLM software in this phase of contract creation. In many cases, these kinds of companies do not have the financial resources for in-house lawyers. Contract automation via CLM means having the text modules legally reviewed once in order to then work with them on a continuous basis with quick access via the contract template library. The situation is different for groups of companies: They do have legal departments, but the volume of contractual matters is significantly higher. Here, too, the template library in CLM simplifies and reliably speeds up contract creation

Contract review in CLM

There is a whole host of information and data worthy of review beyond the legal review of the actual contract. For example, documents accompanying the contract can anchor important facts in the CLM. Prices, delivery times and quantities, termination clauses and non-disclosure agreements (NDAs), service agreements and liability agreements, etc. This data changes naturally during the first and even the second phase of the CLM as a result of negotiations. A detailed review is a matter of course for both contracting parties. CLM software supports this negotiation process so that it always establishes the context between the contract and the accompanying documents. Here, too, it is a question of rapid access to the current contract and the associated documents from any location. The groups of persons authorized for this access are not limited to the legal department; other departments are also included. This is where sophisticated CLM software shines by controlling read and write access to contracts and accompanying documents through finely granular role and rights management. Ideally, the CLM tool brings all documents and correspondence relating to a contract together in the digital contract file to make them easy to find.

Which business units benefit from contract review in CLM?

Automated process control (workflows) can be used to standardize workflows. Everyone involved can perform their assigned tasks in CLM quickly and effectively. This in turn yields measurable improvements in terms of quality as well as efficiency. Purchasing or other departments like HR and IT derive significant benefits from automated process control and the ability to share contracts and contract-related documents with internal and external parties.

Contract approval in CLM

This part of the lifecycle is a phase of transition: The contract has been created and filled out in terms of form and content. This is where the approval process starts in CLM – the ideal basis for ensuring a workflow-driven process at this stage. It’s not all about the contract creators and processors, however; the contract will generally have to be approved by people in management positions. Workflows are the alpha and omega of CLM, and this is where they really shine: The right contract approvers have to be found, informed in good time, and provided with the necessary resources, that is, the contract in question as well as all of the accompanying documents. Workflows in contract management accomplish all this in an effective and highly automated fashion. Ideally, the CLM tool has a versioning function for contracts and the accompanying documents. This enables the contract approvers to track all previous changes to the contract, so that they know who changed what, when, and how. Naturally, the party accepting the contact has a strong interest in reviewing it first.

Who benefits?

All persons with authorization rights: Managing directors or upper management as well as managers in specialist departments. This is not just wishful thinking. After all: Faster approval cycles are one of the benefits gained, as reported by 51% of company representatives surveyed in the Forrester study (Status Quo Contracting 2020).

Contract execution – the step to contract conclusion

After the contract has been approved in the previous step, the workflow forwards it to the group of signatories. Modern CLM software no longer requires pen and paper, of course. Electronic signatures from Adobe Sign, Docusign, FP Sign and other similar signature solutions are available – digital contract signing makes it a breeze to sign contracts digitally, especially in B2B business. These digital signature solutions integrate seamlessly with a modern contract lifecycle management tool. Workflows for the signature process inform signers and countersigners of the need to provide signatures and the subsequent conclusion of the contract.

Who benefits from contract execution in CLM?

Internal authorized signatories as well as external contractors gain important benefits from this stage of the lifecycle in particular: Whereas it used to take several days to sign a contract by post, CLM can reduce this stage to just a few minutes – simply with the digital signature. This is made possible by modern signature services such as FP Sign. Both sides – internal and external – will appreciate this. Another advantage: Digital signatures also prevent further media discontinuity since there is no need to print out the contract and scan it back in again.

Contract fulfillment

The conclusion of the contract is followed by the fulfillment of the contract. It is now necessary to comply with all defined obligations during the term of the contract: mostly to provide services, process payments, meet deadlines and the like. But who wants to monitor compliance? Manual inspections quickly become infeasible as the number of transactions grows. A case for CLM software. Here, review concepts combined with workflows simplify the acid test and automate the inspection process. But CLM also makes a significant contribution to improving compliance. The better the CLM tool integrates with existing ERP, ECM or CRM systems, the more detailed the information available for the inspection. This also applies to the audit and reporting part. The available data can be used in retrospect to create risk assessments for contracts and contract partners, determine the value of current contracts, detect deviations, and determine contract revenues and costs, etc. What’s important here: The CLM software should of course also be able to handle the special case of consolidating lease agreements for greatly simplified balance sheet accounting in accordance with IFRS 16.

Who benefits from this CLM lifecycle?

The company as a whole benefits here. Controlling as well as management can access detailed audits and reporting in CLM. The same is true in matters of compliance. Here, too, CLM makes it possible to detect potential rule violations at an early stage and initiate appropriate measures.

Contract expiration

The contract lifecycle does not end with the expiration or termination of the contract. Legal requirements force the contracting parties to retain records of the contracts. The Fiscal Code (§ 147) and the Commercial Code (HGB) require retention periods of 10 and 6 years respectively – all audit-proof and in compliance with the principles of proper accounting (GoBD). Beyond these requirements of fiscal law, data protection also plays a major role, especially when it comes to GDPR compliance. Because of this, a modern CLM solution has to have a link to an electronic archive that meets these requirements. However, there are benefits to be gained from this seemingly burdensome obligation. Peace of mind when awaiting the next auditor’s visit is just one of them. Beyond that, CLM employees gain benefits such as faster searches for archived contracts, eliminating the time spent navigating the archive rooms. In fact, its physical searching is made completely redundant thanks to the combination of CLM and digital archiving.

Who benefits in CLM during digital archiving?

Modern integration of the digital archiving solution into the CLM software results in highly accurate results. Location-independent and, wherever possible, on all conventional device classes. This means that everyone who regularly needs to access archived contracts quickly will enjoy immediate benefits. Beyond that, GoBD-compliant, audit-proof archiving is certainly a concern for the finance and operations departments, just as GDPR compliance is a key concern for the data protection officer.

Get started with CLM software

The days of paper-based, partially or semi-digitized contract processes are over. CLM software like easy contract enables you to regain and maintain control at all stages of the CLM lifecycle. It doesn’t matter how many locations or how many contracts you want to manage: You will discover the benefits of workflow-based automation, a single point of truth, integrated services for digitally signing contracts and the incorporation of archiving solutions. CLM tools like this put your contract management on a solid footing. You will benefit from all the advantages of digital CLM in no time at all.