Introduction
Effective contract management is crucial for organizations to maximize value and minimize risks. However, many organizations and law firms lack proper CLM programs. To address these issues, organizations need to adopt centralized contract management practices and leverage technology to capture information across departments.
Six best practices to optimize CLM
View contract management as an overarching program
Treat contract management as a holistic program to improve efficiency and reduce risk. Lack of a centralized repository and various contract types make tracking difficult. Start by inventorying existing agreements and storing them in an electronic repository. Categorize contracts, capture useful data, and define contract management goals. Draft policies to minimize exposure and streamline the contracting process.
Treating contracts as an enterprise endeavor can achieve two goals that are important to lawyers and nonlawyers alike: improving efficiency and reducing risk.
Clarify the roles of various departments or functions with respect to contracts
The responsibility for contracting depends on the organization's structure, but legal involvement is crucial. In corporations, different teams may be involved, but legal oversight is necessary to ensure consistency with policies. In law firms, procurement should lead the contracting process, but other stakeholders should be involved to align with risk parameters. Clear roles and ownership enhance control and consolidate expertise in managing contracts and obligations.
To take the organization to the next level, it is important to categorize each contract, capturing data that will be useful for searching as well as for creating a repository of standard terms and conditions, monitoring milestones and tracking renewal timelines and expiration dates, among other criteria.
Determine the acceptable risk parameters
Contracting with third parties poses various risks, such as performance, data security, and regulatory compliance. Risk assessments are crucial in contract management to avoid consequences like higher costs, reputational damage, and legal violations. Assessing relative risk, materiality, and criticality of relationships is important. Monitoring contract performance, creating a risk scorecard, and aligning contract terms with standards help manage risks effectively.
Delineating clear roles and ownership in the contracting process enables better control and management of the resulting contracts.
Establish control parameters and decide how to enforce those policies
An enterprise-wide contracting program that aligns with the organization's goals should have internally consistent policies while allowing customized workflows for different departments or teams. Important considerations include:
- determining when contracts are needed,
- when legal involvement is required,
- contract negotiation and signing authority,
- risk assessment criteria,
- contract performance monitoring, and
- records retention policy.
Addressing these questions creates a strong contract governance foundation.
When contracts are maintained individually or departmentally, it becomes onerous to effectively police the contracting process.
Define the right performance measures across the contract administration process
Contract management should span the entire contract lifecycle. Metrics for the administration phase are essential. Consider cycle times, delays in approvals, inappropriate authorizations, obligation management, missed milestones, deviations from contract language, spend under contract, and non-renewals. These metrics provide insights into the overall contracting process, workflow management, policy adherence, and contract performance.
Remember that technology is a tool, not a complete solution
Technology complements sound policies in contract management by streamlining workflows. AI and automation aid in generating standardized agreements and guiding contract drafting. Centralizing contracts in a repository improves oversight, shortens the contracting lifecycle, and ensures compliance. It enables systematic comparison of terms, prevents breaches, and tracks milestone dates. Technology also enhances spend visibility, providing insights into supplier and purchaser patterns for better decision-making and revenue acceleration.
Improperly managed contracts can be a source of staggering risk, slowly causing business decline or even death.
Conclusion
Implementing a comprehensive CLM program can be challenging, but the potential risks justify the effort. Consulting experts with industry experience can help optimize the CLM process, designing well-defined processes, aligning resources, defining roles, and implementing measurement protocols.
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