One Overlooked Obligation Cost His Company Millions. And It Could Have Been Avoided.

By Madhu Khatri

In my previous post, I related a story from a colleague who missed significant costs savings because of his inability to search his contracts, and how a central repository of digital contracts could have solved the problem.

Today, I want to build on my last post and discuss how risks associated with contract obligations can be managed within a contract management platform to protect companies from financial and reputational damage. Tracking and managing obligations is decidedly more complex than simply searching across contracts but can be achieved with modern contract management software.

Missed Obligations: Damaging Reputation and the Bottom Line

Let me share an example from another colleague who served as General Counsel for a software development company. Among the obligations included in a few of the company's contracts was a clause requiring that the clients’ data, proprietary information, and intellectual property (IP) be removed from the vendors' computers on completion of the project.

This provision was meant to assure clients that their data and IP would not end up in the hands of any third party using the same vendor. Failure to fulfill this obligation would expose the company to expensive litigation and, worse, cause severe reputational damage.

Yet this obligation was overlooked in at least one instance. Twelve months after the conclusion of a particular project, the company received a notice of breach of contract for improper use of proprietary information, and the customer ultimately sued. The claim amount in the lawsuit crossed the materiality threshold, forcing the company to make a disclosure in its corporate filings with its regulator. This damaged its reputation with the public, and worse it raised eyebrows with potential customers.

Hidden Contracts Mean Hidden Risk

So, what went wrong here? Simply put, in this instance the contract and its obligations were not being tracked, and even the Project Manager was unaware that all data and code pertaining to the client on completion of the project needed to be deleted. Unaware of this obligation, some developers did not scrub the proprietary code developed for the project from their computers, putting the company at serious risk.

While no technology can prevent fraud or data misuse, this was not an example of mala fide intent; rather it was a breach stemming from incomplete communication to a Project Manager about an important contract clause. For a company that had every intent of living up to its obligations, this was a bitter pill to swallow.

Contract Management Software Protects Against Missed Obligations

Could a digitized contract management process have helped my colleague and his company? The answer is an absolute yes. An obligation tracking system with alerts and sign-offs is easily configurable in robust contract management systems. It allows users to identify, capture, assign and track completion of obligations assigned by business owner. This includes commitments involving third-party paper and complex commitments, such as those with multiple owners or across regions or business units.

Today Artificial Intelligence (AI) further enhances these capabilities. AI algorithms identify and highlight significant obligations within a contract ensuring that inadvertent, costly oversights are a thing of the past.

These are the capabilities a company begins to enjoy once it lays the foundation of an enterprise-wide contract management platform.

In the case of my colleague, he could have used the platform to identify obligations and assign owners, then set up alerts for when the contract was coming to an end. Once alerted, he could quickly review everything the company had to do at the end of the contract, and audit against the contract's obligations to make sure everything was being fulfilled, all with a click of a button.

The software is not replacing the GC's legal skill or strategic thinking; instead it's giving him the information he needed to manage risks more effectively.

A central digital repository of contracts can not only provide valuable data to GCs to save costs and manage risks but also be used for monitoring high risk obligations the breach of which can cost millions.

Can a technology solution do even more? Yes. In my next blog I will share that. Click here to make sure you don't miss a post.

And if you'd like to determine your contract risk score, take this free assessment.