What is Contract Lifecycle Management? Contract Lifecycle Management (CLM) is an internal practice that focuses on the management of a contract from inception to award, compliance, and renewal.
What does the typical CLM Process look like?
Typical CLM processes include the following stages:
Contract Request or Initiation: The process begins with a request for a new contract or the identification of a need for a contract. This can come from various departments within an organization.
Authoring and Drafting: The contract is drafted, often using pre-approved templates and language. This stage involves creating the contract's terms and conditions that align with company policies and legal requirements.
Negotiation and Review: This stage involves the back-and-forth process of negotiating the terms of the contract with the other party. It may include legal review and revisions to ensure that the contract's terms are mutually agreeable, clear, and legally compliant. CLM processes focus on the optimization of the internal processes for achieving consensus.
Approval: Once the contract terms are finalized, it goes through an approval process. Different stakeholders or departments (like legal, finance, and management) may need to approve the contract before it is executed.
Execution: The contract is formally executed, often requiring signatures from all involved parties. Digital signature technologies are increasingly used in this stage for efficiency.
Ongoing Management and Compliance: After execution, the contract must be managed to ensure that all parties meet their contractual obligations. This involves monitoring performance, managing deadlines, and ensuring compliance with the terms of the contract.
Audit and Reporting: Regular audits of the contract management process and the contracts themselves help ensure compliance and assess the effectiveness of the CLM process. Reporting can provide insights into contract performance, risks, and opportunities.
Renewal or Termination: As a contract approaches its end date, a decision is made whether to renew the contract, renegotiate its terms, or allow it to terminate. This decision is often based on the contract's performance and the ongoing relationship between the parties.
Effective CLM requires a combination of organized processes, clear policies, and often, the use of CLM software or tools. This software can automate many of the steps in the CLM process, provide reminders for critical dates, store contracts in a central repository for easy access, and generate reports and analytics to monitor contract performance.
Remember that CLM is an internally focused practice that is designed to make productivity improvements to your organization’s legal team. This internal focus does create gaps, especially when considering how to improve collaboration with external stakeholders, e.g., contract negotiations.
What are Contract Lifecycle Management (CLM) Tools and What Do They Do?
The primary goal of a Contract Lifecycle Management (CLM) tool, or software is to improve contract visibility, reduce risks, enhance compliance, and optimize the overall contract management process for an organization. While these systems won’t negotiate the contract for you, they deal with many of the administrative tasks and help organizations manage their contracts more efficiently by centralizing contract data, facilitating collaboration among stakeholders, tracking key milestones and dates, automating workflows, and providing insights through analytics.
CLM solutions typically offer features like contract drafting and authoring, contract repositories for storage and organization, electronic signatures for contract execution, version control, alerts and notifications for key dates, compliance management, and reporting functionalities. That said, CLM tools most commonly serve as a centralized storage system where all contracts can be securely kept, easily accessed, and efficiently managed. This "contract vault" aspect is crucial for organizations dealing with a large number of contracts, as it allows for quick retrieval, reference, and auditing of contracts.
Where do CLM Tools fall short?
While CLM tools create value for in-house legal teams and the departments they support (e.g., IT, Sales, Finance, etc), they are not a cure-all. If you are in the market for a CLM tool, here are some key limitations that legal teams should keep in mind as they evaluate their options in the space.
Complexity and Implementation Challenges: Implementing CLM systems is intricate and time-consuming. Customization to fit specific business needs, integration with existing systems, and training employees to use the platform effectively can pose significant challenges.
Cost: CLM solutions come with substantial initial setup costs, including software licensing, implementation, training, and ongoing maintenance expenses. For smaller businesses or organizations with limited budgets, these costs can be prohibitive. Moreover, it’s important to understand the pricing model of your CLM vendor, as many tools are priced on a per-user basis. That model makes it cost-prohibitive to include internal and external resources (e.g., procurement and outside counsel), and external stakeholders (e.g., counterparties, customers, suppliers/vendors, etc).
User Adoption and Interface Issues: CLM platforms have complex user interfaces or functionalities that are challenging for some users to navigate. Poor user experience and lack of user adoption hinder the successful implementation and utilization of the system. These problems are amplified when working with external stakeholders, as many counterparties will not wish to adopt your CLM tool just to work with your organization. In fact, most counterparties will want to use their own tools (maybe even their own CLM Tool!). User adoption frictions are a big reason why organizations default to email.
Integration Challenges: Integration with other enterprise systems, such as Customer Relationship Management (CRM), Enterprise Resource Planning (ERP), or document management software, is complex. Incompatibility issues may arise, leading to data inconsistencies or difficulties in information sharing.
Limited Automation Capabilities: While CLM systems offer automation of certain processes, they do not fully automate all aspects of contract management. Some tasks, especially those requiring nuanced decision-making or negotiation, may still heavily rely on manual intervention. In fact, it’s a big reason why contracts are still negotiated over email.
Reviewing the list, it’s plain to see that the biggest gap that CLM tools have is that they have limited capability for working with counterparties and other external stakeholders. Remember, CLM tools are focused on attaining efficiency gains for an organization. While some tools include features for external collaboration, the biggest barrier to adoption is the existing contract lifecycle management tools, processes, and procedures that your external stakeholders have.
Moreover, there are neutrality concerns, especially when collaborating with counterparties or when engaged in arms-length collaborations. Simply put, most counterparties, such as suppliers, vendors, customers, or partners, won’t feel they are on equal footing using your tool for the negotiation process.
External Collaboration Tools Complement CLM Tools
Wrapping up our discussion on Contract Lifecycle Management (CLM), it's important to highlight a key point: while CLM tools are excellent for managing contracts within an organization, they often fall short in facilitating interactions with external parties. This is where external collaboration tools step in to fill a crucial gap.
External collaboration tools are a perfect extension to your existing CLM platform. These types of tools are designed specifically to smooth out the process of working with people and companies outside your organization - an area where traditional CLM tools may not be as effective.
Why are external collaboration tools such a great addition to CLM systems? Here are a few reasons:
Focused on External Collaboration: They’re built to make interactions with external stakeholders - like customers, suppliers, or partners - more straightforward and efficient. This means easier communication, better document sharing, and a clearer understanding of contract terms for everyone involved.
Complements Your Existing CLM Tool: Instead of replacing CLM systems, external collaboration tools complement them. It works alongside your current setup, enhancing your ability to manage all aspects of contract lifecycle management, both internally and externally.
Improves Business Relationships: Smooth and effective collaboration is key to building strong business relationships. With external collaboration tools, you’re more likely to create a positive experience for your external partners, which can lead to long-term business benefits.
Saves Time and Resources: By bridging the gap in external collaboration, these tools can help speed up contract negotiations and reduce misunderstandings, ultimately saving time and resources for your organization.
In conclusion, while your CLM tool does a great job inside your organization, incorporating an external collaboration tool can significantly enhance your overall contract management capabilities. It’s a smart, efficient way to extend the reach and effectiveness of your CLM platform, ensuring you’re equipped not just for internal contract management but for successful interactions with the wider business world as well. Lastly, external collaboration tools are not only for CLM - they can support all the external collaborations your organization engages in, ensuring seamless interactions with all your external stakeholders.
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