Businesses of all sizes rely on contracts to govern day-to-day operations. From onboarding vendors, to closing new deals, to hiring new employees, contracts are the lifeblood of every business and have a direct impact on expenses and revenue.
The contract management lifecycle describes the enterprise-wide process of managing contracts and documents. It can describe all contractual phases, from conception to execution, that take place when a business enters into a legal agreement with a third party. Multiple stages and cross-departmental collaboration are part of every contract lifecycle, and the length and complexity of this process can vary greatly depending on the efficiency of a company's internal operations.
Developing a detailed understanding of the contract lifecycle - including the various phases involved, the teams that support it, and the opportunities to improve it, can help businesses increase the speed at which documents move through an organization while simultaneously reducing risk and operating expenses.
What are the Stages of the Contract Management Lifecycle?
The contract lifecycle begins when a business needs to enter into a legal agreement with a third party. Before a contract can be drafted, a contract attorney needs to understand the basis for the agreement and the relevant points related to the business' expectations. This includes services the third party will receive/provide, start dates, pricing, and project milestones. Many companies will use a contract management platform to record these details which in turn will trigger a new contract creation request to the legal department. A contract attorney will then write an initial draft (usually starting with a template) and customize it to cover the business details.
After the first draft is finished, there is almost always some degree of negotiation. Legal teams will take turns redlining the agreement with requests and changes until all terms are agreed to and finalized. This process can take place via email, but a contract management platform with version control tools can help facilitate the redline review process and prevent changes from being lost or overwritten.
Most companies have an approval chain comprised of various stakeholders, managers, and officers each responsible for reviewing and approving the final draft before it is routed for signature. The length of the approval chain often depends on the dollar amount of the contract and the size of the company. Contract management platform can help streamline this approval process by tracking who has reviewed and approved the agreement, and ensuring all parties are looking at the final draft. Once a contract moves through the approval chain, it will be ready for signature. Many companies will use an e-sign platform like DocuSign, which will help coordinate the electronic execution of the document for both parties.
After a contract has been signed and dated, an executed copy must be sent to both parties. Finalized agreements should be stored in a central location that is easily accessible to legal teams, business leaders, and project managers who may need to periodically reference the terms of an agreement. However, due to the confidentiality restrictions, documents should be simultaneously protected from unauthorized access.
Renewal and Ongoing Management
The final stage of the contract lifecycle is the management of renewing or expiring contracts. This stage requires a dedicated, organized process in order to be successful. Most contracts will have auto-renewing terms of expiration dates. As a result, a lack of action may lead to the auto-renewal of an undesirable agreement, or the expiration of an agreement that governs key business functions.
In either scenario, teams must get out ahead of key contract dates to ensure appropriate actions are taken. Effectively managing this stage of the lifecycle is key; missed contract dates can create a significant amount of financial, legal, and procurement risk. Contracts that auto renew before a business has a chance to review or renegotiate can result in significant expenses. According to independent research conducted by the International Association for Contract & Commercial Management (IACCM), good contract development and management can improve profitability by up to 9% of annual revenue. This research underscores the need to make this process as simple as streamlined as possible.
What Teams are involved in the Contract Management Lifecycle?
The contract lifecycle isn’t solely the responsibility of the legal department - multiple teams and dozens of employees support each phase. The number of teams involved will generally vary based on the size of the business. Developing a holistic view of the various teams involved and their respective roles and responsibilities can really empower business leaders to determine the best strategy for streamlining the process.
The legal team plays the most important role in the contract lifecycle, as they're responsible for protecting the business from unfavorable obligations or liability. This is done through the drafting and negotiating each agreement that enters the lifecycle. Legal team provide final approval on all agreements before they are routed for signature.
Business leaders and managers are also heavily involved in the contract lifecycle. While legal teams generally review contractual obligations through a legal lens, the management teams will be involved in the negotiation of business-specific terms such as pricing and the scope of work.
Sales & Business Development
Sales teams actively sell the products and services that require legal protection and governance. As a result, they need to inform legal and management as to the services and terms agreed upon during the sales process. It’s also important that sales teams are aligned with business and legal requirements and objectives so they’re not selling terms and price points that the business can't fulfill.
Business development teams responsible for large scale growth initiatives, such as strategic partnerships or acquisitions must work closely with legal to ensure the terms of these deals are accurately captured from a contractual standpoint, as well as have an easy way to manage diligence processes. Similar to sales teams, business development leaders must ensure the terms they negotiate are aligned with business and legal priorities.
Finance teams need to be in the loop on the financial obligations associated with each contract. Pricing, payment terms, and billing requirements should all be communicated and approved by the finance team prior to the execution of any agreement. The finance team is responsible for ensuring the business is capable of fulfilling its contractual obligations from a budgetary standpoint.
Procurement and Sourcing
Procurement and sourcing teams are actively involved in the negotiation of pricing and delivery of products and services from third party vendors. Much like sales teams, procurement and sourcing departments must inform legal and management of the terms required for a specific agreement. They must also be aligned with business requirements and ensure they’re not agreeing to terms the business can’t support.
If a contract governs a specific project, integration, or customer deliverable, a project manager may be responsible for helping the legal team define project milestones or contractual obligations, as well as keeping both sides informed as to a contract’s status. Project managers may also be focused on the general lifecycle timeline and ensuring that the document moves through the organization.
How does Contract Management Software Accelerate the Contract Lifecycle?
Contract management software helps both small and large businesses accelerate the contract lifecycle, while simultaneously managing legal risk and reducing expenses. As the central contract repository for an organization, contract management software enables teams to work collaboratively and easily locate critical documents regardless of location. It can also provide business leaders with the peace of mind of knowing that documents are secure, encrypted, and only able to be accessed by employees with certain permissions. Alerts and reminders can ensure companies stay ahead of key contract dates and coordinate the necessary reviews of expiring or auto-renewing contracts before it’s too late.
The contract management lifecycle is a complex set of phases involving multiple stakeholders. It’s not something that should be manually managed, especially when a business’s contract volume begins to accelerate. When companies reach a point of sustained growth, automating the contract lifecycle becomes critical to maintaining operational efficiency.