Contract Approval Workflow 101
A contract approval workflow is a series of tasks that stakeholders follow to evaluate and accept or reject contracts. It is at the heart of any business process that involves house agreements with clients, suppliers, investors, and partners. The process encourages transparency, identifies and eliminates errors early on, and enables complete compliance with any applicable regulations, all while providing a channel of communication between administrators and contract approvers. In large and mid-sized enterprises, for example, a contract approval workflow may involve cross-departmental input from finance, marketing, sales, and legal professionals. In small companies, on the other hand, a contract approval workflow may only involve one administrator who works directly with stakeholders to get a contract approved or rejected. Regardless, a well-organized contract approval workflow is a must if a business is to ensure the success of its contract management process. Colleagues will be required to go through a series of stages and checkpoints to approve or reject a contract . In most businesses, the most common workflow stages can be separated into seven phases: 1. Contract Creation: The initial draft is created. 2. Editing: Collaborators make adjustments to the contract before it’s accepted. 3. Review: Stakeholders take a closer look at the contract and its terms. 4. Approval: The necessary individuals approve the contract. 5. Execution: The participants sign the contract, typically in-person or electronically. 6. Storing: Once signed, the agreement is saved electronically or in physical form. 7. Sentinel: The contract is monitored to ensure compliance on both parties’ ends. The contract approval workflow process represent the skeleton of any contract management process. A well-organized process minimizes bottlenecks, protects the integrity of data by preventing data redundancy, ensures compliance with relevant laws and regulations, and makes way for transparency regarding individual contracts. This, in turn, promotes the effective delivery of goods and services to clients, suppliers, partners, and others.
Key Components of a Contract Approval Workflow
In any well-structured contract approval workflow, organization is key. A contract approval workflow will generally include the following steps: submission, review, approval, and archiving. The primary functions and responsibilities at each stage are outlined below:
Submission – a contract will typically be submitted to an approver or decision maker through a contract management system for either initial approval (for example, if the process requires a legal department or contract manager to give the employee the go-ahead to enter a contract) or for additional review (for example, if the contract requires an update and is resubmitted to another department such as finance).
Review – the contract approver reviews the new contract or a contract revision against any guidelines or outlines that have been established for the business. The contract approver can issue additional comments, specific requests, or even rejections to ensure that the contract is accurate and meets the company standards.
Approval – the contract approver will then decide whether the terms of the contract are acceptable to move forward with the process. For example, the approver may approve the request on a contract purchase as long as it is within an account balance limit or other established guidelines. The approver can either approve a request within the system or can automatically approve the request to keep the process moving.
Archiving – once all decisions have been made and any necessary attachments are included, the workflow will automatically route the contract to the necessary parties for approval or to archive for future reference.
Pitfalls in a Contract Approval Workflow Process
Understanding the common challenges in contract approval processes is the first step toward accurate identification of bottlenecks and trouble areas, as well as ultimately correcting them. A list of these problems includes:
- Delays caused by missing signatures and approvals
- Bottlenecks due to a lack of clarity in the process
- Compliance issues due to human errors
- Confusion and lack of clarity about who is responsible for what step in the process
- Missing visibility at every stage
- Missing notifications and alerts about upcoming deadlines, needed actions, etc.
- Lack of uniformity in language and design among internal documents
- Poor processes in file storage and updating
- Constant redundancy in the process
- Slow response time of approvers
As a general rule, the larger the business in question, the more cumbersome the different departments and players are forced to become. While this is the reality of a complex organization, there are different approaches businesses can take in order to reduce the impact of these issues by creating useful systems that eliminate most of the above-listed problems. For example, understanding the de-facto processes and identifying department workflows is a critical first step in creating (or fixing) a contract approval process.
Effective contract approval requires clarity throughout the entire process. Lack of awareness or control over compliance with designated procedures can lead to breach of contract, non-compliance with the regulations, financial losses, and breach of trust.
Most importantly, before creating a new approval process, it is important to consider how it would affect the workflow across the organization. For example, a complex approval procedure can create bottlenecks in different departments, which can lead to overall lower productivity. Therefore, understanding the needs, limitations, and workflow of every department is critical for long-term success.
Value of Streamlining Contract Workflows
An efficient contract approval workflow streamlines every process directly related to contracts and mitigates contract risk. Contract approval workflows ensure that each interaction with a contract runs smoothly, whether it’s soliciting, drafting, negotiating or executing contracts. Contract approval workflows are a means of tracking contract status in a simple and transparent manner, rather than a long, tedious process that saps time and other resources. When contract approval workflows are organized, consistent and user-friendly, there are many department, organizational and/or enterprise-wide benefits. The most immediate benefit is obviously time savings. With an automated contract approval process, the requestor and approver won’t have to chase down the status of a contract, and the history of contract approvals, drafts, discussions, etc. will be readily available. This allows these professionals to focus on their core activities, thereby increasing overall productivity. The next immediate benefit is cost reduction. The majority of contract disputes and contract litigation stem from poorly drafted contracts, slow and inefficient contract change processes and lack of or improper contract management. The modern CRO/CM Manager, CLO, CPO, CEO or CFO must have a deep understanding of contract workflow and its importance to contract compliance programs, account audits, program audits and enterprise audits. An organized contract workflow process can substantially eliminate or significantly reduce all of these cost centers. This is especially true when contract approval workflows are tied into a complete contract lifecycle management (CLM) solution, which will allow for faster negotiations, timely renewals, quicker terminations and improved strategic planning for future contracts. In addition to tangible benefits, optimizing contract workflows helps ensure compliance with procedures and policies through more consistent application of business logic to the contract workflow. For example, if contracts aren’t being routed for approval the same way every time, there is a risk that some contracts that shouldn’t have been approved might get approved, or that some suppliers or service providers may have not gone through the proper process. Streamlining contract workflows establishes a single source of truth, thereby allowing for contract review for compliance with policies and procedures and fairness of the negotiation process. When contract workflows are optimized, departments are better able to collaborate across departmental boundaries. Contract workflows are often times tied to inter-departmental workflows involving Sales, Finance, Procurement, Marketing, Engineering, Product Development, Human Resources, Regulatory Affairs, and/or Administrative Services. In many organizations these departments work against each other, resulting in irritation, mistrust, and animosity between departments. By establishing consistent contract workflows, disputes across departmental boundaries can be forestalled. Best practices and processes can then be shared across departments to help develop trust between departments.
Streamlining Contract Workflows: Practices for Success
Streamlining the contract approval process streamlines your business. But the question is, how do you optimize your workflows to ensure speed, compliance, and reduced costs? With such a large part of your bottom line at stake, these tips can help you get the most out of your workflows. It’s no surprise that lawyers prefer tools that save them time. Contract review automation uses natural language processing (NLP) technology to automatically pull up redlines from previous drafts or analyze a proposed clause for missing details based on a company’s contracting history. This dramatically reduces the time each lawyer spends reviewing each contract, allowing more contracts to be screened more quickly. The ROI is apparent when you do the math. Can 11% really make a difference? If you’re an in-house lawyer making $160,000, that 11% of time you’re gaining by archiving old contracts to find relevant clauses and language sooner is an annual $17,600 saved for your company. As you create procedures for contract approval workflows, one of the most important things to do is designate roles. Are you giving your legal team adequate time to review contract details? Are they drowning in task after task? How about the sales team? How do you ensure they have access to the documents they need when speaking to customers? By creating role-based access for your contract approval workflow , you’re ensuring that only the appropriate people have access to the right information at the right time. Your team should continuously update your contracting workflow to bring it in line with your company’s needs as they evolve. But sometimes you can’t be sure what is working and what isn’t. That’s where data analytics come in. Using contract data and analytics software, you can measure the KPI (key performance indicator) for your contract management system. By gathering a variety of data, including contract type, contract value, and performance, you will be able to analyze your business’s contract management activity and draw insights that will improve the efficiency of your contract approval workflow. You’ll also be able to share these insights with other departments whose teams regularly interact with contracts. While keeping good records is essential for auditing your contracts, which you can use to change processes that aren’t working, you should also train your staff on best practices for executing contracts. By getting everyone on the same page, you’re increasing your chances of avoiding human error. When it comes to legal workflows, don’t just wing it. By using the best practices for optimizing contract approval workflows, you’ll most certainly see a difference.
Utilizing Technology in Contract Workflows
When used as part of a contract approval workflow, technology can accelerate the speed of review and signing. Many organizations have already adopted contract management software that makes it easier for stakeholders to access reviews. While they still usually have to sift through emails, other documents, or past contracts sent for review, the document management system is the singular source of truth. With the right permissions, everyone can see what’s been changed and who changed it and whether a version of a document has been approved.
Contract management software is also a good investment if you regularly work with third parties. In some systems, you can grant people without an account access to the platform to create new contracts, provide feedback, and more. This means that you don’t necessarily have to share the document in the way that creates the most strain in the contract workflow (more on that in the next section).
Electronic signatures eliminate the need for physical paperwork. They are faster and more secure than the physical process, and they often require users to verify their identity. Software systems like ContractSafe, IronClad, DocuSign, and others allow you to automate workflows by moving documents from one review stage to another. When using these types of systems, you can also track each activity on the contract.
It’s now also possible to use artificial intelligence to expedite contract workflows. The purpose of AI in contract management is twofold: to extract data so that contract managers can use it for analytics and to generate insights so that organizations can improve their contracts over time. While AI can analyze data from past contract negotiations, it may also be able to analyze a current contract. It "reads" the language of a contract to tell you how the terms and clauses may align with the way your organization structures its contracts in general. Understanding the typical agreement that an organization reaches with a supplier or other third party can help you get a sense for how much leverage you have in negotiations.
As a result of AI used for contract flow, contract managers may be better equipped to make informed decisions about how to approve contracts or alter them.
Contract Workflows: Case Studies from the Real World
Many businesses have already witnessed the positive impacts of an effective contract approval workflow implementation. From large multinationals to smaller local firms, there are examples across different industries and sectors. Bobby Campbell is general counsel for Interactions Corporation, a company in Massachusetts that specializes in providing voice technology systems for businesses. Besides its’ impressive client list, Interactions is better known for its’ unique contract approval process. It utilizes a checklist system for ensuring all parties review agreements with the appropriate tools. It’s a strategy that was put in place by Campbell herself, as part of a new contract workflow they initiated in 2014. "Excluding the large companies we work with, nobody will read our contracts unless it’s absolutely necessary. These large enterprises will tell us they have a problem with a section if they do and then we can deal with them," says Campbell. For example, for the non-disclosure agreements (NDAs) she uses a checklist for the various important sections of the NDAs to ensure none are missing, such as the termination clause or the duration contract. This checklist has, and will continue to support the company in terms of reducing legal costs, preventing the need for the company to return to the contract with revisions, and shortening the duration of the overall negotiation process. Other notable successes include accounting software company Freshbooks. At one point, the Toronto-based firm was having difficulty keeping track of their contracts and client lifecycle and engagement. After reaching out to fellow member of the Toronto startup community Weebly, Freshbooks was able to receive suggestions regarding contract approval workflow software to assist them in tracking information after a deal is closed, allowing their sales and customer service departments to focus on other aspects of their business. Lastly, a business that’s perhaps most identifiable by its mascot, Domo, was also able to experience success implementing a contract approval processing workflow. The business analytics software company used old fashioned spreadsheets to manage the different contracts they had for multiple clients. Their process was labor-intensive and tedious to get through. We reviewed a number of different options to see which style suit our needs best, but it quickly became apparent that an automated solution would be much more appropriate for a company like ours and our growth," said Chris Bank, director of legal operations for the company. Using automated contract approval program, the company reported a 50% quicker application turnaround and reports to stakeholders was significantly reduced. Overall the organization reported significant improvements in speed and efficiency, although the report does not clarify the amount of time reduction.
Contract Approvals Pipeline and Workflow Process: What to Expect in the Future
The digital landscape continues to transform industries and businesses. It should be no surprise that the field of contract management is no different. New technological developments in the areas of artificial intelligence, machine learning, data analytics, and digital transformation are making waves in how contracts are created, stored, examined, and reviewed.
Artificial intelligence (AI)
AI has made an impact in countless fields, from quickly evaluating complex data and providing actionable insights in online retail displays to drafting an email with your typing patterns embedded to provide a simple autofill option for words or sentences. AI is being incorporated into contract management systems to improve contract creation and review. Programs can now quickly analyze large amounts of data, such as hundreds or thousands of previous contracts, to provide recommendations as to what might be missing in a new version that was drafted for the current transaction.
Machine Learning and Digital Transformation
One of the biggest trends seen in the contract management sector is the increased use of machine learning by digital service providers to anticipate the needs and preferences of their users, which fosters a routine use of their services, similar to the experiences of Google, Netflix, and Amazon. Such algorithms rely on user behavior and data to make informed recommendations (e.g., if you liked this product, try these others, too). This predictive software is now offered in the field of contract management. Sophisticated algorithms analyze previous executed agreements to provide tailored recommendations, e.g., the appropriate party(ies) to engage in the negotiation, the most commonly used provisions , and the length of time that it typically takes to finalize the agreement. The system then proposes recommendations based on scientists’ notions of what are ideal variables and the negotiation process. For example, if parties tend to agree on certain provisions 80 percent of the time, the program will recommend them as standard. If a provision is not included, it will then recommend including it as an essential provision.
In the near future, this type of machine learning will be augmented with predictive analytics. Some of these new technologies are starting to run proofs on contracts the same way tinkerers and engineers run proofs on reams of messy data. For example, imagine a supercomputer capable of analyzing all the possible permutations of a piece of language in context to determine risk and reward. It can find the most likely interpretation of a contract clause, predict the legal precedent that would apply, and help the stakeholders decide quickly and confidently whether to include a provision or negotiate a more favorable version. As these machines become smarter, lawyers may use machine learning to rate the level of risk in clauses they are presently agreeing to and specify desired outcomes to eliminate risk. In short, AI and machine learning are destined to have a significant and lasting effect on the nature of work lawyers do, as well as how that work is done.
In A Nutshell
The trend in contract management processes points toward a future where smart systems recommend contract terms. We can expect more sophisticated technology to analyze contract data with greater precision, enabling companies to take a proactive rather than reactive approach to managing their contracts.