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Contract Lifecycle Management: From Drafting to Closure

Scott Whitaker

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Contract Lifecycle Management: From Drafting to Closure - Contract Sent

The contract lifecycle is a crucial aspect of business operations, involving a series of stages from contract creation to fulfillment and closure. Effective contract lifecycle management (CLM) ensures efficiency, reduces risks, and enhances profitability. Before we have a look at the contract lifecycle let’s have a look at how is usually handling this process in startup tech companies and how this changes overtime.

In a tech startup, the responsibility for contract lifecycle management (CLM) falls upon different individuals or teams depending on the company’s size, structure, and complexity of contracts. Although the list below is not exhaustive it does cover a few of the people that are most commonly involved and the stages of the company that the might be involved in the process.

  1. Founders/CEO: In very early-stage startups, the founders or the CEO may handle the contracts themselves, given the lean structure and limited resources. They might be involved in drafting, reviewing, and negotiating contracts, especially those of strategic importance. This is not uncommon. Especially when selling to enterprise customers where deals can get complex and the weight of the founder needs to be applied either to get the deal over the line or to get the company behind delivering a custom contract.

  2. Sales Team: Sales personnel play a significant role in managing customer or vendor contracts. They are typically involved in the negotiation phase and ensure that the contract terms align with the agreed business terms. One of the core roles that a sales person play’s is a role of informing customers what the use case of the product is and how it will be implemented. This has a lot of bearing on the contracts that are put into place and the speed of negotiations.

  3. Operations/Project Managers: These individuals may oversee the execution phase of the contract, ensuring the company fulfills its contractual obligations and the project runs as per the timeline and budget outlined in the contract. They may be involved in the contract negotiation itself when you get to the point of having to get your team on board to deliver what a sales person (or your CEO) has promised.

  4. Legal Counsel: Startup’s often don’t have in-house legal counsel until they get to a two to three million ARR size, if not larger. They will often utilize an external law firm. Either way these legal resources play a crucial role in drafting, reviewing, and ensuring the legal soundness of contracts. They also handle any legal issues that might arise during the services and after the customer has stopped using your platform.

  5. Finance Team: This team oversees the financial aspects of the contract, including invoicing, tracking payments, and ensuring financial compliance. As you scale they are useful to have more and more involved in contract negotiations as often the finance team are the ones that will start feeling the pain of non-standard terms. Especially when it comes to invoicing terms in a scale up.

In some cases, startups might outsource contract management to third parties or use contract management software to automate and streamline the process. Although a lot postpone this the pain that it can cause later down the road can make scaling a business quite difficult. Especially as the volume and complexity of contracts increases.

So now that we know who is involved in the process, let’s have a look at what the lifecycle of a contract looks like.

Steps in Contract Lifecycle Management

Contract Lifecycle Management: From Drafting to Closure - Contract Sent1. Drafting

Contract lifecycle management begins with drafting the contract. Often for tech companies they develop an MSA template that is appropriate for their company and this becomes the base contract to negotiate with. The creation of this master service agreement involves the creation of a legal document outlining the terms and conditions of the agreement and either includes or links to other documents such as a privacy policy or a data processing agreement. Attention to detail is essential in this phase to ensure all parties’ rights and obligations are clearly defined and that the contract is legally sound and aligns with business objectives.

2. Review and Approval

Once the contract has been drafted, it goes through a review process where legal experts, managers, and other stakeholders review and approve or decline the contract terms. They check for compliance with company policies, legal requirements, and ensure the contract aligns with business goals. This can include things such as liability caps or billing terms. Following the review, the contract must receive the necessary approvals before execution.

3. Negotiation in Your Contract Lifecycle Management

Negotiation is a critical stage in CLM, as you and your customer may (well, probably will, let’s be honest) have differing views on contract terms. It’s vital to maintain open lines of communication to reach an agreement beneficial to all parties involved. Having someone that is skilled in negotiation and even involving senior leaders such as the company’s CEO can lead to better contract terms and develop more positive business relationships.

4. Execution

After negotiation and final approval, the contract is signed, marking the acceptance of terms by all of the parties. In many companies, the execution phase is being digitized for quicker and easier signing, but there are still some circumstances where a wet signature is required.

5. Obligation Management

After signing, the contract enters the delivery or obligation management phase. It involves ensuring that all parties fulfill their contractual duties, the product is being delivered properly and the service level agreement is being adhered to. Effective obligation management can reduce risks, avoid disputes, and build a lasting relationship among parties which will help with renewals in the future.

6. Auditing and Reporting

Tracking how your customers are doing is one of the most important parts of delivering a software as a service product. As the customer kicked off well, are they engaged in the product, do they need extra onboarding help? These are all questions you should be keeping an eye on. This will provide insights into how well the contract is working, identifies potential issues, and enables data-driven decision-making.

7. Amendments and Renegotiation

Over the contract’s life, there may be a need for amendments due to changing circumstances. This is most common when either the contract comes up for renewal or something material changes. This stage involves renegotiating terms, updating contract elements, and getting approvals for changes. Transparency and communication are key during this stage. Some common reasons for this to happen is changes to the product delivery or even changes to the structure of the companies involved (a contract can be assigned to another party in some circumstances).

8. Renewal or Termination

As the contract nears its end, the parties must decide whether to renew, extend, or terminate it. This decision is typically based on the contract’s performance, the relationship between parties, prevailing market conditions, the budget of the customer or whether or not the champion at the customers business is still there and using your product. These are all things that your customer facing team should be tracking and reporting on. Look to have renewal motions in place early on. For enterprise customers three months before the end of an annual contract is not uncommon.

9. Archiving

Whether renewed or terminated, the contract is archived for future reference. Archived contracts provide a wealth of information that can be used for future contract creation, risk management, and legal compliance. Keeping well structure contract records can be something that a contract management tool will be useful for.

Contract lifecycle management is a continuous and comprehensive process that requires careful handling at each stage. From drafting to closure, every step plays a crucial role in ensuring that the contract serves its purpose and adds value to the business. By employing efficient CLM practices, organizations can ensure smoother operations, minimized risks, and maximized profitability. With advancements in technology, companies can now leverage contract management software to automate and streamline their CLM processes, driving efficiency and strategic value in their contract management.

Contract Sent is not a law firm, this post and subsequent pages on this website do not constitute or contain legal advice. To understand whether or not the ideas and guidance on the Contract Sent website is applicable to your business, you should consult with a licensed attorney. The use and accessing of any resources contained within the Contract Sent site do not create an attorney-client relationship between the user and Contract Sent.

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ABOUT THE AUTHOR

Scott Whitaker

Scott is the founder and CEO of Contract Sent. He has a decade of experience in building and scaling software as a service companies, legal, operations and finance teams.

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