Depending on the size, value and strategic relevance of the contract, stages of contract lifecycle may vary in importance but not in sequence – there are some exceptions – and all must be completed.
Note that if you want to skip the theory, you can jump directly to another post: contract management excel template.
1 – What is a contract in this article
There are contract of all kinds. Those are commercial contracts (for instance buyer-seller relationship), an employee contract, your electricity contract, a wedding contract, a contract related to intellectual property, a contract with the devil, a contract with your kinds to reduce their screen-time, a contract to kill your boss,…
Let’s focus on B2B contracts lifecycle stages, such as commercial contracts, partnerships and contractor / project types.
And believe me, this is fairly enough!
2 – Contract is tailor-made: the stages of the contract lifecycle management process
What is a tailor-made contract?
This is a contract designed specifically for a single purpose. The document is not based (or at least not on its main articles) on a former contract. This has two possible reasons:
- New or specific situation: such as new field of Business, specific partnerships,…
- New legal frame: new geographies, change in regulation,…
So now, in real-life, if you managed to streamline your contract writing in a single sequence, starting stage3 after finishing stage 2 for e.g., then you managed what I never managed… That is why this is kind of theoritical, and much more an iterative process than a sequential process.
But globally, the sequence and iteration is in 3 blocks:
The 3 cycles and 8 stages of contract lifecycle process
Let’s have a detailed look at the stages of contract lifecycle management. We can distinguish 3 main phases:
Cycle1 – Ignition:
- Need or Request: The story starts with at least two persons or organizations wanting to settle past or future relationship. Whatever the purpose (commercial, IP, …). The involves parties set the purposes and targets. They define and gather all the relevant information, propose a temporary time frame. This stage is the most crucial one. Conducting it in a wrong way has strong impact on all other stages. You may end-up failing in contracting or starting all over again when not conducted properly.
- Writing or Authoring – From this point of time, legal support is usually involved (lawyer, legal department,…). This is when the contract gets drafted and written. Two main aspects emerges from this step: the formulation of most important articles and the overall structure, including appendix.
Cycle 2 – Construction:
- Alignment or Negotiation – While the overall structure and approach of contract is not put into questions, parties discuss specific formulations, clauses and parameters. Usually amounts, obligations and duration are main topics, but this phase may modify any of the articles without restriction.
- Approval – Depending on who is negotiating, the approval can be done during negotiation when both parties have full power of decision, or separately when other parties are involved in decision making. Phase 3 and 4 are most of the time iterative and intricated, as you do place parallel streams to speed up processes.
- Signing – Here again, negotiator and approver being the same person, signing can be done during phase 3 and 4. Nonetheless, this is a separate phase. The person making the approval are usually entitled to sign. It can be other parties for four eyes principle. This is done in paper, fax, scan or eSigning (such as Adobe or Docusign)
Cycle 3 – Execution:
- Implementation – This is contract specific and about implementing the various clauses of the contract.
- Obligation and Compliance – Compliance means the involved parties keep their obligations. Without a proper system (contract manager, dedicated resource or contract lifecycle management software), compliance can be hazardous.
- Termination or Renewal – When an agreement comes naturally to an end, or when either party wishes to stop it or modify it, a cycle of request starts again. Even requesting not to renew would be a request.
3 – Contract is template-based: the lifecycle of contract is shortened
When you have a template-based contract, the phases of contract management remain the same in theory. But in reality, the cycle are shorten as the writing has been done.
What is a template based contract?
This is contract based on an existing template, when similar contracts have been designed several times, or when ones intend to have repetitive similar contracts. Those are the most common ones, and I could name hundreds and not being ready:
- General terms and conditions
On this blog, we usually focus on business approach, so wedding is not gonna be our Sample/pattern, but this article is a generalization on contracts. It proves that the concept is applicable independently from in which area you implement it. But consider what you may share the most: your general purchasing conditions or your software copyright. This is definitely a template you do not write everyday.
How the 3 cycles and 8 stages become 2 and 6
The eight contract lifecycle management stages are still valid in a way, but since the writing is done long before, the whole process is streamlined. The template is covering the Cycle 1 in a generic approach of future specific variants. Let’s look at the first 2 stages (i.e. the cycle 1):
- Writing or Authoring is done before as this is a template
- Need or request comes as “template request”
- All others phases remain the same: construction and execution
So cycle 1 simply disappeared.
4 – Tracking phases of contract lifecycle
When you have only a couple of contracts, some reminders in Outlook will do. If you want to set it up in a more professional way, this is done with a contract management system.
A contract is owned by:
- a legal owner
- a business owner
- a counterparty owner
- a counterparty legal owner
Usually, the business owner is the single official owner, in charge of tracking and monitoring what happens with the contract. He gives pace, guidance and sets milestones.
And usually the legal owners are too slow 🙂
Key Benefits of defining the contract stages:
Keeping control, mitigating risks and increasing value you get from contract. When having a constant process, you ensure you et the maximum at each stage of contract life cycle. No leakage in you value chain is possible when done with system. Let’s take a classical example, of price increase proposal to you by your supplier.
- Early identification of delays on signing: In our example of price increase, any delay would need earning money, as the old prices would still be valid. But it may as well have no impact, as signing date is not necessary the valid date of contract. Your nightmare may just start, as you would need to manage credit notes and accounting jungle for the next weeks…
- Early identification of delays on implementation: You agreed to start price increase at 1st of February? And your colleagues still have not uploaded the new prices in systems, P.O. are placed with old prices. Your phone is burning, Accounting department wants to kill you, your supplier claims that you don’t keep your word…
- On time renegotiation or renewal: arrrgh, you just missed the date to refuse the automatic price increase? Who to blame but your contract management system….
This is obviously an easy example of everyday life, can be much more complex. And even more beneficial to have a contract monitoring system.