We may not realise it, but contracts help to drive and shape pretty much every business: Gartner estimates that between 60-80 per cent of all business transactions are governed by contracts or agreements in one form or another, particularly across finance, IT, legal dept, purchasing, sales, operations and HR. So, whether we are aware of it or not, contractual agreements are an important part of organisation’s underpinning structure.
And contracts aren’t just about ‘laying down the law’ with third parties and employees: on a more positive note, they provide the framework for how we work with people and other organisations, they provide the rules and guidelines for obligations so that everyone should be clear what is expected of them. And when managed properly, contracts can even help organisations to reduce costs and improve profitability, as well of course as mitigating risk.
So if contract management is so important, why hasn’t everyone been doing it for years? The problem is that traditionally, most contracts are created by individuals or departments, with no single central ownership or control. Forrester Research reckons that contracts take 3.4 weeks to create on average – not surprisingly, considering that they so often rely on unwieldy email communications or in many cases, snail mail and fax. The legal or procurement function will probably only get involved if a non-standard requirement or problem arises.
Once created, contracts are stored in multiple locations and formats – electronic and paper-based- making them hard to centralize and find again. Faulker estimates that 10 per cent of all contracts are actually lost.
Does this matter? Yes, because lack of cohesive contract management can lead to problems and missed opportunities. Here are some examples: automatic renewal of contracts can mean being tied into unwanted contracts; lack of foresight meaning that the chance to re-negotiate better terms were lost; lack of compliance or regulatory breaches, not to mention expensive litigation. Indeed, Fulbright & Jarowski has estimated that 60 per cent of corporate litigation in the USA and UK is caused by contract breaches.
Get it right and contract management has multiple benefits. Again, some examples help to demonstrate this: observing an early repayment clause leading to a discount; enterprise-wide favourable terms with the same supplier; only paying invoices on goods and services actually received.
Yet this situation is changing fast, as companies increasingly realise the importance of management contracts, as well as the advent of contract lifecycle management systems, a market sector that Forrester Research says is growing at 23 per cent per annum. Numerous vendors have now entered the fray, with systems on offer that range from simple cloud-based sytems for SMEs through to large solutions based on Microsoft SharePoint, which now adopted – or in the process of being adopted – by over 90% of large organizations worldwide.
Different vendors (and there are quite a few now) offer different feature sets, but a comprehensive solution might include: A contract clause tracker; compliance monitoring & regulatory requirements; automated alerts; tracking of price rebates; reporting; contract negotiation workspaces; workflow and reporting tools; author workspaces; contract drafting and storage; tools that support collaboration on contract with external parties.
The latest generation of contract lifecycle management systems also include e-discovery of legacy contracts. This is an important point, because while it is tempting to rush into implementing a contract lifecycle management system for all new contracts, unless existing contractual milestones and obligations are included, then an organization does not have the full picture.
Research shows that around 80% of companies admit to not having full knowledge of all their legacy contracts, yet considering that contracts many last for many years, then it is reasonable to assume that a large organization will have thousands of legacy documents. (I’ve recently helped a media organisation audit 30,000 contracts and their situation is certainly not unusual).
Who owns contracts? The organizational split
All well and good, but who owns all this stuff? Well, as I said earlier, contracts are traditionally very dispersed throughout an organization. However, the advent of contract management systems gives companies the means by which to remedy this and in theory, to everyone’s benefit. What do I mean? Well, if you were in charge of all legal affairs – perhaps you have the title of company secretary or general counsel – you’d be able to see the advantages of having overall visibility of all contractual obligations. After all, it’s your job. But you’d probably be worried about opening the floodgates.
The benefit of a contract lifecycle management system is that it allows individuals to still retain control over creation of a contract, as well as management of resulting milestones and obligations. But you, as the legal professional, would be able to keep track of status and through system alerts, be made aware of any impending problems. For instance, a particularly enthusiastic sales person may be able to agree to terms that are not appropriate.
Similarly, if you are the sales person (or the procurement officer, or the IT director, or the HR manager) you can see the commercial and performance benefits of contract management, but aren’t too happy about the idea of losing control to the legal department. Again, contract management lifecycle systems mean that you are still in charge of creating the contract, but you know the legal expertise is on hand if required.
Let’s also not forget the fact that many organizations spend huge amounts of money with third party legal firms. By automating much of the contract creation process – for instance, standard clauses and templates – then this area of expenditure can potentially be reduced.
So what should companies be looking out for when implementing contract management and looking for a system that fits their needs? Here are a couple of ‘best practice’ suggestions:
- Find out what already exists – without full visibility of all existing contracts, then implementing any contract management system is only addressing part of the picture. Invest in a contract audit or choose a system that has an e-discovery element that can automatically locate legacy contracts and extract milestone and obligation data.
- Assign roles and responsibilities – technology can only do so much. Since contracts have rarely had a single point of overall ownership, this is uncharted territory for many organisations. Regardless of where they sit in the organisation, the best contract gatekeepers are people who understand that contract negotiation is a ‘people’ process. Get these champions on board and think about creating cross-function working groups to help facilitate the adoption of contract management across the organisation. After all, contract management processes and systems are going to touch on most departments in one way or another.
- Find a system that suits your organisation – if you are a small one-man band, then a simple cloud-based system will probably fit your needs. But if you have potentially thousands of contracts stored in multiple formats, locations and systems, then obviously you need a system that will scale, but ideally one that will sit on top of existing IT infrastructure, rather than adding an additional level of complexity or investment. For instance, if you are using Microsoft SharePoint, then there are various SharePoint-based contract management solutions now available. Also consider the usability of the system for staff without legal or IT expertise: are there management dashboards that are easy to use? What about reporting tools? Can the system link with existing organisational KPIs? Will it integrate with other systems?