In this article we explore an important topic: the management of the contract lifecycle (or contract lifecycle management). Whether this subject fascinates you or not, it is a compulsory step for anyone who wants to venture into contract management, and more broadly for those in charge of organisation, processes and methods within a company because, as we pointed out in this article, almost a third of a company’s employees are involved in one way or another in this cycle.
We therefore start with a definition of the various stages that make up this “CLM”, approaching the subject through two questions that will make you unbeatable on the contract lifecycle (and, we hope, the star of your next dinner party). In the first part, “Why take an interest in the contract lifecycle?”, we dive into the reasons why it matters to understand this cycle, before describing each of these stages in a second part.
A. Why take an interest in the contract lifecycle?
Like it or not, legislative and regulatory inflation punctuates the life of projects, and day-to-day business is increasingly governed by contracts.
Once a feature of Anglo-Saxon markets, the omnipresence of the contract in companies’ business models has for many years now spread to continental markets.
The management of these contracts nevertheless remains embryonic, if not non-existent, in many companies in France and across the old continent. Still too often administrative in character, this contract management is frequently relegated to second place within the departments to which the discipline is entrusted, whether legal, finance or sales.
So, while a few companies have created high-level contract management departments (no name dropping, they will recognise themselves), they remain a minority in an industrial and commercial landscape that overlooks the stakes and benefits of contract management.
Yet to understand the value of the discipline, its boundaries have to be mapped out. This is where defining the contract lifecycle takes on its full importance.
B. The 6 stages of the contract lifecycle
At the risk of disappointing you, let us start with an admission: there is no universally recognised breakdown of the contract lifecycle! While some experts maintain that this lifecycle has 5 stages, others take a more granular view of the process and count up to 9.
This lack of convergence is explained – among other things – by the variety of fields in which contracts apply… or indeed by diverging interests. CLM software vendors, for example, tend to claim that the contract lifecycle has (as if by chance) exactly as many stages as their software has features.
At Prime Conseil, we take no such side! We also have no trouble acknowledging that, depending on the use case (type of industry, corporate culture, internal processes, etc.), the number of stages can vary.
That said, we generally tend to break this cycle down into 6 phases. We touched on them briefly in this article, but following the many exchanges we have on the subject among consultants, with our partners and with our clients, we felt it was time to cover them in detail:
1. The initiation phase
Every cycle begins with a starting point. In contractual matters, that point is initiation.
It is during this phase that the need for a contract is identified, often following promising pre-contractual discussions. This stage includes identifying the parties, defining the contract’s objectives, and often creating a first outline (a term sheet or similar) with the essential technical or commercial information.
Various stakeholders may be involved at this stage, including the contract manager, whose presence helps to properly “initiate” (hence the name of this phase) the contractual process.
To illustrate this phase with an example, picture a potential partner met at a trade fair with whom a joint response to a call for projects is being considered.
2. The negotiation phase
This is certainly the best known and most universally recognised phase.
During this stage, the contracting parties exchange views, confront more or less opposing positions, and adjust the content of the contract so that it reflects their common intention.
In practice this is often an iterative process in which a balance of power (bargaining power) takes hold and forces one or both parties to propose, counter-propose, argue, justify and sometimes impose changes until mutual agreement (or a point of no return) is reached. Sometimes the law frames these negotiations, protecting the weaker party and/or imposing mandatory public policy rules from which no derogation is possible.
The classic example for this phase is negotiations between a supplier and a distributor, in which prices, volumes, delivery lead times, penalties and other issues relating to promotion and/or liability are hotly debated.
3. The approval phase
This phase, which is fairly little known, is often confused with the signature phase. It is nevertheless a distinct stage of the lifecycle, in the sense that it can end in no signature at all.
We also find that this often-neglected phase is a formidable lever for improving risk management and, more generally, for spreading contract management within a company. This approval stage, which consists of a number of internal sign-off milestones, successively involves legal, finance, compliance, management control and other departments, to ensure that the contract complies with the company’s policies and other golden rules.
It is therefore the perfect opportunity to turn it into a genuine moment for sharing contractual information and gathering good practices, identified risks and opportunities, and other elements that will underpin sound execution after signature.
One example is a large aerospace group which, in order to approve each contract, requires a form to be followed that ensures review, comments and sign-off by numerous stakeholders, depending on the amounts and topics involved.
4. The signature phase
This stage (sometimes combined with the previous one) marks the formalisation of the agreement between the parties.
More than simply putting a signature on a document, it is a stage that can generate (wasted) time, misunderstandings and other hitches that technology now allows us to control to a large extent.
CLM and other digital electronic signature solutions are now fairly widespread, smoothing the entire flow of signing, countersigning, initialling and so on, and thereby cutting both the time spent on these (very) low value-added activities and the errors they produce.
To illustrate this phase, remember the assistant who spent whole days chasing a signature folder around the office and scanning documents.. Docusign and Yousign have since come along, freeing that assistant up for tasks that generate more value.
5. The execution phase
During this penultimate stage, which in some sectors could be broken down into several sub-stages, each party performs its contractual obligations.
It is during this phase that project hazards arise (delays, non-conformities, changes, etc.), and for that reason the contract manager’s role is often confined to this phase, which is certainly important but is a rather reductive view.
Managing this stage well means putting in place processes, tools and methods to monitor performance, handle payments, deliver the services or products, and resolve the problems that may arise. Examples of this stage are legion!
By way of illustration, take a company that signs an EPC (Engineering, Procurement and Construction) contract and which, over the course of the project, has to manage weather hazards, the mobilisation and demobilisation caused by a supplier’s delays, changes to the end client’s requirements, and so on.
6. The contract closure phase
You have normally been reading this article for 4 minutes, you are certainly finding it hard to stay focused and are starting to feel the time drag: that is normal, and it is time to conclude with the final phase.
The contract comes to an end, either through completion of its terms or through termination. Contrary to appearances, this phase is neither painless nor entirely “automatic”.
The end of a contract can indeed trigger many actions, the first of them being its renewal should the parties wish to continue their contractual relationship. Where the parties’ contractual paths diverge, many actions have to be anticipated, for example those relating to reversibility, the handover of services, maintenance, upgrades, and so on.
By way of example, in IT contracts it is not unusual to see failed transitions between providers (particularly on application maintenance issues, among other upgrade and maintenance topics) because of sub-standard contract management.
Conclusion
If you take away only one thing from this article, let it be that knowing the contract lifecycle well is the key to managing contracts effectively. Beyond that, whether there are 5, 6 or 18 stages, the number of stages in the lifecycle matters little; what counts is finding a breakdown that meets the needs and culture of your organisation.
Of course, involving a contract manager at every stage is essential to optimise and get the best out of each phase of the contract, ensuring smoother and more effective management in the service of your company’s objectives.