A while back I wrote an article about Contract Lifecycle Management (CLM) that looked at the two major parts of these solutions and why it’s so important to set a clear scope for your implementation. In today’s article, I return to this topic and expand my thoughts on setting the scope a bit more.
CLM was one of the first procurement processes to be automated, or at least semi-automated. The focus was initially on creating contract repositories to ensure that procurement organizations had access to all their contracts and could track at least basic meta data such as expiry dates. But quickly the focus expanded to automating the creation of the contracts using templates, clause libraries, advanced workflows, and so on.
The Complexity of Contract Authoring
And all this makes so much sense to use solutions to standardize contracts, focus on legal resources where they are needed, ensure correct approvals (and audit trails) and so on. The problem? Contracts and contracting are really complicated and nuanced. The required language depends on where the contract is used, what is managed by the contract, how governing law applies, and a host of other factors. This makes the contract authoring part difficult to set up. Similarly, it can quickly turn the implementation project into a never-ending chase of different clause versions, etc.
The solution to some of these issues lies with GenAI (Large Language Models (LLMs), in particular. But since the cost of error in contract management can be extremely high, usage of GenAI/LLMs require significant governance. Also, while standard contract language is available to train these models, the problem is often the subtle differences come with the specific context of the contract.
Operationalize Contracts
So, where am I going with this? Be careful when scoping out your CLM initiative. Unless you have a very mature contracting process and a tech savvy legal department, authoring should likely take a back seat until more basic CLM capabilities are put in place and embedded into the processes.
In fact, if we look at CLM from a procurement perspective, there is an aspect of CLM that might be more important than authoring — linking contracts to procurement operations and to supplier performance and risk management. The specialized CLM solutions that are leading the CLM market tend to be very focused (for obvious reasons) on the contract itself rather than how the contract is used once it’s executed. One big exception to this is Sirion, which originally launched more as a supplier performance management solution than a CLM one before evolving into one of the leading CLM specialists. And, of course, we have the strategic sourcing/S2P suite providers (like Coupa, GEP, Ivalua or SAP) that (ideally) have their CLM modules integrated with the rest of the suite to ensure that obligations, performance, and risks are managed and tracked appropriately.
I also think that IM&PPO solutions like ORO or Zip can play an important role here. On the intake side, they can provide a simple and intuitive interface for casual users who don’t need all the functional depth of a specialized CLM solution. On the orchestration side, they can connect different systems (if multiple systems are in use, which for most larger organizations is very likely) and ensure that the necessary data is shared and can trigger the necessary actions. For smaller or less mature organizations, a solution like Zip can even serve as a contract request and repository solution.
Implement CLM in Phases
So, while full digitalization of CLM, including authoring, repository, and linking the contracts to operations, should be the end goal for any procurement organization, my recommendation is to simplify things and take a phased approach:
- Start with the repository. Ensure you have your contracts available digitally and that relevant meta data is captured. This will allow you to quickly search for relevant contracts and keep track of expiry dates, renewal dates, and so on.
- Link contract meta data and obligations to procurement operations, supplier performance, and risk management. Make sure your contracts are not just sitting there but that terms and conditions are transferred to other relevant systems/modules and monitored. Is the cost on the invoice in line with agreed performance levels, etc.? Should the cost be adjusted due to changes in indexes, currency rates, and so on?
- Automate contract creation. Leverage classic rules-based workflow approaches or LLMs to lessen the burden of creating contracts. But don’t try to cover all eventualities. Use the good old 80/20 approach and expand the scope over time.
As always, Ardent Partners is here to answer any questions.
