Contract Management: Why More Companies Are Using CLMs

Traditional contract management methods rapidly become unsustainable in today’s fast-paced business landscape. As companies seek greater efficiency and transparency, contract management software has emerged as a critical solution to streamline every phase of the contract lifecycle.

The increasing adoption of contract management software is primarily driven by the need to reduce administrative burdens, minimize human error, and harness the growing importance of data-driven insights.

We will examine the reasons behind the rising popularity of contract management software, how it can transform outdated practices into agile digital workflows, and what this means for businesses striving to stay competitive in an ever-evolving marketplace.

Contract Lifecycle Management (CLM)

Contract Lifecycle Management (CLM) is the systematic process of managing a contract from its initial request through drafting, negotiation, approval, execution, and finally to its post-execution management. Essentially, CLM ensures that every phase of a contract’s life is tracked and optimized, often using specialized software to automate workflows, improve compliance, reduce risks, and provide actionable insights throughout the contract’s duration.

The Contracting Workflow

The traditional contracting workflow typically involves 5 stages:

Contract Initiation and Drafting
Internal Reviews.
Negotiations
Execution and Signing
Post-execution management

1. Contract Initiation and Drafting

A contract is a formal agreement between the parties involved, clearly outlining their obligations and expectations to ensure mutual understanding. This necessity leads to the drafting of the contract, which often involves using standard templates and manual authorship using word processing tools. The responsible team gathers all necessary background information, outlines objectives, and selects relevant standard clauses and templates.

Common Pitfalls:

Inconsistent Language: Templates may be outdated or not uniformly applied, leading to varied legal language across contracts.
Human Error: Manual entry increases the likelihood of typos, incorrect clauses, or missing essential terms.
Version Control Issues: Multiple drafts can circulate simultaneously, making it hard to track which version is the most current or correct.
Lack of Traceability: Without a centralized record, tracking changes, edits, or the origin of specific clauses is challenging.

2. Internal Reviews

The process involves circulating the draft among internal stakeholders for feedback before sharing it with the contract party. When standard templates are used, internal reviews are typically not extensive. However, when contracts are written from scratch, these reviews can be thorough to ensure that all stakeholders are aligned.

Potential Pitfalls:

Fragmented Communication: Feedback may be spread across emails, comments in documents, and informal discussions, leading to confusion.
Consolidating Changes: Merging various sets of revisions can be time-consuming and error-prone.
Overlooked Revisions: Important changes might be missed, especially if multiple versions are floating around.
Delayed Timelines: Back-and-forth revisions without a centralized system can significantly extend the negotiation phase.

3. Contract Negotiations

This phase extends communication and collaboration beyond the organization, highlighting unique challenges and opportunities for improvement. The contract draft is securely shared with the client for review. Both parties exchange feedback, often using redlines or tracked changes. The client may request modifications to terms, pricing, or service level agreements. Negotiations can occur over email, video calls, or through dedicated digital platforms. Due to differences in priorities and legal perspectives, several iterations of the contract may be required to reconcile both parties’ interests.

Potential Pitfalls:

Version Control Challenges: As the contract circulates between external and internal parties, managing multiple versions can lead to confusion over the most current terms.
Security and Confidentiality Risks: Sharing sensitive contract details with external parties through unsecured channels can expose the organization to data breaches or leaks.

4. Execution and Signing

The final contract is signed by both parties, traditionally via physical signatures on paper documents.

Potential Pitfalls:

Delays in Signing: Physical mailing and in-person signings can significantly slow down the process.
Risk of Loss or Damage: Physical documents can be misplaced, damaged, or even tampered with during transit.
Verification Challenges: Ensuring the authenticity of signatures and maintaining an accurate record of executed documents can be difficult.

5. Post-Execution Management

After a contract is fully executed, it enters the post-execution phase where it must be stored, monitored, and managed throughout its lifecycle. Key activities include tracking key dates (e.g., renewal or expiration dates), ensuring compliance with contractual obligations, and managing amendments or renegotiations as needed.

Potential Pitfalls:

Disorganized Storage: Contracts may be stored in multiple locations (physical files, disparate digital folders), making retrieval difficult.
Missed Milestones: Without systematic tracking, important deadlines (renewals, expirations, compliance audits) can be overlooked.
Limited Visibility: It can be challenging to analyze contract performance or monitor compliance when contracts are managed manually.