There has never been a more important time for UK businesses to have effective contract lifecycle management process in place. UK businesses of all sizes are urged to look at their commercial contracts and lifecycle management to make sure that in difficult economic times they are keeping on top of and getting the best out of their commercial contracts.
- What is contract lifecycle management?
- Why use contract lifecycle management?
- Which businesses should use contract lifecycle management?
- What contracts can form part of a contract lifecycle management system?
- What is the contract lifecycle management process?
- How do you implement a contract lifecycle management system?
- Should all contracts in a contract lifecycle management system be standardised?
- What contract terms can be standardised by a business?
- Contract lifecycle management and monitoring contract performance
- Contract lifecycle management and contract renewal
- Contract lifecycle management and the contract owner
What is contract lifecycle management?
Contract lifecycle management is shorthand for the effective use and management of commercial contracts.
The lifecycle includes:
- The award of a contract
- The negotiation of the terms of a commercial contract
- The approval and execution of contracts
- The use of main contracts, subcontracts, back to back agreements, and schedules, appendices and addenda
- Monitoring contract performance and compliance
- Reviewing and renewing contracts
- Terminating contracts
Effective contract lifecycle management provides
- Proactive and methodical means to manage commercial contracts so the business doesn’t enter contracts without proper assessment and cost-benefit analysis
- Ongoing mechanisms and safeguards to ensure contracts are reviewed and potential problems spotted before they crystallise into a contractual dispute or commercial litigation
Why use contract lifecycle management?
Effective contract lifecycle management provides:
- Cost savings
- Improved efficiencies through analysis, planning and standardisation (where appropriate)
- A focus on the objectives and obligations of the contract through the management of each contractual stage
- An ability to spot new opportunities through contract reviews
- Ongoing mechanisms and safeguards to ensure potential problems are actioned before they crystallise into a contractual dispute or commercial litigation
Which businesses should use contract lifecycle management?
It is often thought contract lifecycle management is the preserve of listed or multi-national companies. However, businesses of any size can achieve economies, efficiencies, and growth with fit for purpose operational processes to manage the lifecycles of their contracts in place to.
Businesses are different in terms of the sophistication of their contract lifecycle management needs but any company can benefit from the right system, such as:
- Fully automated case management or
- Professionally led contract lifecycle management or
- Internal management with diary write-ups
What contracts can form part of a contract lifecycle management system?
Any contracts a business enters into should form part of the contract lifecycle management system to ensure that, where possible, standard terms are used and there is an organised and coordinated review process.
Different commercial contracts should be categorised and organised to help with efficient organisation. For example:
- Supply of goods contracts
- Supply of service contracts
- Main contracts and associated agreements
- Franchise contracts
- Joint venture agreements
- Property contracts such as leases and licences
- Hire and equipment lease contracts
- Intellectual property agreements
- Loans documents
- Non-disclosure agreements
What is the contract lifecycle management process?
Contract lifecycle management is about efficiency and organisation of commercial contracts so the key steps in the process are:
- Contract identification and storage – contract lifecycle management should start out with contract identification as it is essential that your business easily knows who it has entered contracts with and where the commercial contracts are stored. Some businesses save everything electronically, with a copy of the signed contract also stored in a central shared contract directory. Other businesses find it harder to find contracts filed haphazardly in cabinets, with the administrator struggling to work out if the unsigned or undated document is the finalised contract
- Recording key facts – once contracts have been identified and stored efficiently (depending on the nature of your business and whether you are investing in an automated contract lifecycle management system or using a simple database) key facts need to be extracted from each contract, such as start date, termination date, notice period, and penalty provisions
- Monitoring and tracking key information – to work efficiently, reduce risk and increase profitability every business needs an effective system to monitor and track key commercial contract information. For example, if your business has entered into a main commercial contract, there should be a system in place to monitor if subcontracts or back to back agreements have been negotiated and executed and that the terms are consistent with the main contract.
- Contract review – contract reviews should be triggered if a contract is nearing the termination date or if a risk issue has been flagged up in a similar type of contract. It is easy to spot potential associated risk factors in other commercial contracts through the use of the central contract records and key information database.
- Contract creation – whilst many commercial contracts need to be bespoke in nature, a central checklist of clauses for inclusion in each type of contract can help with contract negotiation and speed up the contract process. Contract checklists should be focussed on the specific contract type as what is relevant to one won't necessarily be relevant to another. See here for an example checklist for your supply chain contract.
How do you implement a contract lifecycle management system?
Business owners often don’t have the spare time to think about contract management or the cash to purchase an automated contract lifecycle management system. However, contract lifecycle management doesn’t have to be expensive or automated and the initial investment of time will ultimately save your business time and money.
When looking at contract lifecycle management options the best place to start is assessing current contracts to consider their number, the range or types of contracts, and how standardised they are. The next step is to look at what you are hoping to achieve with a contract lifecycle management system. Your business may need professional or external help with this either from a commercial solicitor or through the purchase of a ready-made automated management system.
The reason your business may need help in setting up your system is that you don’t always know what you need or how your contracts can be improved until you get professional help. The cost of help to achieve efficient contract practices can quickly pay for itself through the benefits gained through the use of contract lifecycle management. Commercial lawyers work with business owners, managers, and existing personnel to devise a system that works for your business and, where appropriate, by adapting existing work practices so the system has the buy-in of those who will be operating it. The legal team can help with contract standardisation and review procedures and work with staff to ensure that there are guides in place dealing with aspects such as:
- An overview of the contract management process
- A guide to who does what in the contract process from the use of standard checklists and documents to who has the authority to negotiate contracts and execute them on behalf of the business
As staff in a business can change, or to help with monitoring compliance with your contract lifecycle management system, most businesses find it productive to have written policies and guides. That is especially the case in larger organisations, so each team knows what element of completion of the contract lifecycle management system it is responsible for and who has to sign off on decision making.
Should all contracts in a contract lifecycle management system be standardised?
The purpose of contract lifecycle management isn’t to standardise all the commercial contracts a business enters into, though obviously from both a cost and time management point of view it helps if there are standardised checklists and contracts where appropriate.
In a bespoke contract lifecycle management system solicitors and managers can identify what can be standardised and, if appropriate, identify triggers that should result in a contract receiving additional attention. Triggers can include the value of the contract or a request by another party to change a standard term (such as the jurisdiction clause or delivery or payment terms). Where the use of standard contracts takes place, it is important that the contract lifecycle management system factors in reviews of standard wording to check that the wording of the contractual provisions remains in accordance with best practices, developments in case law, and legislative changes. Training packages on how to get the best use out of your contract lifecycle management can help with this process.
What contract terms can be standardised by a business?
It makes sense to standardise some terms in specific contract types, such as:
- Limitation of liability
- Data protection
- Preferred method of dispute resolution
- Notice provisions
- Termination of contract triggers
The contract lifecycle management can set out the extent to which the business is willing to amend standard terms, subject to the contract type. For example, there may be no permissible change when negotiating back to back agreements because of the risks to the business of terms being inconsistent with the main contractual terms.
Contract lifecycle management and monitoring contract performance
A central feature of a good contract lifecycle management system is its ability to help your business monitor contract performance. That minimises the risk of commercial contract disputes and helps you assess whether notice should be served, terminated early, or if the contract should be renewed or renegotiated.
If a contract is important to your business and you want it to be renewed then carefully monitoring your contractual performance (for example supply times, service provision, or complaints response) can give you the information you need during contract negotiations.
The administration involved in contract performance can often be outweighed by the benefits obtained, including your business having the management information necessary to ascertain the cost benefit analysis of key commercial contracts.
Contract performance monitoring isn’t something that just occurs at the start or end of the contract but throughout its duration and should include:
- An understanding of the contract terms and requirements
- The diarising up of key dates to include periodic reviews of the contract to assess your performance and that of the other party. If you are keen to renew the contract it is an idea to conduct your own review of the performance in advance of any contractual review so you can remedy any issues arising or be well prepared for any service level reviews, pricing audit reviews or re-tendering.
Contract lifecycle management and contract renewal
It is surprisingly common for businesses to allow a commercial contract to expire without renegotiating a new contract first, often because they don’t use an effective contract lifecycle management process. Sometimes parties just continue to perform their previous contractual obligations but without the protection of a written contract.
That approach means your business isn’t in charge, isn’t efficiently managing its contract renewal opportunities, and isn’t using the information available to it through the use of a contract lifecycle management system to get the best contractual renewal possible for the business.
Contract lifecycle management and the contract owner
The contract lifecycle management process should include designating a ‘contract owner’ to administer the contract and review performance. The contract owner can be responsible for all the business’s commercial contracts or a specific type of contract.
The role of the contract owner will depend on the nature of your business and the number of non-standard contracts that need to be kept under review.
Having a manager or contract owner allocated to a contract ensures a degree of personal responsibility, even if the contract owner is supported by administrative staff to oversee matters such as:
- Ensuring contractual obligations are met - for example, goods or services are delivered in accordance with the provisions in the contract and payments are made on time
- Quality control is maintained to avoid complaints over the quality of goods or services supplied or delivery times
- Contract termination assessments - if contractual obligations are not met your business should assess if that will enable you or the other party to exercise notice or termination rights. For example, if there is a breach of confidentiality
- Set contract triggers – to internally review a contract before contractual renewal negotiations start so your business has the information it needs to negotiate on a variation of terms or a contract renewal. External factors such as inflation or the cost of source materials or transportation may also trigger the need for a review of the contract or specific provisions. For example, the product specification so you can keep costs down
- Manage the review and renewal of the contract
Whatever the size of your business or its life stage (start-up, scale-up, franchise, or listed) the reality is that no business can afford to be inefficient. One of the ways you can effectively manage your business is through the use of a contract lifecycle management system that is designed around your business and its needs.