In today’s competitive and dynamic business environment, managing contracts efficiently is key. Effective contract management helps organizations mitigate risks, ensure compliance, increase efficiency, control costs, and reduce errors. To help companies better manage their contracts, different software tools, such as Contract Lifecycle Management (CLM) and Financial Contract Management (FCM), have emerged. Both types of tools provide central storage for contracts and streamline elements of contract management and renewal, however, the tools serve distinct aspects of contract management, making it essential to understand their unique features and how they differ.
Contract lifecycle management software
Contract Lifecycle Management (CLM) software is a tool that helps legal teams manage contracts beginning with the initial request or intent to enter into a contract. It spans drafting, negotiation, approval, execution and storage of the contract.
CLM software is designed primarily for legal use cases such as standardizing contract clauses to ensure consistency across customer agreements, document version control through the redline process, and moving contracts through the necessary review and approval processes. Companies tend to use CLM software to automate and standardize the customer contract drafting and signature process. Because CLMs are designed for legal teams, CLMs often lack the functionality needed by accounting and finance teams to manage vendor contracts.
Financial contract management (FCM) software
Financial Contract Management (FCM) streamlines post-signature contract management, providing financial and business leaders (not just attorneys) with valuable control and insights into overall vendor spend, budgeting and forecasting, and how to actively manage vendor contracts.
For example, FCM provides the accounting and finance teams with visibility into all payment amounts and payment dates required by the contract, supporting a wide variety of payment structures. It distinguishes between recurring and non-recurring fees, enabling better financial tracking and forecasting.
As its core strength, FCM enables proactive, post-signature vendor contract management for financial and operational efficiency. Consider a scenario where a company is undergoing rapid growth and needs to scale its operations. The company relies on a number of software vendors for critical services, each with its own contract terms, renewal dates, and payment schedules. Using FCM, the finance team can effectively manage these vendor contracts, for example, by:
- Tracking payment schedules
- Anticipating renewal dates
- Facilitating accounting for the contract and
- Budgeting for future costs
This level of oversight ensures the company can maintain operational efficiency and financial control as it expands, avoiding potential disruptions that could arise from late payments or missed contract renewals.
CLM vs FCM: Understanding the differences
Fees and budgeting
Finance professionals need reliable, accurate and complete information to feed accounting systems and forecasting and budgeting models. Garbage in, garbage out. For example, a contract’s TCV, or total contract value, may be helpful information, but alone it is insufficient to support an accurate budget or forecast. What if that entire TCV is paid upfront? If paid annually, does the annual amount accelerate year-over-year? When, specifically, are those payments due? If you can discern that information for a particular contract, well done, but what about your other 1,000+ vendor contracts? Can you report or export financial data for your vendor contract portfolio as a whole?
This is where FCM tools shine in relation to CLM tools. CLM tools often do not provide the information necessary for detailed financial analysis and budget forecasting. They lack features that could automatically track payment amounts and dates, identify types of expenses, and facilitate accounting, budgeting and forecasting based on the contract terms.
FCM, on the other hand, is built to solve this problem with features for financial oversight. FCM enables organizations to extract detailed information about all required payments and their due dates, categorize expenditures (such as capital vs. operating or recurring vs. non-recurring), and aggregate that data (by any customizable reporting period) for the entire vendor contract portfolio. Finance and accounting teams can finally enjoy a clear understanding of current liabilities and future financial commitments, enabling more accurate budgeting and financial planning.
Finance and accounting support
CLM software does not support finance or accounting functionalities like cash flow forecasting or prepaid and accrual management, whereas FCM software does. Additionally, because of its ability to integrate with an organization’s ERP, FCM provides much more holistic finance and accounting support. This capability enables finance teams to accurately manage and record all financial transactions related to contracts, reducing the risk of accounting errors and ensuring compliance with accounting standards.
Alerts and notifications
Both types of software provide alerts, but FCM alerts are more comprehensive. Typically CLM tools offer pre-configured renewal reminders but may not support alerts tied to other key contract dates. In contrast, FCM software provides more detailed alerts that are customizable and can be tied to any specific contract event, such as a payment obligation, milestone or renewal opt-out deadline. This feature enables finance teams to stay on top of critical dates such as renegotiation deadlines or price changes, ensuring opportunities for cost savings are not missed.
Choosing the right solution
When it comes to contract management, choosing the right solution depends on your organization’s unique needs and priorities.
Three birds with one stone: FCM for finance, accounting and legal teams
If you are looking to optimize your spend with a single vendor contract repository that best meets the critical needs of your finance, accounting and legal teams, FCM may be the ideal choice.
Let’s face it, CLM software is expensive. To differentiate themselves in the eyes of legal team buyers, CLM providers have ventured deep into “nice-to-have” insights into nuanced legal terms, resulting in higher price tags for a product that still does not meet the needs of accounting and finance teams. Ask yourself: Do you really need to know what percentage of your vendor contracts are governed by New York law?
FCM takes a different tack. At a lower price point, it has all the features and functionalities accounting and finance teams need for vendor contracts, plus the features and functionalities most critical for legal teams:
- Serve as a centralized and searchable contract repository
- Provide tracking of and reporting on contract changes
- Create automated alerts to help manage contract lifecycle
Teams across the business could benefit from the central repository, automated alerts, and contract abstracts without the need for a higher-priced tool.
When to use FCM and CLM (without duplication)
If your critical needs include streamlining the pre-signature process and serving as a repository for customer contracts, you will need CLM software for your customer contracts. Customer contracts benefit from CLM’s pre-signing functionality including tools for standardizing contract templates. Similarly, a customer contract repository may be better managed and tracked using CLM due to the customer-centric terms it can track at scale.
The name of the game is to avoid duplicative spend; however, using a CLM for customer contracts and FCM for vendor contracts is not duplicative.
CLM software has been around longer than FCM software. Therefore, many companies, initially triggered by a need to wrangle customer contracts, started with a CLM software. However, especially with the ongoing digitization of business functions and transition of many systems to the cloud, most organizations also have a large number of software, vendor, supplier, or lease contracts, and CLM software is insufficient for accounting and finance professionals with respect to vendor contracts. Excel just isn’t enough to efficiently and accurately manage vendor contract deadlines, much less extract accurate, aggregated, customizable payment obligations in support of accounting, budgeting and forecasting needs, for hundreds or thousands of vendor contracts.
Summary
While both Contract Lifecycle Management (CLM) and Financial Contract Management (FCM) software are essential tools for contract management, they cater to different aspects of the process. CLM focuses on pre-signature and customer contract management, while FCM specializes in financial oversight and management of vendor contracts. Understanding their differences can help organizations and teams choose the right solution for their needs, ensuring effective contract management and financial control. Additionally, where needed, utilizing a CLM for customer contracts and FCM for vendor contracts can provide a comprehensive approach to managing contracts, ensuring all aspects of contract management are covered for accounting, finance, and legal teams.
