A guide to contract lifecycle management

Contract lifecycle management (CLM) is a critical process in supply chain management that, approached strategically, can help optimize overall business performance.

Contract lifecycle management plays a key role in the broader practice of. It helps businesses ensure that their contracts with buyers and suppliers align with their overall business objectives.

A more effective approach to contract lifecycle management can achieve various benefits, such as driving supply chain efficiency, increasing operational resilience, and expediting growth.

So, what is contract lifecycle management (CLM), and how can a business benefit from improving its approach to it? In this guide we will cover everything you need to know about CLM.

What is contract lifecycle management?

Contract lifecycle management is the process of managing and supervising a contract throughout its lifecycle. Whereas simple contract management focuses on managing a contract from the point that it’s awarded, contract lifecycle management covers the whole process, from initiation to expiry or renewal, usually with a more strategic approach.

Benefits of CLM

An effective contract lifecycle management strategy can make a significant contribution to the efficiency of a company’s supply chain management process, as well as to its wider business objectives. It can be used to achieve terms that align with the company’s financial goals, as well as helping to improve relationships with both buyers and suppliers.

By improving their approach to contract lifecycle management, an organization can streamline processes such as buyer and supplier onboarding to increase operational efficiency and reduce the risk of human error.

The increased oversight over contract-specific performance also provides insights into how effectively partners throughout the supply chain meet their obligations and contribute towards financial objectives, making it easier to decide whether contracts are worth renewing. This enhanced visibility also ensures that all internal stakeholders can access the information they need.

In addition, by implementing appropriately rigorous checks during the contract creation processes, a CLM strategy can guarantee that contracts meet the required standards and regulatory requirements, allowing companies to mitigate the financial and legal risks of non-compliance.

CLM software

In the past, organizations had to manage their contracts using manual tools and processes prone to human error. Small companies might still manage the process manually, but as businesses scale up and deal with more contracts, it becomes increasingly important to simplify and streamline contract management processes.

Contract lifecycle management software is designed to facilitate this, offering a suite of tools that make managing steps throughout the contract lifecycle simpler, more efficient, and more transparent.

The contract lifecycle: Step-by-step

Understanding each step of the full contract lifecycle makes the importance of a refined approach to managing it more apparent. These are the main stages of the contract lifecycle:

Initiation: The first step is identifying the need for a new contract and initiating a request. This involves formulating a business case, informing key stakeholders, and designing the preliminary terms and conditions to include relevant legal requirements and suitable protection for both parties.
Negotiation: Negotiations are often the most challenging part of the contract lifecycle. During this stage, the parties involved can discuss proposed terms and conditions, raise any concerns and clarify points of ambiguity, before reaching a consensus and agreeing the final version of the contract.
Approval: Once a final version of the contract has been drafted, business and legal teams will ensure that it meets their requirements, with any further changes carefully documented. The final version approved by all parties should be clear and concise.
Execution: When all the parties involved have signed the relevant documents (either on paper or digitally) the contract comes into effect and becomes legally binding and enforceable. In order to avoid any misunderstandings, all relevant parties should be made aware of their contractual obligations.
Monitoring: After the contract comes into effect, it must be administered and monitored. This should include ensuring that the terms are complied with and addressing any deviations or discrepancies.
Expiry/renewal: When a contract comes to an end, the parties need to consider whether it should be terminated or renewed. When a contract is renewed, it may be extended on the existing terms. Alternatively, the original terms may be modified or renegotiated.

Why contract lifecycle management is important

Effective contract lifecycle management can play an important role in increasing efficiency and reducing operational costs. By establishing a clear contract management process and upholding it with the help of a CLM system, companies can ensure that their contracts are managed consistently and effectively.

Digitizing the CLM process offers particularly compelling benefits, allowing companies to automate routine tasks like contract creation or administration. It reduces the need for manual input, speeds up the entire contract process, and consolidates disparate contract-related functions into a single system.

Other benefits of CLM include the following:

Streamline onboarding: Although contract lifecycle management and onboarding are seen as separate processes, CLM systems can help streamline, standardize, and strengthen the onboarding process for new buyers and suppliers.
Improve risk management: By adopting a more conscious approach to CLM, companies will also be better placed to identify and assess buyer and supplier risk, implement controls and contingency plans, and ensure compliance with standards and regulations.
Strengthen business relationships. By ensuring that contracts reflect the expectations and needs of both parties, businesses will be better placed to build mutually beneficial and lasting relationships that help to optimize their future performance.

Contract lifecycle management’s role in supply chain management

Contract lifecycle management is a key component of supply chain management. As such, there is an opportunity for companies to optimize their operational performance by increasing the effectiveness of their CLM process.

A revised CLM strategy should be oriented around existing supply chain management objectives to achieve broad-reaching benefits. If a business’s key supply chain objective is to lower supply chain costs, for instance, its CLM strategy should be focused on improving financial terms in contracts and reducing contract management costs.

CLM software can also be part of a broader supply chain management technology suite. Integrating CLM software with other systems, such as customer relationship management (CRM) platforms, supplier databases, and cash flow analytics platforms, gives companies a single source of truth for supply chain information across the business.

Improving supply chain resilience with CLM

CLM can also mitigate supply chain risk and improve business resilience against external threats, making it especially important in challenging economic or geopolitical environments.

In times of uncertainty, a reliable and effective CLM process can play a critical role in maintaining strong relationships with buyers and suppliers, ensuring that the flow of goods and services continues smoothly.

This, combined with CLM software’s improved contract performance insights, reinforces an organization’s ability to protect itself from supply chain disruptions.

By facilitating mutually beneficial supplier and buyer relationships, effective CLM can contribute to a stronger and more resilient supply chain that is well-equipped for today’s rapidly evolving business environment.