Just why are improvements in contracting and contract management so important?

Publicity in the last few years has highlighted contract lifecycle management (CLM) – both as a set of activities all companies do, and for providing perspective on technology enablement. Investment is flowing into CLM tech companies at unprecedented levels, and we may even see an IPO this year. Many companies, however, are losing sight of the benefits of these advancements. Innovation and digital transformation are necessary in contract lifecycle management and contracting in general.   

But why is this happening and why is CLM so important?  Many reasons, but let’s take a closer look at a couple… Let’s look at the why: 

Self-service

Since 2020, self-service may be the most common request of CLM technology and CLM processes/teams. Companies that have mastered self-service typically use a mix of technology, contract (re)design and simplification of process/approvals. But why is this important? For sell-side contracting, the reason is speed. For buy-side contracting, self-service is important as well, but it often focuses on shifting work from the legal team to a procurement team, which has the benefit of less legal time, and lower cost (legal tends to be a more expensive resource than procurement). 

Self-service, however isn’t just about moving an activity from one group to another. Mastery of self-service requires simplification, analysis, and re-design. It is evident in surveys gauging where companies spend time negotiating versus identifying risk. A limit on liability regarding gross negligence and willful misconduct in a corporate contract rarely leads to an unfavorable outcome, and yet companies often waste time and resources trying to agree the scope and change management around their agreement. Those who understand the real benefit of self-service tend to make their contracts easier to read, more focused on the points that may affect the business relationship, and tend to merge the more “legal” clauses with generally accepted terms, leaving the procurement team or “business” person who uses the contract, to focus their discussions on the things that really matter. 

Companies that don’t focus on the why will not get the real benefits—economically or relationship-wise. I have seen attempts at the same cumbersome contracts that lead to long timeframes, communication exchanges between lawyers, and debates about version control, being put into a state-of-the-art self-service tool. It often leads to interpretations of self-service failure. 

Post-signature contract and commercial management

This is the area where most companies are missing the true driver behind CLM, as it requires a change in mindset and organization. But it’s also the area where the most benefit—economically and beyond—can be found, particularly on the buy-side of contracting. 

Companies are usually satisfied that CLM tools (mostly) come with functions for setting reminders, or managing tasks. Although these are important, companies sometimes forget the people and process parts. This leads to the inevitable comments in surveys like, “we have an obligation management tool, but we’re not really seeing the benefits of it”, or “the reminder system just created a lot of noise, so we shut it off”—something that sadly happens with some frequency. My interpretation of this is that people are not being informed properly about why these functionalities are there and how to use them. 

Companies get a report showing vendor non-compliance, but no one owns it. The legal department is too busy and it’s not their remit; Procurement is often also stretched and dealing with the next deal; and “the business” isn’t trained to do this and is more focused on the project they have to complete. 

Understand your “why”

Not everything in a contract is important – so the things you do around a contract need to be.  As an example, let’s look at reminders. Reminders for a report from your supply chain to avoid failing an internal or external audit, or applying discounts for volume purchasing are important, but you probably don’t need a reminder that you received an invoice from a vendor. Therefore, if you want to get to the why, and realize the benefits, then understand that the tech piece is only a third of the story. Without process and people to follow through and perform the management of obligations, you’ll be missing the mark.

The why of all this contract transformation really has to be about business outcomes—economic benefit. Imagine all the losses avoided and the gains that could be achieved when you do contract lifecycle management right. It would be a shame to lose out, or miss those opportunities, all for an oversight of the why.