Making Sense of Contract Management
Contract lifecycle management solutions can provide greater insight and control over contractual obligations; helping companies to manage risks and increase profits.
By J. David Montgomery, Vice President, Solution Architecture, CLM Matrix
Mention the words “contracts” or “contract management” and the first thing that comes to mind is a filing cabinet with paper documents neatly tucked away; perhaps multiple filing cabinets for the average Fortune500 company managing 20,000 to 40,000 contracts at any one time. At best, companies may have manual procedures and document repositories to track expiration dates with some technology-assisted alert mechanisms.
Business owners and CFOs know that they should be tracking their contracts, yet very few have manually integrated these activities into their business operations. Even fewer have automated these processes.
Categorically, contracts have been aligned to functional parts of a business, with purchasing and procurement managing "buy-side" vendor contracts and sales managing "sell-side" customer agreements. Traditional contract management solutions have been designed to capture key information about these contracts but have stopped short of helping companies proactively manage the obligations contained within those agreements.
Companies need to know what is happening with a contract once it has been executed. For example, they need to know which contracts have obligations that cause penalties due to non-compliance, which contracts have upside opportunities such as the ability to renegotiate terms as certain milestones occur, and which contracts result in penalties if deadlines are missed. Lack of visibility can result in increased risk and lost revenue.
Enter contract lifecycle management solutions. Deploying these systems, IT departments help drive business intelligence and knowledge management by providing the necessary insight and intelligence to functional business units that demonstrate contract obligations are being met.
Contract Lifecycle Management: The Future of Business Contract Operations
To help mid- and large-sized organizations gain control over their contract obligations, deploying a contract lifecycle management solution is essential.
Rather than managing contracts in silos across functional parts of a business, contract lifecycle management solutions consolidate contract metadata into one central repository. The visibility gained provides organizations with a better understanding of the risks and rewards associated with date-driven milestones, making it is easier to prioritize obligations.
Once obligations are prioritized, automation capabilities can quickly be set to monitor progress and ensure important deadlines are not missed. For example, contracts typically contain multiple terms and conditions that require elements of a contract to be carried out by specific dates. If the obligation is not completed by the agreed upon date, a fee may be incurred. Many contract lifecycle management solutions offer the ability to set triggers to proactively alert stakeholders of pending deadlines and corresponding obligations. For service driven contracts or multi-year projects containing multiple milestone targets throughout the life of a contract, the alerts can prove very valuable.
For more complex contracts containing performance-based obligations, contract lifecycle management solutions allow action triggers to be set which proactively generate reports detailing how and when obligations were met. Action triggers are especially useful in mitigating risk in highly regulated industries such as pharmaceutical, medical device or oil and gas where proof of compliance is mandated periodically throughout the life of a contract.
Monitoring and tracking compliance-driven obligations over an extended period of time can be a very labor intensive and error prone process when relying on manual methods. It is not uncommon for the process to take multiple employees several days to gather and compile data for use in developing detailed reports demonstrating proof of compliance. With contract lifecycle management solutions, reports can be generated with minimal effort through the use of in-depth reporting and analytics capabilities.
By siphoning data from multiple systems (accounting systems, CRM systems, purchasing systems, etc.) into a data warehouse or a business intelligence cube, in-depth reports can be generated. Analytics capabilities enable actual performance data that occurred within these systems to be pulled and compared against the obligations housed in a contract lifecycle management system to track performance against the stated obligations. Information can be pushed out through a dashboard to executives or other key stakeholders.
Contract lifecycle management solutions also provide users with a central library of executable contract templates with pre-approved language, allowing organizations to keep a tighter rein on individual terms, conditions, and clauses. Additionally, a central contract library ensures business units and legal departments are on the same page from the outset. Standardized, rules-driven contract creation also enables organizations to close contracts in a shorter timeframe.
When considering contract lifecycle management solutions, they should be measured in total by how well they manage obligations and how they create business intelligence and enhance management visibility across an organization. Lack of insight into an organization’s annual contractual obligations makes it extremely difficult to forecast future expense projection and manage risk. It’s clear that in today’s business world, contracts do not belong tucked away in filing cabinets or siloed in business units.
J. David Montgomery is vice president, solution architecture at CLM Matrix, a developer of contract lifecycle management (CLM) software solutions on Microsoft Office and SharePoint technology platforms. You can contact the author at firstname.lastname@example.org.