Contracts are the most commonly heard word in the world of business. No matter how big or small your company is, you must have encountered contracts at some point. It is the basic need for any two businesses or partners to collaborate and work in mutual consent. In addition, contracts are very crucial for a company to maintain harmony with their partners or vendors in times of trouble or misunderstanding. Every contract has multiple clauses defining actions and protocols to be followed during the contract period. In case of any breach, these contracts act as guiding light to the businesses.
Now, you know how vital these contracts are for any business. When talking about businesses, they work with multiple vendors, partners, and businesses simultaneously. This means they have several contracts at a time to take care. Managing such important documents is one of the most vital tasks. Usually, there is a dedicated department to handle these documents, but with such big numbers of documents, there is always a risk of missing deadlines and compliance failure.
Fortunately, technology comes in handy here by offering contract management solutions where AI helps manage contracts. If you look at the numbers, The Journal of Contract Management estimates that 71% of businesses can’t locate at least 10% of their contracts. These missing contracts cost huge money and risk to businesses. Therefore, businesses are relying more on CLM to manage these crucial documents, rather than manually.
Let’s dive in deeper to know what is contract management;
What is contract management?
Contract management or contract life-cycle management (CLM) is a business process that manages the creation of contracts, their implementation, and evaluation to maximize business performance and reduce risk. Contract management is evolving with technology, and now one can manage contracts from start to finish at their fingertips. According to the KPMG survey of outsourcing suppliers, businesses stand to lose up to 40% of a contract’s value without close contract governance.
Aren’t these numbers big? They are.
Therefore, Businesswire.com says that the global contract life cycle software market is expected to grow at a CAGR of around 13.7% during 2020-2026.
Here are the fundamentals of the Contract Life-cycle Management:
Contract management isn’t limited to contract creation or storage, but it is way more than that. When two parties sign a contract, it is the legal document defining the business relationship between the two parties. Mostly, contracts comprise the revenue and expenses part; therefore, it affects the business profitability up to a great extent. Effective contract management creates a strong business relationship and takes business to greater profitability over the long term, but only when managed appropriately. An effective CLM offers excellent insights about the contracts such as their types, clauses, alerts the deadlines, highlights the loopholes, and identifies the relationships between the parties, and many more.
To get more understanding of the process, here are the Contract Management Stages.
Contract Management can be divided into several stages to understand its functioning. The process may vary with different CLM solutions, but the core idea remains the same. Here, we have bifurcated the contract management process into seven major stages:
- Initial Request
- Drafting Contracts
- Approval and Execution
- Revision and Amendments
- Auditing and Reporting
Initial Request: The process begins with the initial request of contract identification and collecting its relevant documents.
Contracts Drafting: Once the contract purpose is identified, the contract’s drafting is done where all the legal obligations, protocols, terms, and conditions with legal clauses are drafted. It is better to involve legal experts in this stage for legal effectiveness.
Negotiation: After the completion of drafting, contract versions are compared with others for identifying any discrepancies to reduce the negations time.
Approval and Execution: It is the most time-consuming stage as many times, management approval takes time. When both parties agree on the contracts after discussing with their legal teams, the execution takes place. Here, electronic signatures help to shorten the process.
Revision and Amendments: In situations where any critical document is overlooked before drafting or any edits in the contract clause are requested, revision is made, and amendments are executed, followed by the approval stage.
Auditing and Reporting: Contract management doesn’t end at the approval stage, but regular audits are required to ensure that both parties comply with the agreement’s terms in the contract.
Renewal: With modern CLM, Renewal has become very easy. Before the contract deadline approaches, an automated alert pops in to remind the renewal date. Depending on the business experience, both the parties can renew the contract or end the contract. Aberdeen Group says that Best in class companies renew 56% of their contracts annually.
These were the primary stages for any CLM system. Most contract functions the same way; however, they are not limited to the above points. Nowadays, audits and obligation managements are very commonly used contract management features. They help businesses to understand their contract better and offer profitable outcomes.
Recently, the CLM industry is experiencing that Automation has become the new fuel for the contract management process. Even Gartner predicted that by 2024, the manual effort for contract review would fall by 50% due to the adoption of AI-based contract analytics solutions.
This article is intended to provide you with a brief understanding of what contract management is and how it works. Every year, CLM helps businesses to save billions of dollars. According to Forrester and Aberdeen, Digitization of contract management can improve compliance by 55%. This explains the importance of CLM and its buzz. Contract management is the need of the hour and has plenty to offer its users. If you want to explore more about the CLM, reach out to our expert by scheduling a meeting.