3 Ways to Know Your Contract Management Process Is Improving
Automation of your contract management process results in improvements in both efficiency and effectiveness. Three ways to know that your contract management process is improving include a reduction in contract cycle time, workflow processing time, and risk. These benefits can be readily identified by leveraging the reporting functionality present in most contract management applications. Read on to learn more!
Contract Cycle Time
Reducing the time from contract request to execution is common goal for CLM implementations. With contract management automation you will see reductions in contract cycle time. How and why, you ask?
- Draft contracts are routed electronically from department of origin to internal approvers such as legal and finance.
- Internal reviewers are alerted to the need to look at a draft contract through emails or a contract dashboard.
- All changes and approvals are made to a single electronic copy, eliminating collation of responses.
- Negotiation and redlining are managed electronically by email or a portal where the counterparty can securely work with the draft contract.
- Version control and comparison reliably show changes to contract language so decisions and responses during negotiation can be made promptly.
- E-signature integration allows a final contract to be signed and returned without printing, posting, and delivery time.
- Average cycle time by contract type – you should see the greatest time savings on your simplest contract types such as NDAs or routine agreements which require little to no negotiation.
- Average cycle time by contract owner – contract managers may have responsibility for a contract from draft to execution. If some managers’ reduced cycle times stand out, this report identifies them so you can see what they are doing right.
Workflow Processing Time
Contract types follow a standard series of workflow steps on their way from request to execution. Some organizations follow standard workflow steps for contracts after execution. With contract management automation, you should see time reductions in any of these workflow steps. For example:
- Contract creation – contract templates allow standard contracts to be created in seconds through completion of forms with distinct information about the contract type, counterparty information, dollar commitment, etc.
- Contract review – since approved language is used in templates, internal legal review of each contract should be minimal or even unnecessary. However, review of contracts by finance or executives based on dollar commitments will still require time, though ideally less as the system confines review to the contracts over an agreed upon dollar threshold.
- Negotiation – sending drafts, reviewing redlines, and responding to counterparties should all take less time with an electronic system. Focusing on the substance of contract changes rather than processing the contract drafts should allow standard contracts to proceed to signature very quickly.
- Execution – e-signature and email make contract turnaround much faster for the vast majority of contracts. Even where a counterparty is late signing, automatic reminders and escalations should get the contract signed and returned in a predictable amount of time.
- Processing – With a contract signed and returned, the contract manager should receive a task with the steps needed to process the contract and create distinct obligations based on the agreement. The obligations themselves should allow for electronic tasks with owners, due dates, automatic reminders and escalations to insure timely completion of your commitments under contract.
Measuring Success: The time to complete any one of these steps is recorded by a contract management system and can be analyzed in several ways:
- Average time per step – how long from contract request to creation, from creation to internal approval, from approval to negotiation, from negotiation to signature. If bottlenecks are slowing the contract down at certain steps, you may see ways to address them with additional training or resources.
- Average time per step per user – if a number of contract managers have similar tasks for similar contract types, a report comparing their performance time should show comparable results. If there are outliers, the department head (procurement, sales, legal, finance, etc.) can find out why. This goes for time-pressed executives too – reducing their time to review agreements through training or reassignment of some contracts may be appropriate.
- Obligation on-time completion rates by user – contractual commitments have deadlines and so do obligation tasks in a contract management system. Reports can show how well the contract management team is keeping up with an increasing volume of work – a sign of success. If some obligations are frequently at risk or completely late, a report can show whether the problem lies with the obligation itself, the amount of time being allotted, or the person responsible for getting it completed.
What to look for: A CLM system records the dates for every step in your automated process and can report time to completion for each step as well as for the whole process. Once again, your ability to filter or segment the report by contract type, user, time period, etc., will provide consistent data that makes sense in context, pointing either to success or room for improvement.
Material Changes Made to Your Standard Contract Language around Risk
While contract management systems do promote efficiency – getting more done faster – they can also promote effectiveness – doing the job better. A good place to start is your own standard contract language. If you have taken time to draft optimal language and incorporated that language into your contract templates, material changes to that language can affect (and likely increase) risk. A contract management system can help you measure and reduce that risk in several ways. For example:
- Boilerplate clauses can be assigned a risk score. What is the risk that your organization seeks to avoid with its terms and conditions around indemnification, hold harmless agreement, limitation of liability, waiver of subrogation, choice of law, dispute resolution, collection of attorney’s fees, notice, etc.? Assigning a numeric weight or score to these clauses that identifies the risk they address can allow for reporting on increased risk when they are changed or replaced during negotiation. The risk scores for all changes can be summed by the contract management system and signal when a contract should not be approved or should receive attention from more senior reviewers.
- Fallback clauses can be assigned increasing risk scores. If you are using a clause library and a contract playbook, you have probably drafted fallback clauses that can be deployed if a counterparty objects to your organization’s standard terms and conditions. Where these fallback clauses represent concessions that carry higher risk, deploying fall back clauses will increase an overall risk score for the contract.
Measuring Success: During negotiations, clause-related risk scores can signal a need to reevaluate the contract or require review by more senior executives. But in terms of measuring risk reduction on contracts approved, here are some reports to consider:
- Material changes by clause – a report that lets you know which clauses are most often changed in negotiation. Most often it will be a good signal if this number stays low. However, a clause that frequently requires changes during negotiation deserves legal and business review.
- Frequency of fallback clauses deployed – like the report above, this report can suggest increased risk when the fallback clauses are deployed frequently.
- Risk by clause type – using the risk scores as they relate to negotiated changes, this report may show the clauses that represent the greatest and least risk overall which in turn will suggest where risk mitigation is needed.
- Risk by negotiator – identifying who can best present and defend the organization’s position is easier when seeing who accepts the most risk in negotiation. This is especially true when defending boilerplate, where the risks are well understood and the potential gains for giving way on language are minimal.
What to Look For: a contract management system with a clause library and provision for a contract playbook will also have a means of scoring clauses for risk. Indeed, a system with truly configurable reporting will allow you to report on risk in many aspects: late obligations, discount money left on the table, low customer spend under contract, or even use of counterparty paper versus one’s own contracts. Contract management systems help to quantify and make known the unsung victories of contract managers who reduce risk to the organization by preventing mishaps or insuring that harms is avoided or limited.
Contract management is often perceived as a cost center. This puts the onus on contract managers to show continuous improvement and cost savings. A contract management system makes improvements in efficiency and effectiveness possible. As important, it documents those improvements and displays them in quantitative terms that executives will appreciate.