CLM Maturity Model

Implementation of Contract Lifecycle Management (CLM) software is a journey. While it is possible to jump straight to a highly-automated (and highly complex) CLM system for your entire organization, I recommend taking a slower approach. The benefits of CLM are great , and it is tempting to unlock them all at once, but doing so introduces a lot of complexity and risk. By taking a slower approach -- and maturing over time -- you can strike a balance between functionality, complexity, and risk.

What should that approach look like? What is the CLM journey? I can help clarify that with a CLM Maturity Model. The Maturity Model breaks down CLM into its functional areas. Those areas are:

• Template Management and Document Generation
• Workflows and Process Automation
• Contract Analysis and Negotiation
• Contract Repository and Insight

For each functional area there are four levels of maturity corresponding to the amount of standardization and automation enforced by CLM:

• Level 0: No CLM
• Level 1: Basic
• Level 2: Standard
• Level 3: Advanced

Let's look at the functional areas and their levels of maturity from a CLM perspective.

Template Management and Document Generation

CLM systems give you the ability to control contract templates. For instance, if your organization frequently needs to create Non Disclosure Agreements (NDAs), Master Service Agreements (MSAs), and Statements of Work (SOWs) then it helps to have templates of each of those contracts rather than trying to write them from scratch each time they are needed. CLM can help greatly here.

Level 0

With no CLM, templates may exist but they are likely scattered across a shared drive system or across employees' own computers. When someone wants to create an SOW for a new customer, for example, they may find an SOW they created for a previous customer and manually edit it for the new customer. A Level 0 system has the following characteristics:

It is risky. With no centralized and controlled repository of templates, users create documents from outdated templates and old contracts. There is high risk of including outdated, nonstandard, or unfavorable terms.

It is slow. It takes time to find a valid template or document and all edits must be made manually.

It is cumbersome and chaotic. Every person drafting up documents has their own method for doing so, none of which are very streamlined and all of which differ from each other.

Level 1

With the most basic capabilities of CLM, template management and document generation becomes more organized and streamlined. All templates are stored in the CLM system and controlled by the organization. Users can start with a standardized and approved contract template.

A Level 1 system CLM can "merge" basic dynamic content into the contract. For example, a user may go through an intake process and enter information like Legal Entity Name and Address into a form. The CLM system merges this form data into the contract in the correct place rather than relying on the user to manually edit the contract. A Level 1 system has the following characteristics:

It reduces risk. Legal, finance, services/delivery, and all other stakeholders can rest easy knowing that all contracts will start from the same, approved document templates.

It is more organized. Users can quickly find document templates and generate documents via a more organized and standardized process.

Level 2

A Level 2 system provides the functionality of a Level 1 system but enhances the ability to merge dynamic content. Level 2 systems often pull data from Customer Relationship Management (CRM) or other systems to further automate the creation of contracts. For example, a user may click a single button to generate a bespoke MSA for a specific customer based on data stored in a CRM. This bespoke MSA could have terms automatically added or removed based on the customer's location, or the products they need, or anything else that would drive contract content.

A level 2 system has the following characteristics:

It greatly increases speed. Rather than searching for contract templates and manually updating the content, users of CLM have a "one-click" experience that generates documents automatically.

It greatly increases standardization. By taking away the users' need to manually edit contracts, there is little room for adding custom or non-standard language.

Level 3

The jump from Level 2 to Level 3 is a big one. With a Level 3 system, users can describe the contract they need and the CLM system can use generative Artificial Intelligence (GenAI) -- along with an organization's rules for document generation -- to create bespoke contracts. A user can ask the system to "write a mutual NDA for Acme Corp that starts on X date and expires on Y date". The system takes the request from the user as well as any predefined guidance for writing NDAs and writes an NDA (or two or three) for the user.

It is the ultimate in speed. While creating a document with a single button click in a Level 2 system might be faster in many scenarios, a Level 3 system is faster when no template exists for the needed contract.

It provides near-infinite flexibility. Because there are no templates per se (just rules for writing contracts), a Level 3 system gives near-infinite flexibility.

It may or may not be less risky. While certainly incredible, Artificial Intelligence (AI) is not a panacea. While an AI-generated contract may be less risky than one edited from a template by a non-expert user, it is still wise for an expert to review AI-generated content for quality. This review process may negate any gains in speed.

Workflows and Process Automation

All organizations have some sort of process for reviewing, approving, and executing contracts. With sales contracts -- for instance -- it is common for a complex contract to require review from sales management, legal, finance, and other stakeholders before it is ready for signature. CLM systems give organizations the ability to automate workflows and contract review processes.

Level 0

With no CLM, the processes that do exist have little to no automation. There may be Standard Operating Procedures (SOPs) that define the rules for review and approval but it is the responsibility of people to remember and follow these procedures; there is no means for enforcement. Reviews, comments, and edits happen via email and word processors and the process can be rather chaotic and disorganized.

It is highly chaotic. Many stakeholders often review a document simultaneously. Tracking versions and tasks -- who needs to do what when -- is incredibly difficult and chaotic.

It is very slow. Emails get missed, tasks go undone, and documents get stuck in limbo.

It is highly frustrating. The lack of standardization, the lack of automation, the slowness, and the abundance of chaos is frustrating. Highly frustrating.

It is highly flexible. One benefit of a lack of process automation is the flexibility of a level 0 process. When there are no rules -- or the rules are self-enforced -- anyone can do anything at any time.

Level 1

With a Level 1 system process automation may be low, instead relying on users to move the contract along the process. But transparency, task management, and version control helps organize and streamline the contracting process. In this system users can assign tasks and all stakeholders can see who needs to act and how the document has changed over time.

It is flexible. User can assign tasks as needed rather than following a highly standardized process.

It greatly increases transparency. Instead of relying on email threads users use a purpose-built system made to track contracts.

It reduces chaos. All contracts, tasks, and versions are in one place rather than scattered across email threads and computers.

Level 2

A Level 2 system introduces more standardization to the review process. CLM system designers can build review and approval rules that dictate how documents flow from creation to signature. An MSA with nonstandard Intellectual Property (IP) terms may need a review from an IP lawyer within an organization, for example.

It decreases risk. A Level 2 CLM systematizes and enforces Standard Operating Procedures that reduce risk.

It increases standardization. All documents must follow a predefined process with various rules, levels of review, and escalation logic.

It may reduce flexibility. Flexibility and standardization are in many ways opposed. The system must strike a balance between these two goals .

Level 3

In a Level 3 system, AI helps to further automate the review and approval process. While a Level 2 system may rely on users entering key contract data like contract value, non standard payment terms, etc. a Level 3 system uses AI to automatically detect this data and route a contract accordingly.

Beyond Level 3 is a level I have not seen yet but I'm sure will become available in the near future. In a hypothetical Level 4 system CLM developers won't need to configure or program a CLM process automation but would rather simply describe it. E.g. "When a contract comes back from a customer with nonstandard terms send an email to the legal queue with key contract data and assign the contract to the legal user who has the fewest tasks assigned". The CLM system will use the instructions to configure itself to behave accordingly.

Level 3 has the following characteristics:

It greatly decreases risk. Documents get routed for review with the help of AI.

It greatly increases standardization. You can define complex rules leveraging AI to route contracts exactly as needed.

Contract Analysis and Negotiation

One of the biggest bottlenecks in contracting is the process of reading through contracts, analyzing contracts, understanding counterparty edits, and writing counteredits. CLM can help with this.

Level 0

Without CLM, the process of readying, analyzing, and negotiating contracts is completely manual. For example, someone in procurement may send their corporate attorney an MSA from a new vendor. The process of contextualizing the MSA, reading it, analyzing it, and redlining it is tedious and arduous for the attorney whose time may be better spent on other tasks.

It is arduous. Contracts can be very long and dense. Reading a contract that is 10, 20, 50, 100+ pages can take hours or days.

It is frustrating. For corporate attorneys, many contracts may come to them without context. They are left trying to chase down what the contract is for and why their colleague needs it.

Level 1

In a Level 1 system, contract metadata helps attorneys and anyone else seeking to analyze a contract. Contract metadata is the data relevant to that contract, e.g. start date, end date, total value, payment terms, termination notice window, etc. With a Level 1 system a contract requester/creator can enter document metadata or the system may pull document metadata from some other system like a CRM. Rather than reading through a document, document reviewers can scan the metadata for important information.

It is faster. A Level 1 system increases contract velocity by helping to contextualize contracts and making key contract data readily identifiable.

It may miss important information. It is unlikely that every single important piece of information can be transformed into metadata. This is especially true of a piece of natural language like a contract which can contain a lot of information.

Metadata may be inaccurate. Level 1 systems often rely on humans to update metadata. This means that while data may be accurate right after contract creation it may become out of date as people edit the contract.

Level 2

A Level 2 system uses AI to capture document metadata and identify key areas of risk. Such a system can pull out relevant data from a contract -- even from contracts that come from an outside client or vendor -- and keep that data up to date as the contract content changes over time. A Level 2 system can also highlight risky language that should be given special attention by reviewers.

It is much faster. AI pulls out nearly all of the relevant metadata and can even create a summary version of the contract, thus reducing the time needed to review contracts.

It relies heavily on AI. AI is not magic and it is not infallible. Even with AI, users may still want to read through the entirety of a contract.

Level 3

A Level 3 system builds on a Level 2 system by helping with editing a contract and contract negotiation. A Level 3 system may identify particularly unfavorable language and provide suggestions for more favorable language. It may take a vendor's language about intellectual property and weave in language that makes the terms more favorable, for example.

Beyond Level 3 is the possibility for an automated contracts lawyer. Employees in an organization may send a contract to a CLM system and instantly receive a redlined version to send to their counterparty. I know of no CLM system that has this level of maturity, though I am sure it will exist in the next decade.

A Level 3 system has the following characteristics:

It is incredibly fast. This level of CLM maturity expedites the process of document review and document editing -- two notoriously arduous tasks.

It relies very heavily on AI. Many organizations may not feel comfortable allowing AI to write portions of their contracts.

Contract Repository and Insight

After executing contracts, organizations must store them somewhere. These executed contracts describe the relationships organizations have with clients, vendors, partners, and literally every entity they do business with. It is important to have deep insight into these contracts and a CLM system can help with that.

Level 0

With no CLM system contracts exist across myriad systems. Searching for contracts is very difficult and running reports on contracts is impossible or nearly impossible.

It is disorganized. With no central repository, contracts could be anywhere. Even if an organization uses some sort of shared file system there may be as many ways of organizing contracts as there are employees with contracts.

Insight is impossible. Want to know which contracts have unfavorable terms? Want to know which ones expire soon? Is it too late to stop your contracts from auto-renewing? Good luck finding out.

Level 1

A Level 1 system provides a single source of truth contract repository. Folders are organized according to standards and rules and documents follow a standardized naming convention. Optical character recognition (OCR) allows users to search for text within contracts, even those that might be in the form of images or PDFs.

It is organized. The very nature of a standardized repository increases organization of contracts.

It may lack insight. Contracts may be organized and searchable but without contract metadata it is difficult to run reports and get advanced insight.

Level 2

A Level 2 system leverages document metadata to enable reporting and insights into an organization's contracts. Metadata may be set manually or with the help of AI which can pull important information like termination notice periods, auto-renewal language, expiration dates, and more. With contract metadata it is possible to set up dashboards for upcoming renewals or upcoming fee increases, for example.

It provides insight. Reports give organizations the ability to understand their contracts and their relationships at a glance.

It enhances compliance. Organizations can track contractual obligations like fee increases or payment milestones and report against them, reducing the chances of falling out of compliance.

It provides a sense of control. Seeing contracts at a glance in a single system gives organizations a huge amount of control. No longer are stakeholders in the dark when it comes to understanding their contractual relationships.

Level 3

With Level 3, AI can further enhance a CLM system and its ability to provide contract insight. Rather than relying on a CLM administrator to configure, build, and share pertinent reports a CLM user can make a request of the CLM system. For example, a user might tell a Level 3 CLM system to "display all contracts valued at over $1M that have a fee increase that takes effect in the next 90 days".

It provides ultimate insight. This level of CLM maturity is like having a super-human paralegal capable of reading thousands of documents in seconds and providing insight.

It relies heavily on artificial intelligence. Like all the other AI-enabled features mentioned in this article, any heavy reliance on AI can be a liability.

Conclusion

CLM can do a lot of good for an organization, and it is tempting to set up as much as possible all at once. But jumping into the highest levels of CLM maturity comes with risks and complications. Identify the areas of CLM that is most valuable to your organization and focus on maturing those areas first. The CLM journey can be a long one but is worth the effort