In today’s increasingly litigious business climate, risk abounds as enterprises try to navigate the regulatory, governance and legal issues that impact business practices and ultimately profitability. Although organizations rely on contracts to protect their interests and their assets, the accelerating volume and increasing complexity of contracts present a daunting challenge across the enterprise.
This article looks at industry trends and presents the case for utilizing a contract lifecycle management (CLM) solution to sidestep potential disasters and help unlock the value buried deep within the multitude of contracts in force.
Businesses today operate in a world guided largely by contracts. As international borders dissolve thanks to the Internet, contracts are growing in complexity as the teams that create and maintain them struggle with a barrage of new regulations affecting agreements on a global scale. Further, businesses must consider the many governance and financial issues that extend far beyond legal and tax codes.
In an age of increasing specialization and focused intellectual property (IP), businesses increasingly turn to partners to round out the ecosystem needed to engage in commerce. Enterprises of all kinds use partners to source products or materials, both as distribution and sales partners and to provide business services such as staffing, IT and marketing. Each of those relationships whether with an individual contractor or Fortune 500 company is bound by one or more contracts — so much so that the corollary to the saying “there’s an app for that” is evolving to “there’s a contract for that.”
Having a multitude of contracts is not a problem in and of itself. However, the evolution of contract management often has not kept pace with this explosive growth. Major problems for many organizations result from having too many legal and business teams involved with various types of contracts, which often leads to fragmented management and contractual obligations falling through the cracks.
The use of email to collaborate on contracts can also lead to version control nightmares, where multiple copies of a contract exist in a series of email inboxes and send mail folders, instead of a central repository that maintains the true, current approved contract that is in force. Additionally, not having a central contract repository makes searching contracts by parties, clauses or dates impossible.
All of these business factors are amplified by merger and acquisition activity, which brings all of the acquired entity’s contracts into the fold. And when M&A activity is international, the integration of managing new contracts can be further hampered by differences in contract language and the meaning of terms and obligations under different flags.
Contracts are created by people, and in some cases contractual obligations are people-dependent and not captured on any system, which can lead to instances of non-compliance or other issues whenever there is a change or failure of the stakeholders involved.
Where Risk Lurks
How does the current state of contract mismanagement lead to increased risk to the business? First and foremost are risks associated with missed commitments, expiries and other contract milestones. Lacking the ability to abstract and track important dates across all contracts can lead to penalties and loss of goodwill. Additionally, the lack of a central repository for contracts and related information make it difficult to perform analysis on contract performance or to prepare for renewal negotiations.
Market forces change, and these shifts can also have an adverse impact on the potential value of a contract when stakeholders such as sales, production, legal and marketing teams are not notified in a timely manner. If a contract is suddenly underperforming — say due to a change in consumer sentiment toward a sourced product — taking rapid action can make the difference between profit and loss.
Misunderstandings due to lack of standardization in contract language, terms and clauses when doing business in multiple jurisdictions can also lead to non-compliance and confusion.
The Dollars and Cents of Contract Management
The risks introduced by ineffective contract management can rapidly bring on negative financial impact throughout the organization. With manual contract management, untold millions are left on the table by businesses that do not take advantage of price breaks or discounts earned by reaching contractual milestones. No proactive alert — no savings. Perhaps more troublesome are dependencies on individuals who can leave — and take the only knowledge of an important process with them when they go.
Similarly, organizations mired in manual contract lifecycle processes may be unable to effectively monitor contract risks, leading to lost opportunities, non-compliance, penalties and fines that could have been avoided entirely.
Manual reporting for large numbers of complex contracts can chew up huge amounts of legal staff time, which could lead to an inability to produce timely reporting for the myriad of government agencies. Even when an organization knows what is needed, the manual processes may take too long to get it done on time.
Missed renewals could lead to expired Master Service Agreements (MSAs), resulting in revenue delays for a given service.
And again, the loss of goodwill inherent in missing contract milestones can far exceed any other punitive or regulatory penalties imposed by other parties.
The Role of Contract Automation
In 1965, when Intel’s Gordon Moore famously posited that computer chips would double in performance about every 18 months, futurists had a difficult time imagining how businesses would use all the power that was expected to be at their disposal a half century later. Now, in the age of the cloud, smartphones and terabyte laptops, that vision has become a reality where the abundance of available horsepower in today’s computer systems can be focused on automating complex business tasks to enable attorneys and business users to focus more on business activities and less on certain management tasks. That is the concept behind Contract Lifecycle Management (CLM) solutions.
Contract management software automates functions critical to every business that enters into contracts. First, contract management software platform can ‘read’ contracts and copy them into a central repository where they are automatically indexed for rapid search while automatically extracting key metadata such as parties, provisions and dates and loading that information into databases that further simplify access to business-critical information from every contract.
Perhaps more importantly, having a single common repository means contracts no longer have to move via email, fax or FedEx. The latest, agreed-to version of every contract is in the repository and accessed from there, not from an attorney’s Outlook .PST folders.
Next, contract management software solutions create and deliver operational reports on contracts and related information to stakeholders, and automatically inform necessary parties of new contracts, changes or actions requiring their attention. Having a single repository enables rapid searches across all contracts as well. This helps provide for completely auditable contracting compliance and administration.
Forms built into the contract management software platform simplify the creation of new contracts and provide a consistent user interface (UI) which speeds the learning curve and simplifies onboarding of new attorneys, paralegals and business users. Having a single UI also helps all parties and outside counsel speak the same language, which is also facilitated by having a standard contract glossary which provides the ‘true’ meaning for terms throughout the enterprise.
Having a CLM platform in place helps mitigate the risks inherent in hyper-growth and M&A. Having a repeatable, consistent system that not only tracks milestones but also helps to uncover the hidden value within an organization’s thousands of contracts can pay for itself in many ways.
How to Choose the Right Contract Management Software
It is clear that adopting contract management software can eliminate many points of human error, improve oversight and compliance, prevent missed renewals and greatly reduce the analysis and reporting burden previously on the shoulders of expensive attorneys. However, all contract management software is not alike. Here are some questions to keep in mind while looking for a contract management platform partner.
Partner Stability: How long has this contract management software provider been in the market? Is the provider financially stable? Does the executive team have the right background to ensure they understand your needs? Choose a contract management platform that will not only solve today’s growth and contract challenges but will be around to grow with your business.
Track Record: Has the contract management software been tested by businesses like yours? Can the partner provide case studies that show real-world success? Specifications and features are great, but the bottom line benefits are what matter most. Seeing how other businesses have adopted — and continue to use — a given contract management platform can build confidence that it is the right product for your business as well.
Legacy Agreement Support: Your business probably already has hundreds or thousands of contracts in force, and managing them is perhaps more important—and immediate—then managing contracts that will be created in the future. Make sure your CLM platform can find existing agreements and extract the information needed to automate their management as well.
Configurability: Every CLM platform offers standard reports, but most businesses will want to tailor them to their needs, create altogether new reports, or use the search infrastructure to perform ad-hoc reports as well. Recent advances in analytics have spawned a wealth of new tools that enable the mining of contract data in new ways, so you should choose a partner that offers flexible reporting without the need to learn complex programming languages and that can export those personalized searches to Excel for further manipulation.
Process Automation: The heart of CLM success is often right here — automating the mind-numbing analysis of every contract to ensure commitments are met and alert key parties when milestones or expiries are about to occur. The more flexibility the automation offers, the more likely the CLM solution will be deemed a success by all involved.
Integration: Your business probably already has ERP, CRM, procurement and other enterprise applications in place. Ensure that the chosen CLM platform easily and quickly integrates with existing applications to avoid complex and expensive custom integrations after the fact.
Cloud Scalability: An extensible, scalable, flexible Cloud-based CLM platform can ensure that your contracts — and your business — won’t outgrow the partner infrastructure. Even better, with most Cloud offerings software installation can become a thing of the past — and your contracts are available from any web-connected device in the world.
Simple UI: Ease of use is the single most important factor driving adoption of new tools. Ensure your partner offers a CLM that is intuitive, provides guidance when necessary and encourages standardization across contracts enterprise-wide while making it easy for new users to come up to speed.
Mobile: Since it is not uncommon to use notebook, tablet or even smartphone to both read and create contract data, make sure that the CLM platform you choose offers the same kind of anywhere, anytime, any device access.
The Icertis Contract Management (ICM) platform is a CLM solution that offers all this and more. Aberdeen states adoption of a CLM like ICM drops contract approval time an average of 82%, thus helping to reduce the cost of contracting while improving customer, partner and employee satisfaction.
To learn how your businesses can get started ICM, register for a demo.