“My contract is in the Contract Lifecycle Management System (“CLM”), when can I expect the signed version?” As Legal Operations professionals, you will have heard this question numerous times.
However, a contract shall go through a round of approval(s) before being circulated for signature. Therefore, the real question is: “Who should approve the contract before it is signed?"
Deals might take weeks or months to close, and when they do, the contract is expected to be signed simultaneously. A well-thought-through approval process linked to automated workflows is key for the organization's success, as it will ensure effective internal controls and consistency while avoiding bottlenecks.
An organization is represented by its Board, which delegates the day-to-day management to an executive team. The executive team will, therefore, be in charge of deciding “WHO approves WHAT,” which shall be transcribed in writing into a clear and concise Delegation of Authority (“DOA”) policy, transferring adequate powers to pre-defined roles for specific contract categories.
The DOA is a governance tool that ensures internal accountability for the organization’s financial and activity commitments.
KEY ELEMENTS OF DOA
Authenticate roles as authorized approvers. The DOA grants the authority to approve contracts pertaining to a certain category. Identify roles, not individuals. Although the DOA acts as the instrument of delegation, it is worth drawing up a power of attorney if one of the approvers is also authorized to sign the contract.
Establish risk thresholds by placing limits on the scope of authority. While the practice is for the financial value of the transaction to determine the risk threshold, it can also be steered by the nature of the contracting party (i.e., contracting with the government) or other elements. The DOA shall classify the different contract types of the organisation and provide an approval flow appropriate for each type.
A EUR 1,000,000 grant agreement will not require the same approval(s) as a non-financial licensing agreement, not because one is less important than the other but because the expertise required to sign off on each agreement is different.
The DOA needs to be fit for purpose and be designed in line with the risk threshold. Some colleagues might find the contract approval process too long, while others would prefer to see more people involved. A balance must be struck to ensure the contract is reviewed by the relevant experts in line with its risk evaluation. Contract approval shall be an added-value process and not convert into a mere formality.
Accountability. The approver shall know what he/she is committing to when approving a contract. A checklist provided with the contract to be approved can be helpful. Approvals, dates, times, and approvers comments shall be recorded in a coversheet and filed with the contract record. This is the first thing auditors will look into when performing controls on CLM.
TECHNICALLY SPEAKING
Once the DOA has provided us with the answer to “WHO approves WHAT,” how do we translate this into CLM?
- Make sure your CLM solution offers automated workflows that can be customized for your needs. Avoid workflows that are to be triggered manually, as this would defeat the purpose.
- Identify one or more categories of data that will be used to send the contract for approval. This could be, for example, the code assigned internally for each project.
- Setting up and amending workflows can be tricky. It is important to ensure knowledge transfer from your provider to your internal IT team for them to be able to amend the workflows should the contract approval process change with time. If not, paying for amending workflows might be a showstopper to bringing changes or streamlining your processes.
WHAT NEXT?
Once the DOA is in place, linked to automated workflows in CLM, what happens next?
- Create a visual aid to reflect the approval steps.
- Get management’s buy-in to communicate with colleagues. It helps if the CEO understands the rationale behind the contract approval steps.
- Regularly check in with colleagues to get a sense of whether the DOA is still fit for purpose or requires amendment.
- Periodically train colleagues and management.
- Share audit findings, if any, on any irregularities in the contract approval process and lessons learned.
The journey from DOA to CLM is about marrying effective governance with technological solutions. By doing so, organizations will ensure not only a swift and reliable contract approval process but also adaptability to changing requirements over time.
As Legal Operations professionals navigate this landscape, the collaboration between legal expertise and technological capabilities becomes the cornerstone of success, promising not just timely contract signings but also sustained internal controls and consistency.