There has never been a more important time to have an effective contract lifecycle management system in place for your business as UK businesses are urged to review their commercial contracts and assess whether they remain fit for purpose given the financial ramifications of Covid-19, the impact of Brexit and the end of the transition period on the 31 December 2020. In this article we look at contract lifecycle management, what it means and what you should be doing to keep on top of it.
- What is contract lifecycle management?
- Why 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 the terminology used by some as the shorthand for the effective use and management of commercial contracts encompassing:
- The award of a contract
- The drafting and negotiation of the terms of a commercial contract
- The approval and execution of contracts
- The use of main contracts, subcontracts and back to back agreements
- Monitoring contract performance and compliance
- Reviewing and renewing contracts
- Terminating contracts
The point of contract lifecycle management is to provide a proactive and methodical means of the management of a business’s commercial contracts so that contracts aren’t entered into without proper assessment and cost benefit analysis and, as importantly, there are ongoing mechanisms and safeguards in place to ensure that contracts are reviewed and potential problems spotted before they crystallise into a contractual dispute or commercial litigation.
Why use contract lifecycle management?
The use of effective contract lifecycle management can result in:
- Cost savings
- Improved efficiencies through planning and standardisation (where appropriate)
- A focus on the objectives and obligations of the contract as the contract management process ensures that the stages in the contract are properly managed
- Reduced risks of contract disputes and fallouts
- An ability to spot new opportunities through contract reviews
Some businesses assume that contract lifecycle management is the preserve of listed or multi-national companies. However, commercial solicitors argue that whatever the size of your business it pays to utilise a contract lifecycle management system as all businesses need to have effective and efficient operational processes in place. Therefore, from a commercial solicitor’s point of view, it is all about having the right system in place for your business, such as:
- Fully automated case management
- Professionally led contract lifecycle management
- Internal management with diary write-ups
That’s because all businesses are different in terms of the sophistication or simplicity of their contract lifecycle management needs.
What contracts can form part of a contract lifecycle management system?
All the contracts that 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 provision to review each contract as appropriate, depending on the nature of the contract.
Different commercial contracts should be categorised and organised to help with the efficient organisation of contracts. For example:
- Supply of goods contracts
- Supply of service contracts
- Main contracts and associated back to back 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 all about efficiency and organisation of commercial contracts and therefore the key steps in the contract lifecycle management process are:
- Contract identification and storage – it may seem odd to suggest that contract lifecycle management should start out with contract identification but it is essential that your business readily knows who it has entered contracts with and where the commercial contracts are stored. Some businesses store everything electronically, with a copy of the signed contract also stored in a central shared contract directory, whereas others find it far harder to find an individual contract, filed haphazardly in a filing cabinet. Often when the right physical file is located an administrator can only locate the draft of the contract or an unsigned or undated document.
- Recording key facts – once contracts have been identified and stored in an efficient manner (depending on the nature of your business and whether you are investing in an automated contract lifecycle management system or using a simple excel database) key facts need to be extracted from the contracts, such as start date, termination date, notice period etc.
- Monitoring and tracking key information – to work efficiently and to 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 that any subcontracts or back to back agreements have been negotiated and executed and that the terms are consistent with the main contract.
- Contract review – there is limited point in having a contract lifecycle management system in place unless the contract information is reviewed. Reviews may be generated because a contract is nearing its termination date or, for example, because a risk issue has been flagged up in a similar type of contract and it is easy to spot potential associated risk factors in other commercial contracts because 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 issues for inclusion in each type of contract relevant to the nature of your business can help with contract negotiation and speed up the contract process. Contract checklists need to be focussed on the specific contract type as what is relevant to a supply chain contract checklist won't necessarily be relevant to a provision of services or a subcontractor contract.
How do you implement a contract lifecycle management system?
It is all very well for a commercial solicitor to recommend the use of a contract lifecycle management system but how does a business implement such a scheme? Often businesses are hard pressed to keep up with day to day administration and they don’t have the time to think about contract management or have the funds to purchase an automated contract lifecycle management system.
Prior to looking at contract lifecycle management options the best place to start is by looking at current contracts to assess their number, the range of 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 contract lifecycle management system.
The reason that your business may need help in setting up your system is that you don’t always know what needs looking at or what can be improved until you get professional help. The cost of such help to achieve efficient contract practices could quickly pay for itself through the benefits obtained through use of contract lifecycle management.
Commercial lawyers can work with business managers and existing personnel to devise a system that works for your business and, if necessary, by amending or adapting existing work practices so that any system has the buy-in of those who are going to operate it. The legal team can not only help with contract standardisation and review procedures but 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 within the organisation 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 that 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 advice. 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 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 practice, 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 try 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 contract type. For example, there may be no permissible change when negotiating back to back agreements because of the risks to the business of the 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 not only helps avoid commercial contract disputes but also helps you assess whether notice should be served, terminated early or if the contract should be renewed or renegotiated. In addition, if a contract is important to your business and you want or need the contract to be renewed then carefully monitoring your contractual performance (for example in relation to supply times or service provision or complaints response) then contract lifecycle management 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 the various key commercial contracts that your business is party to.
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 that 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 cover of the written contract.
That approach means your business isn’t in charge or efficiently managing its contract renewal opportunities and isn’t using the information available to it through use of a contract lifecycle management system to get the best contractual renewal possible for the business.
Contract lifecycle management and the contract owner
Whilst to some it may seem like ‘overkill’ part of your contract lifecycle management process should involve designating a ‘contract owner’ or overseer to administer the contract and to review performance. The contract owner could be responsible for all the business’s commercial contracts or for a sector of the contracts, such as all franchise agreements, the role depending 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 they are supported by administrative staff to oversee matters such as:
- Ensure that 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
- If all contractual obligations are not met to assess if that will enable your business or the other party to exercise notice or termination rights. For example, if there is a breach of confidentiality.
- Set contract triggers so that a review is arranged before any contractual review process so the business has all the information it needs to negotiate on a variation of terms or a contract renewal. External factors such as the financial impact of Covid-19 on a business or the affect of Brexit and the end of the transition period may also trigger the need for a review of the contract or specific provisions. For example, delivery commitments and ability to meet deadlines because of Brexit, currency and payment terms, product specifications and jurisdiction clauses. Read our guide to Brexit and commercial contracts for more information.
- Manage the review and renewal of the contract.
However large or small your business is the reality is that no business can afford to be inefficient in 2020 and beyond. One of the ways you can effectively manage your business is through use of a contract lifecycle management system and the appointment of a contract manager.