A Contract Lifecycle Management (CLM) system has become a necessity for many businesses looking to streamline their contracting processes. These systems offer automation, centralized storage, and compliance tools that simplify various aspects of contract management while reducing the administrative burden on your business. However, even the most sophisticated CLM system is just the foundation for contract optimization.
In this post, we’ll explain why a CLM system fits into the larger picture of contract optimization, and how businesses can maximize the impact of their contracts using a comprehensive approach.
The Role of a CLM System in Contract Management
A CLM system automates various stages of contract management, making it easier to create, store, and track agreements. By digitizing the contract lifecycle, CLM systems provide a layer of structure and control over contracts that save time and reduce human error. Some of the key benefits of a CLM system include:
- Centralized Storage: CLM systems provide a centralized location for all contracts that makes it easier to locate, track, and manage documents.
- Compliance Management: A CLM system can also be customized to create contracts that adhere to both internal policies and external regulations, reducing the risk of non-compliance.
- Automated Workflows: These systems also automate routine processes like contract drafting, approvals, and renewals, freeing up valuable resources.
- Risk Mitigation: With tools like version control, audit trails, and automated alerts for critical deadlines, the CLM system can identify areas of risk and reduce opportunities for error.
The capabilities of a CLM system are far-reaching, especially for organizations handling a large volume of contracts. Despite its benefits, a CLM system’s core strength lies in supporting businesses maintain operational efficiency. To truly optimize contracts, businesses must implement strategies that go beyond this technology.
What is Contract Optimization?
Contract optimization refers to the strategic process of maximizing the financial and operational value of contracts throughout their lifecycle. An optimized contract maximizes its potential by aligning with the company’s objectives, protecting its interests, and facilitating smooth, cooperating partnerships. This process requires a deeper, ongoing analysis of contract terms.
Maximizing Value
Optimizing your contracts helps you create agreements that deliver maximum financial and operational value. This is done by integrating clauses in the contract that, if optimized, can provide cost savings, better service-level agreements, or new revenue opportunities.
CLM solutions can support contract optimization by helping you tailor agreements to meet the unique needs of your business. This ensures that each agreement contributes to the organization’s goals while addressing potential risks. CLM solutions also facilitate regular reviews and updates of contracts, keeping them relevant in a rapidly changing business environment.
The CLM System as a Starting Point
A CLM system sets the stage for contract optimization, but to achieve contract optimization, a business needs to adopt policies and practices that elevate the capabilities of a CLM system. This can be done by treating a CLM system as a tool that enables further strategic analysis and decision-making.
Aligning Contracts with Business Strategy
One of the most overlooked aspects of contract optimization is aligning contracts with overall business goals. Contracts should not exist in isolation; they should reflect the company’s strategic priorities. A CLM system can help track key contract data, but businesses must actively ensure that contract terms are in sync with broader objectives like cost management, revenue growth, and risk mitigation.
Leveraging Data from CLM Systems
Most modern CLM systems provide powerful analytics and reporting tools that give organizations deep insights into their contract processes. Analyzing this data allows companies to assess where contract terms can be adjusted for better outcomes.
For example, contract performance data can highlight which suppliers or partners consistently meet their obligations. With this information, companies can renegotiate contracts with underperforming vendors or strengthen relationships with top-performing partners. So, by regularly tapping into the data generated by a CLM system, businesses can refine their contract strategy over time by making decisions that contribute to better contract outcomes.
Automating for Efficiency
The efficiency gains from automating contract processes are undeniable. Routine tasks – such as drafting contracts, sending approval requests, and tracking expiration dates – can be time-consuming and prone to error if handled manually. A CLM system takes care of these administrative burdens, freeing up time for legal and procurement teams to focus on strategic improvements.
Identifying Opportunities for Improvement
CLM systems are excellent at flagging issues, such as approaching renewal dates or non-compliant clauses, but they are less adept at identifying opportunities for improvement. Optimization often requires a detailed examination of contract terms to uncover potential areas for negotiation. Specific insights don’t come from the system alone – they usually require the help of human experts who know how to use the system as a tool.
Collaboration Across Departments
While CLM systems can make it easier for departments to share and manage contracts, effective contract optimization requires proactive collaboration to ensure that contracts reflect the needs of all involved parties. Contracts usually impact multiple departments, such as legal, procurement, finance, sales, and operations. By fostering collaboration across these teams, businesses can create more balanced contracts that represent the needs of everyone involved.
Managing Risk More Effectively
Risk management is a core component of contract optimization. A CLM system can help track contractual obligations and flag potential compliance issues, but businesses must also take a proactive approach to managing contract risk.
One aspect of contract optimization is regularly reviewing risk. Market conditions, legal requirements, and business priorities change over time, so contracts must adapt to avoid exposing business to unnecessary risk. This might require businesses to include clauses that plan for unforeseen circumstances to ensure the agreements stay relevant in a changing environment.
Proactively managing risk also means conducting regular audits of existing contracts. A CLM system can automate alerts for upcoming renewals, but businesses should regularly review contracts to ensure they still meet business needs.
The Role of Human Expertise in Contract Optimization
As technology and the capabilities of artificial intelligence continue to improve, they will continue to play a significant role in contract management. However, true optimization is driven by human expertise.
Contract managers, legal teams, and procurement specialists play a vital role in analyzing complex data provisions and assessing how they impact the broader business. These experts bring an understanding of nuanced legal language, business goals, and market trends that no software system can fully replicate.
Human expertise is required to:
- Navigate sensitive negotiations, balancing risk and reward in a way that aligns with the company’s strategic objectives
- Anticipate how changing regulations or economic conditions might affect existing contract terms
- Customize contract language based on the specifics of each deal, ensuring that standardized templates from CLM systems are tailored to fit unique business needs.
The partnership between automated CLM tools and human expertise ensures that contracts represent your business’s interests and deliver maximum value.
Taking Contract Optimization to the Next Level
Contract optimization is a continuous process that involves ongoing evaluation, adjustment, and improvement, even after a contract is signed. While a CLM system provides the foundation for managing contracts throughout their lifecycle, staying actively engaged with your contracts can keep them optimized throughout their lifecycle.
Implementing a CLM system can provide the foundation you need for contract optimization. To find the best CLM solution for your organization, contact us to speak to one of our expert team members.
