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What is Digital Contracting?
Digital contracting is the process of creating, negotiating, executing, and managing contracts in a data-first, collaborative environment. Rather than dealing with stacks of paperwork, businesses either use cloud-based software or browser-based tools to handle their digital contracts.
Modern electronic contracts are dynamic, interactive, and customizable. They offer a high degree of flexibility, including the ability to drag and drop text, edit contracts post-send, collaborate with buying groups, and include multimedia elements like videos and attachments.
Authorized team members can make real-time edits, negotiate in real-time, and view contract analytics (e.g., engagement and contract statuses). Since digital contracts also integrate seamlessly with other software like CRM and CPQ, they facilitate organized contract workflows and reduce manual errors throughout the sales process.
- Electronic contracting
- Digital contract management
- Contract automation
The Purpose of Digital Contracting
Modern digital contracting presents an efficient and secure alternative to traditional paper-based and static PDF-based contracting methods.
Within an organization, its purpose is multifold:
- For your sales team, a digital contract is easier to generate, share with stakeholders, and monitor, meaning it’s easier to move deals through the pipeline.
- Your deal desk will use it to negotiate and redline contracts with buyers, keeping the process transparent and organized.
- Compliance and legal teams appreciate the pre-approved templates, rule-based approvals, version control, and cloud-based storage.
- Buyers don’t have to worry about security, signatures, or processing time — digitization eliminates all the friction from their end.
It also serves as an organizational tool. Rather than stick every sales, vendor, and partner contract into a filing cabinet or save them to your computer in a folder, digital contract management software keeps everything in one easily accessible, secure location. And all you have to do to pull up a contract is search — by keyword, client name, expiration date, or any other relevant criteria.
How Digital Contracting Works
Contract Lifecycle Management
Contract lifecycle management, broadly, refers to the entire contract administration process, from conception to renewal or expiration. It’s the backbone of digital contracting.
There are five main stages of contract lifecycle management:
- Request — Reps send the approved sales quote to your legal team, which will generate the first draft.
- Negotiation — The prospect receives the first contract, reviews its terms, and asks for changes. Your team redlines the contract and sends a revised version to the buyer.
- Approval — Your customer (or, more often than not, their buying group) reaches a consensus. They sign it, then you or a company representative countersigns it.
- Execution — The contract goes into effect, and its terms become legally binding. You carry out your obligations as a vendor or service provider. They uphold their end of the bargain.
- Renewal or Termination — The contract reaches its expiry date, at which point it will either be modified, renewed, or terminated.
With an electronic contract, all of this occurs without the need for physical paperwork or manual reconciliation. Team members can generate and edit contracts right within the application. Any time a team member or buyer completes an action item (e.g., approving or signing a document), the system automatically notifies the next party in line.
AI and Contract Automation
Digital solutions use contract AI to auto-generate business contracts from templates. AI-based contract automation uses natural language processing (NLP) and machine learning algorithms to understand the specific clauses and terms that apply to each contract type.
You can use it to:
- Scan and digitize physical contracts
- Pinpoint risks, abnormalities, and errors
- Generate contracts from templates and clauses
- Auto-populate fields (e.g., customer name, payment terms)
- Summarize documents and extract key information (contract abstraction)
- Classify contracts based on keywords, contract type, and metadata
- Set up reminders for action items, renewals, and
Although the document generation process requires human oversight, the ability to use contract templates and rules to draft contracts (with minimal manual work) significantly reduces the time it takes to create one.
Digital contracting solutions almost always have an electronic signature function. Most also offer DocuSign integration for users who prefer that platform.
A digital signature works like this:
- The customer receives a signing request via email.
- They click the button/link in the email to go to the contract.
- When the contract loads, the system guides them through the required information, starting from the top.
- Where a signature is required, the signee checks a box verifying they agree to replace their real signature with an electronic representation (normally a cursive version of their name or initials).
After checking the box and completing the guided workflow, e-signatures are legally binding — they’re as good as a handwritten signature from the standpoint of legitimacy.
Integration with CRM and CPQ
Although your contracting software will integrate with a few different platforms, the two most important for your sales motion are CRM and CPQ.
CRM integration enables you to auto-populate customer data, account numbers, and other information. When your reps create a contract, they can select the account and customer information from the CRM database directly. Each time an action item is complete, the CRM system automatically updates the sales pipeline or customer account accordingly.
Integration with CPQ (configure, price, quote) enables you to use product catalog and pricing data in your quotes (many CPQ systems actually have digital contracting built-in). When you create a quote, the system already has your product and pricing data in it. Once a customer agrees to the terms of a quote, the system can instantly generate a contract.
There are four main ways your digital contracting solution can gather and analyze information from your contracts:
- Searchable contract database — You can find contracts in your digital database by any keyword, date range, and other relevant criteria.
- Contract statuses — How often does a buying group go back and forth with your reps to negotiate terms? How long does it take for them to complete each action item?
- Sales and customer engagement metrics — What percentage of deals actually close? Which contract terms result in the most customer churn? How much time does it take your reps to draft and negotiate contracts?
- Risk management — Artificial intelligence and NLP detect potentially costly clauses, terms, and errors. Anytime the system detects an issue, they flag it. Your team can go in and remove it or send it to the legal team for review and revision.
Challenges in Traditional Contracting
“Traditional” (i.e., paper) contracting has been on its way out for decades. Very few companies exclusively use paper contracts because they’re (a) an administrative nightmare, (b) prone to errors, and (c) take forever to complete.
What’s more common is PDF-based contracting, which is a better approach. But it’s only better because we’re running businesses from laptops these days. Not because it’s efficient.
Whether it’s traditional or PDF-based, there are several problems with old contracting processes:
- High costs. Companies spend as much as 3% of their total revenue on paper, printing, filing, and storage. That means a company doing $10 million ARR could be spending $300,000 on document output.
- Inefficiency. Since inside sales is the prevailing method in the vast majority of companies the need to physically sign a document or convert a PDF to a Word document and back creates significant friction. In a lot of cases, it’s the deciding factor in whether a deal crosses the finish line.
- A lack of professionalism. Frankly, having no way to effectively and elegantly present a contract reflects poorly on your company. When they say “looks aren’t everything,” they aren’t talking about business deals.
- Risk of errors. It’s far too easy for a rep to make a mistake when they enter everything themselves. Whether it’s a small typo on pricing or the wrong clause, poor contract management practices cost businesses ~9% of their revenue every year.
Benefits of Digital Contracting
Digital contracting offers significant advantages for businesses in terms of speed, cost savings, and data management.
Efficiency and Cost Savings
Arguably, the clearest and most important benefit of digital contracting is its time-saving potential. As an example, companies that switch to e-signature solutions reduce their document management expenses by 85%.
When you factor in all the other benefits of digital contracting, like improved sales velocity, streamlined contract management processes, and error reduction, the potential cost savings is much greater.
Effective Risk Management
Identifying and mitigating contract risk before a contract goes into effect has the potential to save your company tens or hundreds of thousands of dollars. Artificial intelligence and NLP in digital contracting software automatically flag potential issues, saving your team time and effort in reviewing contracts.
Version Control and Audit Trail
Contract versioning entails plenty of challenges and mistakes when it comes to traditional paper or PDF-based contracting. Whenever you or a team member makes a modification, you still need the old versions for future reference (e.g., for compliance or auditing purposes).
In digital contracting, you don’t have to worry about:
- Naming conventions (every contract has a unique ID and version number)
- Enforceability (whenever there’s a dispute, contracting parties can pull up the contract with an audit trail of all changes and approvals)
- Manual version tracking (the system keeps track of changes and updates the repository automatically)
- Access issues (authorized parties can access the latest version from anywhere, at any time)
Enhanced Compliance and Security
When encrypted software handles all your sensitive business and customer information, you’re much better off than you would be if you kept everything on-premise or in computer folders.
There are a few reasons for this:
- Access control. Only those who need access to a contract can receive it.
- Data integrity. Since the software controls edits and updates, there’s less chance of data being compromised or manipulated.
- Encryption. Sensitive information like pricing and customer details remain secure.
Digital contracting is also a great way to ensure your business is compliant with relevant laws and regulations, as well as internal policies.
Companies using digital contract management solutions report an 80% faster cycle time from initial bid to signed agreement, according to a 2022 study published by World Commerce and Contracting.
For legal teams, contracting software significantly outperforms the traditional manual methods of contract review. In one study from SuperLegal, contracts that took an average of 92 minutes for trained legal professionals to review manually took only 26 seconds with AI-powered software.
Better Sales and Contracting Insights
The ability to see how customers engage with contracts during the quote-to-cash process enables sales reps to personalize the buying experience and prioritize certain deals over others.
For instance, a customer who takes a long time to review or sign a contract may need extra attention from the sales rep. Or, depending on the context of the situation, they might want to move on to another lead.
From a broader perspective, knowing dispute/resolution rates, contract signing times, contract renewal rates, and compliance issues all gives teams a chance to improve the operational processes associated with sales, product/service delivery, customer service, customer success, and even product development.
Digital contracting offers considerable environmental benefits over traditional paper-based methods. While there’s a significant amount of energy required to run data centers, it pales in comparison to the energy and resources used to produce (and eventually throw away) paper products.
Switching to digital contracting is an easy step that will reduce your company’s carbon footprint and promote sustainable business practices. As an example, Adobe’s digital signature solution alone has reduced its environmental impact by 95% compared to its old paper-based contracting system.
Essential Features of Digital Contracting Software
When you’re shopping around for digital contracting software, you’ll notice there are tons of different types. They range in capabilities, by industry, and offer various features and functionality.
The most important criteria when selecting software for your business are:
- Adaptability to your workflow. For instance, a manufacturer would need contracting software that works with bills of materials (BOMs) and other engineering documents, plus CAD software. A SaaS company would be more focused on contracts involving IP, software licenses, and recurring payments.
- Integration with your tech stack. Buying software that doesn’t work with your tech stack is like buying an electric car in a city with no chargers. CRM and CPQ integration are the baseline. You may also need seamless integration with your ERP, e-signature software, and digital asset management (DAM) system.
Once you’ve got those criteria figured out, there are some general features you’ll want to look for in digital contracting software.
AI-Powered Contract Review
As mentioned earlier in this article, contract AI uses natural language processing (NLP) to interpret and analyze text within a contract. You can use it to flag issues, highlight critical terms, and summarize contracts.
Redlining and Collaboration Tools
The ability to make changes to a contract and track those changes is essential for collaboration between parties. Digital software offers contract redlining capabilities, allowing users to easily see where changes have been made and by whom.
Automated Approval Workflows
Digital contracting software streamlines the contract approval process with automated workflows, reducing bottlenecks and delays. You can also use this feature to establish specialized approval processes for certain types of contracts or create alerts for when a contract requires specific approvals.
Real-Time Contract Status Tracking
Know exactly where your contracts are in negotiation/signing or awaiting approval/action items with real-time status tracking. You need your digital contracting tool to keep your sales team on top of their deals, identify any potential holdups or issues, and prioritize their workload.
E-signatures are a standard feature in today’s digital contracting software. They allow parties to sign contracts remotely, eliminating the need for printing, scanning, and mailing physical documents.
Native CPQ Integration
To keep your sales team working in the same UI for the whole sales cycle, it’s best to search for a CPQ software solution that has contract management built into it (like DealHub) or is native to your CRM. This way, you don’t have to worry about switching between different software and potentially losing data or creating confusion.
A smart contract is a blockchain-powered self-executing contract. In other words, it’s a coded contract that automatically executes once certain conditions are met.
Smart contracts can have several benefits beyond your standard digital contract, including:
- Efficiency. Smart contracts can automatically process transactions, removing the need for intermediaries and manual execution.
- Transparency. Since they’re recorded on a public ledger, all parties involved have access to the same information in real time. This makes it nearly impossible for disputes to occur from discrepancies or misunderstandings.
- Security. The use of blockchain technology makes a smart contract unassailable, with no room for tampering or manipulation.
Not every company needs smart contracting. At present, they’re mostly used in highly sensitive or regulated industries, like FinTech, banking, healthcare, insurance, IP protection, and digital identity. They also have applications in real estate, supply chain management, gaming, retail, and ecommerce.
People Also Ask
What is an example of a digital contract?
An example of a digital contract would be a software licensing agreement your sales team produced using software and signed electronically using e-signature technology. It could also be a purchase order or sales contract they sent via email for a customer to sign.
Are digital contracts legal?
Aside from the fact that they replace your wet-ink signature with a digital representation, digital contracts are legally binding, just like paper contracts. Once you check the box giving your consent to use an electronic signature in place of your real one, you’re obligated to fulfill the terms of your contract, and so is the other party.