Every business in every industry relies on contracts. Every one of your departments - from human resources and transportation to sales and procurement - is based in legally binding agreements between parties. While these can vary according to the subject matter and negotiated terms, the life cycle of such documents is broadly the same. This predictable, standard structure means that your business can adopt a policy that seeks to use the contract life cycle as a tool, with the purpose of increasing efficiency and productivity.
The contract life cycle is the key to effective Contract Management because it breaks down the process involved in the creation and adoption of a new contract while taking into account what happens outside of the drafting and signing processes. It is the detail of these adjacent processes that are of the most important in Contract Management, and mean the difference between an efficient and productive operation, and one that is characterized by personnel constantly having to race to catch up with the function of their own administrative systems.
What is a contract life cycle?
Contracts are live documents. This means they must be tended in a variety of ways to ensure they are always operating at their absolute best. Whichever department originates the contract, the document has seven stages to its life cycle.
- Preparation - The most effective contracts are those that are best prepared. Contract preparation does not mean the writing of the document, however. Instead, it refers to the initial decisions made, and the research undertaken to determine the content and parameters of the agreement. During the preparation stage, it is necessary to answer the following questions:
- Why is the contract needed?
- What are the goals of the contract?
- How is the relationship between parties defined?
- What are the risks involved?
- How can the risks be mitigated?
- What are the potential scenarios and events that can occur during the period of this contract, and how will they be handled?
The proper preparation of a contract ensures that the rest of the life cycle stages run more smoothly, and in a time-efficient manner. In this way, the preparation stage should be thought of as the foundation of the contract, in the same way as the foundation of a building. The stronger and deeper the foundation, the more stable the structure upon it will be. This will be particularly important later in the contract life cycle, when different scenarios and situations can arise, having a potentially destabilizing effect. The more effective this early due diligence is, the more the contract will be able to withstand disruption in the future.
- Drafting - The drafting of the contract is the stage at which the body of the document is produced, or the structure is built upon the foundation. The most productive contracts are drafted in a way that is standardized across the organization, using carefully crafted, specific wording that ensures all the questions asked during the preparation stage are comprehensively and thoroughly addressed. It is advisable to undertake the drafting of a contract in collaboration with your legal department, as this ensures that the necessary wording is in place, and all your interests are protected.
- Negotiation - Before it becomes a binding document, the contract must first be agreed and, in order to achieve that, the minutiae must be negotiated. If the proper preparation has been undertaken in stage one, then the negotiation stage should be relatively brief and straightforward. However, this is the opportunity for all parties to review the terms and conditions specified by the contract, and discuss alterations and additions as required.
- Approval - Business contracts must be approved, whether this is by a project manager, the senior leadership, or the CEO. It is the task of the approving parties to confirm that all questions have been answered, all negotiations have been completed, and that the draft of the contract is agreeable. In businesses using Contract Management Software, this is made easier and quicker by the use of workflow features within the package.
- Execution - When we talk about ‘executing’ a contract, we mean to have it signed. The signing of a contract makes it legally binding upon all parties, and this can be a time-consuming process if the parties concerned are in different territories or regions – even when drafts have been exchanged by email. This stage can be completed more quickly by using the e-signature features of Contract Management Software.
- Amendments and updates - Work on contracts do not end once the parties concerned have signed on the dotted line. As these are live documents, this sixth stage is when the real ‘tending’ happens. Even the most diligent preparations cannot foresee or predict all scenarios and situations, so contract revisions are inevitable. In order to manage these effectively, it is vital to track changes and version histories – not only for the purpose of compliance and governance but for the timely addressing of business relationship issues for the future prosperity of your organization.
- Audit and renewal - Just as you review the performance of your staff and departments, you must also review the performance of your contracts. This process provides the opportunity to check that all obligations and milestones are being met and that the contract is delivering exactly what was intended. It also ensures that your business never misses the chance to renegotiate as contracts come up for renewal and that underperforming or obsolete contracts can be ended and removed.
From start to finish, the contract life cycle encompasses every action and decision-making process involved in comprehensive Contract Management. For that reason, it is imperative that businesses of all types understand the detail of the contract life cycle, in order to ensure commercial success.
What do we gain from understanding the contract life cycle?
In the simplest of terms, by working to properly understand the contract life cycle, you gain greater control. This sounds highly agreeable for your business, but what does it actually mean, in real terms?
- By undertaking clearly defined due diligence at the preparation stage, you retain control of everything related to the specifics of the contract in question – from terms and conditions to the mitigation of risk. Each of these elements included in the contract has a direct impact on your business operations, so keeping them under tight control is the best way to ensure that your enterprise is functioning in the optimal way.
- Thorough mapping of potential decision pathways at the preparation stage increases efficiency throughout the contract life cycle, particularly in negotiations, and in the amendments and revisions stage.
- Keeping the remaining five stages in mind during the drafting stage of the contract life cycle ensures that all eventualities are catered for in the legal language put forth into the negotiation stage.
The end result of this increased control within your business will ultimately be seen in your bottom line. With control comes efficiency, and efficiency breeds productivity. Contract life cycles are longer than the duration of the legal agreement itself, so tighter control means that the life cycle – and, therefore, project run-time - is shorter. Consequently, a higher number of projects and contracts can be undertaken, with personnel and resources more effectively deployed.
The other side of that coin is the timely removal of ‘dead wood.’ By taking greater control of your contract life cycles, your monitoring of contract performance is necessarily closer and more detailed. This allows you to cut out those contracts that underperform, or simply fail to deliver on their intended goals. Underperforming or failing contracts consume space and resources, so cutting them from your contract repository will keep your system lean and functioning in an optimal fashion.
How does Contract Management Software help?
The best Contract Management Software packages are specifically designed with the whole contract life cycle in mind. These browser-based platforms work to help you manage contracts in a single place on an individual level, on a category level, and as a whole-organization library.
- Contract creation – Contract Management Software packages provide a centralized repository that constitutes your contract library. Within this, editable templates, clause libraries, a drag-and-drop interface, and a Microsoft Word extension mean that your contracts can be drafted inside the software, while you are safe in the knowledge that personnel will be using only the most up to date information and versions of terms and clauses. Moreover, permission-based access control features mean that you can easily track activity and version changes throughout the system.
- Accessibility – The processes of drafting, negotiation, approval, and execution specifically require collaboration within your organization, and with external parties, too. The accessibility of Contract Management Software makes this not only easier in general, but also faster. The best software packages are browser-based platforms with permission-based access, which means that authorized personnel can securely access the necessary sections of the platform from anywhere in the world, as long as they have an internet-connected device. This means staff can begin putting contracts together remotely, without having to return to the business premises to do it. Likewise, e-signature processes can be deployed to ensure swift authorization of the legal documentation from any location.
- Encrypted data transfer – Inevitably, data protection issues accompany software package accessibility, but the best Contract Management Software packages use encrypted data transfer. This means that information regarding contracts can be exchanged safely and securely through digital means to speed up the drafting, negotiation, and execution stages of the contract life cycle.
- Configured reporting and notifications – In order to track changes and keep control of required amendments, it is necessary to have a configured reporting and notification facility, and this is the most powerful part of any Contract Management Software package. This feature delivers a high level of automation, letting you know when versions are updated, and when milestones are due. In addition, configured reporting is the leading tool needed for comprehensive auditing of contract performance – allowing you to drill down to the most specific and fundamental data, in order to make the best informed business decisions.
It is the configurable nature of Contract Management Software that makes it indispensable to your growing business. It means that the software system can be regularly adapted to meet the needs of your organization, as it evolves over time. It also allows you to really make the most of your contract library in commercial terms.
When we understand the contract life cycles in our business, we can work to truly optimize our processes with the goal of increasing revenue. In order to achieve this, we need to be able to fully assess the effectiveness of each contract life cycle stage, along with the performance level of each individual contract. With configurable reporting, it is possible to gather every type of actionable data required to boost your bottom line.
In addition to identifying those contracts that need to be ended and scrapped, configured reporting can also identify those contracts that present further sales opportunities, as well as those that can be renegotiated in a more efficient, more profitable way. When used in conjunction with the centralized repository and clause template library, configured reporting can help root out more easily those contracts that would benefit from amendments arising from business scenarios and events, or from changes in legislation and regulation. Finally, the configurable notification and event milestones mean that tightly controlled oversight can be maintained, and directed toward increased productivity.
Contract Management Software for contract life cycle control
The case for taking control of your contract life cycles with Contract Management Software is clear. Harnessing the power of your contract library in this way ensures that no opportunity to increase revenue is missed, and no chance to improve efficiency will pass your organization by. While contract life cycles are an all too often overlooked business resource, Contract Management Software can be used to help you understand their potential and to optimize your enterprise.
Call Symfact today to book your Contract Management Software demonstration.