Research shows that without digital technologies, our ability to handle contracting processes has been diminishing in recent years. Today, many CM experts see contracts as the primary cause of disputes, but the growing complexity of the contracting process creates a larger problem with information management in general. So, how can digital technology help us untangle this dilemma?
Effective leadership teams are well aware of their long-standing responsibility to efficiently handle information management, process compliance, document retention, disaster recovery, and business continuity. However, the scope of information management has now expanded to include unstructured data as well as structured data, including details and metadata from corporate acquisitions, digital archiving, and contract authoring.
According to a report from the Information Governance Initiative1, the amount of digital information in the world will double every two years. The challenge is therefore twofold: companies must address both the volume of data being created and the myriad of forms it takes.
Contracts house valuable data needed for companies to remain compliant with regulations and prevent or respond to legal disputes. But the number of contracts, their complexity, and the volume of data associated with them have grown beyond what companies can manage without the assistance of technology.
Disputes - are contracts really the problem?In 2019, IACCM surveyed 750 organizations and found that contract management tools and systems are the number one focus area for improvement. As Tim Cummins, President of IACCM wrote, “...technology is an enabler of these improvements.”2
According to the 2018 Litigation Trends Annual Survey from Norton Rose Fulbright,3 87% of businesses surveyed expect the number of litigations and legal disputes to remain the same or increase. Across industries, the number one or two reason given for disputes is “contracts.”
Research by Norton Rose Fulbright (Figure 1) below shows contracts are prominent in dispute-related involvements. The authors of the referenced article containing Figure 13 believe our CM environment is becoming increasingly “litigious” and this results in the rising costs of outside counsel. In other words, not going digital in your CM practices will cost you more time and likely more money if you are still using manual contracting processes versus digital.
Figure 1. Research results from Norton Rose Fulbright US LLPⒸ 2018.
… but can digital contract management really improve CM performance?
The first objective of digital contract management is to increase contract management’s visibility into the company’s contractual assets. Traditionally, this process might have involved taking contracts to an external third party, such as a legal process outsourcing (LPO) firm, to manually extract the designated fields and enter them onto a spreadsheet or a designated system. But, this approach is expensive and may need to be repeated if the requirements change or if additional metadata is required.
Companies need a digital platform for data extraction that enables them to discover their contractual documents and automatically extract key contractual metadata. This may require a searchable template contract within a software application or searchable index or database. With that in place, the organization can leverage their contractual discovery capabilities across all functions to meet the needs and objectives of each function so that…
- financial services could comply with complex and rapidly changing regulatory demands such as Dodd-Frank, Basel III, Sarbanes/Oxley, FCA and AntiBribery;
- mergers and acquisitions could accelerate time to results by allowing C-level executives to make informed decisions about immediate opportunities while mitigating any risks;
- sales could provide a single view of all contractual information for the sake of improving customer relations, renewal rates, and revenue generation.
- procurement functions could reduce costs by cancelling, standardizing, or renegotiating contracts; ensure contract compliance with corporate standards; and proactively manage and adhere to both ‘hard’ and ‘soft’ contractual obligations.
- IT operations could track and manage the tabular information found in contracts, bills of materials, and software and hardware line items; and could cleanse contractual data and consolidate it into a single repository accessible by all business users.
Contract Lifecycle Management (CLM) technology helps companies achieve distributed but agile contract governance, and provides the information required by senior management to make optimal decisions based on complex scenarios. A CLM solution that includes the above discovery capabilities can make it easier to locate contracts, create a searchable rendition or index, and access an automatically-created abstract containing contractual metadata such as clauses governing law, jurisdiction, indemnity, etc..
So, when using CLM’s discovery capabilities, you, as a user, will generally be expected to fully review a sample batch of contracts to establish a learning set. You would then use this set to start up your contract discovery analytics to serve as the catalyst for system or extraction policies.
Then you would be able to define policy groups, search across their contract corpus, selectively add contractual paragraphs and sections, and define sentence rules to identify and extract metadata from specific contract documents. Your extracted metadata would then flow back to the contract discovery program to enrich the contract abstract.
As the regulatory landscape changes, organizations can very easily adjust and respond to new requirements. Companies that have grown through acquisition or find that they must divest a division or a product can swiftly and dynamically respond to the legal issues raised by such events. This is compelling when “time to results” is critical, because it mitigates risk and accelerates results.
Non-standard clause detection – your challenges lie ahead
Many organizations use well-defined contract and clause templates during the initial drafting process, but many clauses are accepted with changes, sometimes significant ones. This raises two challenges:
- How can organizations efficiently discover which clauses are frequently negotiated or which ones differ significantly from the approved corporate template?
- How can a legal department know which third-party clauses have been accepted previously so that they can quickly review newly proposed clauses?
To meet both these challenges, your contract management solution with inherent contract discovery analytics should reveal the functionality of non-standard clause detection. When users only define standard clauses, how will they be able to detect, group clauses, and non-standard clauses for legal review? This dramatically reduces the contract review and approval times for new and renewal contracts, and also enables you to generate a real-life clause library and risk matrices.
Proactive contract template management is essential
Many organizations struggle with the proliferation of contract templates and the lack of control associated with these templates. New contract types, short form contracts, amendments and variations are continually being created. Being able to recognize and classify those items can be a daunting challenge.
But with the right digital contract management in place, business users can define template policies and then apply these to the contract corpus. They can also quickly and easily see those contracts that match the policy, know which templates they matched, and discover how closely they matched them.
Contracts, their embedded data, and associated documents are critical to every part of an organization. To stay competitive, an agile and proactive solution is required -- one that enables parties responsible for managing contracts to intuitively and dynamically leverage the full contract repository as required.
Organizations must be agile in the face of business demands, and position themselves to provide answers to complex questions for making informed decisions quickly. Without effective digital contract management, this will not happen.
- ©2015 Information Governance Initiative LLC
- Top ten issues for contracts and commercial management article by Tim Cummins, February 2019.
- 2018 Litigation Trends Annual Survey from Norton Rose Fulbright
ABOUT THE AUTHOR
Julien Nadaud's focus is to bring teams and innovative technologies together to build a global industry leader in strategic sourcing, supplier management, procure-to-pay and contract management. A global specialist in eProcurement and spend management, he has an impressive career of industry innovations, having implemented more than 100 projects worldwide.