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Is your CLM in order ?

| 31 July 2023

Pacta sunt servanda (in other words: agreements must be kept). One of the first and most important rules that law students learn when they study agreements. It is not without interest: this is the basic principle in contract law. Yet, what happens if you forgot what you have agreed upon? Or with whom have you made an agreement? Contract Lifecycle Management (CLM) gives you the answer!

Contracts as the basis

Contracts form the basis of an organization. Whether it concerns internal, supplier, or sales agreements, it is important to have a record and an overview of all the agreements. In practice it is not always the case. Contracts are often not complete, not signed by the right person, or even not signed at all or lost. If you consider the amount of time that companies invest in drafting, negotiating, and managing contracts, this translates into a loss of valuable time. Not to mention the risks and impact on the organization.

Contract management process

Inside every organization there is a process for agreements signed with third parties. Some organizations pay a lot of attention to it, while others are not even aware of the processes. This process can roughly be split into three parts: pre-contractual, contractual and post contractual.

The first phase concerns the managing of templates, the drafting of the appropriate contracts and the internal distributing of the correct documents. This phase is especially important for the internal processes and valuable for the managing of quality beforehand. Good templates that are simple to find and to use prevent the use of incorrect, deviant, or out of date documents.

Once the contract is drafted, we move on to the contractual phase. During this phase negotiations, internal workflows and signature take place. Depending on whether the parties agree on the content or not, different workflows will be followed. The process does not stop at the signature.

On the contrary, after the contract is signed the collaboration begins and the content of the agreement becomes very important. This is the third phase in the CLM process. Are the agreements well executed? Are there any compliance related matters that are important for this specific contract? Will the agreement be automatically renewed or is there a need for a specific action for renewal? This is the post contractual phase and offers an overview in the (fulfillment of) contractual obligations.

The management of this whole process is called Contract Lifecycle Management (CLM)

Contract Lifecycle Management: software for contract management.

The three phases of CLM described above are suited for partial automatization. The management and centralization of templates can be done easily with a CLM platform. It is also possible to make a template interactive to generate contracts in a simple way. Very often CLM products work with a questionnaire which is used as a basis to generate the contract draft. In this way, the employees do not need to modify Word documents manually anymore, the quality of the document is guaranteed, and it avoids the risk of having different versions of a template inside the organization

In the second phase CLM also offers advantages. It is possible to create workflows that prevent that a contract is signed before the appropriate steps are followed. Does an employee choose to generate a contract with an option that has to be checked by the legal department? In that case the agreement will be blocked until there is an approval from the relevant legal counsel. In this way it is possible to put in place an additional guarantee for legal content and quality. Also, most of the CLM tools have an integration with e-signing that allows users to sign the contract inside the platform.

For the analysis of contracts there are different options. By using software, you can have a real-time insight into the contracts, required actions and potential risks. This information can be essential in your daily use and for management.

Using metadata in managing contracts

Each contract has specific features that are unique in the context of the agreement. We call this MetaData. Accessing this data and storing it as metadata enables better management of contracts. Metadata is highly relevant when managing, searching, and analyzing contracts.

For instance, It can be useful to generate an overview from all the contracts that expired during the month of December. Several CLM software have a full text search function. Users can use it to search in the text of all contracts.

Another practical example is the use of metadata to create a summary of a specific agreement. The metadata makes the contract unique. In the legal department you often find the same contracts, for instance rental agreements. Most of the provisions are standard and the same on all contracts of the same type. What is relevant is the data that is unique to each contract: term, address of the rented property, price, etc. With the use of this metadata as a resume, it is possible to look for specific contractual terms without having to open many contracts.

Metadata is of great value within CLM, but it also has a drawback. It must be added to the contract at some point. When contracts are created via a CLM platform, this is often not a problem. Then the metadata can be extracted from the questionnaire answers used to generate the contract. But if the contract leaves the system or if the contract is created externally, the metadata still needs to be added manually.

Fortunately, a solution to this too is imminent. Several CLM vendors offer metadata extraction from existing agreements based on artificial intelligence.

How can you choose the right product for your CLM

When choosing one system or another, a few issues are important. These include security of the system, handling and storage of personal data and, of course, the functionalities of the software.

At this moment, relatively few vendors offer software in which all three phases are well represented. These are also generally the more expensive products. Price aside, in many cases it is also not necessary to have so much functionality. A modular solution is therefore a good alternative. Find out in which part of the contract process the most challenges occur and start automating the process there. Is the problem in drafting and negotiating? Then look for a product that specializes in contract generation. However, if most of the challenges arise after contracts are signed, look for products that are good at analyzing and controlling metadata.

In practice, different systems can work well together as open APIs are increasingly used. This means that metadata is not lost the moment the contract moves from one system to another. There is also a big additional organizational benefit. Innovation of the entire CLM process requires a long time, takes time and effort. This demands a lot from the organization. With a modular approach, this problem is less relevant: the implementation period is slightly shorter and there are generally fewer stakeholders. It is also easier to switch to a different supplier at a later point in time without changing the entire process again.

ICTRecht can help you!

Our legal tech consultants have extensive experience with CLM software and can advise you on which CLM software suits your organization, and help you implement it. Read more about our services on our webpage Software for contract lifecycle management (CLM).