I. What is the contract lifecycle?
The term ‘contract lifecycle’ describes the various stages that a contract goes through within a company during its lifetime. There are six stages in the contract lifecycle, starting with the initiation of the contract and running through to its execution and archiving.
Typically, contracts follow the same pattern throughout their lifecycle. This enables companies to gain significant advantages through effective contract management at every stage. For example, errors can be avoided, revenue can be generated and resources can be saved and redeployed elsewhere. This increases efficiency and, in turn, leads to higher productivity.
Usually, some stages of the contract lifecycle are given more time and importance than others. The individual stages and their significance are discussed in more detail below to better understand why this is the case.
II. What stages does a contract go through?
Essentially, a contract goes through six consecutive stages within a company. The exact names and number of these stages can vary slightly depending on the source, which is why there is no clear, universally accepted definition. However, based on our experience of manufacturing contract management software, we have defined the following six stages: initiation, creation and negotiation, review and approval, signing, execution and fulfilment as well as expiration and archiving.
1. Initiation
The contract lifecycle begins with the initiation of the contract. This refers to the initial idea for the contract, or its conception. At this stage, the purpose, content and contracting parties of the contract are defined. These basic conditions must be established before the contract is drawn up.
It is also important to clarify the objectives and tasks of all parties involved. Jeder Vertrag zwischen zwei Geschäftspartnern, seien es nun Endkunden, Lieferanten oder Kunden im B2B-Segment, dient dazu, die Geschäftsbeziehungen rechtlich abzusichern und zu stärken. The contract must reflect the mutual interests of all parties. Once these have been defined, the contract can be drawn up.
When drawing up a contract, it is important to remember that it is a legally binding document. It is therefore crucial to be well-organised, and prepared from the outset. What would happen, for example, if the business partner filed for bankruptcy during the term of the contract? What does the contract stipulate if the business partner ceases trading? Is the company financially secure? Such questions must be clarified before the contract is finalised.
2. Creation and negotiation
Following the conceptualisation stage, the next step is to draft an initial contract. Companies often use existing templates to create contracts. For example, contracts with other business partners can be copied and filled in with new data. This saves time and ensures that the most important clauses are included in contracts of the same type. Modern, professionally organised companies that use contract management software often have a separate template and clause management system.
Once the first draft of the contract is ready, the next step is negotiation between the contracting parties. The first draft is adapted and revised until both parties are satisfied that their interests are protected. Contract management software makes this process easier, as both parties can view and edit the draft contract.
At this stage, a decision is made as to whether a business relationship will be established. Issues such as costs, prices, tasks and responsibilities must be clarified and defined here. This second stage of the contract lifecycle is therefore particularly important.
3. Review and approval
Once the contract has been negotiated to the satisfaction of both parties, the draft is sent for internal review and approval. This usually involves a legal review by the legal department. The contract may need to be amended until it meets all legal requirements. Only then is it approved by the line managers.
The review and approval process can be supported by software using workflows. The relevant people are contacted directly via the workflow and assigned one or more tasks, such as final approval. The advantage of automatic workflows is that they can speed up the creation of contracts enormously. Furthermore, all employees can view, edit and comment on the contract in real time before it moves to the next stage.
4. Signing
Although the fourth stage of the contract lifecycle is the most important from a legal perspective, it should be the simplest and quickest: signing the previously negotiated contract. One advantage of our digital working world is that this can now be done using legally binding digital signatures. This means that documents no longer have to be posted and signed; the entire process can now be completed digitally. Only certain contracts, such as real estate purchase agreements which require a notary and personal appearance, still require physical signatures.
5. Execution and fulfilment
The fifth stage of the contract lifecycle involves carrying out and completing the obligations and tasks specified in the contract. This includes the delivery or receipt of goods and services, and payment agreements, among other things. Regular audits help ensure that all parties fulfil their obligations and that you don’t lose track. Contract management software can also assist with this, for instance by setting up automatic notifications and deadline monitoring. If ERP or CRM systems are connected to the software, further relevant information can be processed and taken into account.
The fifth stage of the contract lifecycle is one of the longest, as it covers the entire service provision period, i.e. the entire contract period. This can range from a few days or weeks to several months or even years.
At the end of this stage, you must decide whether to start the contract lifecycle again or end it, i.e. whether to allow the contract to expire, extend it or terminate it. If the contract is extended, adjustments may be made to the previously defined contract content. A frequently asked question, for example, is whether a price reduction is possible. If the contract is extended, the cycle begins again from stage one or two. If the contract expires or is terminated, the process moves on to archiving.
6. Expiration and archiving
The sixth and final stage of the contract lifecycle is contract expiration and archiving. A contract’s expiration does not mean the end of its lifecycle. In fact, the contract now enters its longest stage as it is transferred to an archive or electronic archive system. Old contracts are often reused within the company, either as templates for new contracts or because old contract data is required.
In addition, certain documents are subject to legal retention periods. Due to these statutory retention periods, it is illegal to delete contracts or their associated data and documents before the specified periods have expired. In most cases, archiving periods of six to ten years apply to contract data. This is the minimum period for which the documents must be retained. In addition, GoBD-compliant, audit-proof archiving is required by law and must be complied with.
Note: GoBD compliance – a closed book? We have summarised the most important points for you in our article ‘Archiving’.
III. Contract Lifecycle Management (CLM) in the digital age
As you can see, the contract lifecycle is an extensive and complex process. Since almost all departments within a company interact with it, effective management of the contract lifecycle is crucial. For this reason, companies now have dedicated CLM teams.
CLM can be carried out in various ways using different means. Nowadays, more and more companies are turning to digital contract management and, consequently, electronic contract management systems. This has the advantage that analogue paper files are no longer necessary, and all documents, contracts and data are available at any time and from anywhere.
Microsoft 365 is one way to implement digital contract lifecycle management in your company. It comes with a comprehensive toolkit, enabling you to develop sophisticated specialist applications. However, building highly functional (business) applications from the basic equipment provided requires a fair amount of expertise and, above all, resources, so it is advisable to involve a specialised Microsoft partner, such as Portal Systems AG, in such a project.
Hamburg, 28 November 2022
Author: Sara Glöckner
Category: Business Wiki
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