Nancy Jessen and Bret Baccus, Huron Consulting Group
Whether because of growth by acquisition, the existence of autonomous organizational "silos," or other reasons, in many companies the contract function varies widely by business unit, with individual units demonstrating different contracting perspectives and relying on different systems and processes. In these organizations, contract management, to the extent it exists, occurs disjointedly. Truly innovative companies treat contract management as a cohesive process that recognizes the business objectives of the entire enterprise. The general counsel's office can guide enterprise-wide contract management innovations that strike a balance between mitigating risk and meeting the company's business objectives, and that will streamline the contracting function creating process efficiencies. (Read more about the general counsel's role in driving change.) Following are ten innovations that promote operating as a cohesive organization.
1. Use agreed-upon contract templates with simplified contract language.
Templates with standardized language, including approved alternate language, enforce consistency and manage risk while minimizing the need for law department intervention. Simplified standard contract language that includes more "plain English" and less "legalese," combined with training of business-side users on the meaning of specific contract terms and their use, will make the templates more user friendly. Standard contract language will be more accepted within an organization when it is based on shared perspectives of risk tolerance throughout the organization including legal, business operations, and finance departments. The benefits are numerous: increased understanding of contractual obligations, fewer negotiation cycles, and reduced demands on the law department's time.
2. Regularly reassess clause "starting points."
Merely developing standardized language and then moving on is not enough to keep the company in the forefront of innovative contract management. Templates with standardized language lose their effectiveness when that language is frequently renegotiated. Innovative companies routinely analyze contracts to identify clauses that are frequently negotiated, and then revise their "starting point" language to reflect a consistent outcome. Keeping standard language up-to-date and consistent with business practices can reduce the number of negotiation cycles and time between drafts, as well as ease business relations with vendor and customers.
3. Route contract work to appropriate personnel.
Many companies are inconsistent in how and when the law department gets involved in contracting, affecting the department's work flow. An important innovation at the law department level is to make sure contract work is assigned to the appropriate resource. Low value/low risk contracts typically involve legal issues that should not require a significant amount of negotiation or changes. Low value/low risk contracts can be assigned to professional non-attorney resources skilled in contract drafting and negotiation, especially with the introduction of forms or templates to streamline the contract process and training regarding the company's legal positions. This shift will give attorneys more time to focus on high value/high risk contracts, and may also create opportunities to handle some contract work in-house that had previously been done by outside counsel. If the company has an automated contract management system, it can integrate contract assignment.
4. Implement self-service "kiosks" for routine, non-negotiable contracts.
Certain types of recurring contracts may be non-negotiable. These contracts have fixed, standardized terms, and therefore individual contracts require no law department involvement. For these, or for contracts that require limited or no negotiation or revision, self-service kiosks available through the company's intranet site or via the contract management system can enable business-side users to directly enter the necessary information to request and generate a contract. Self-service kiosks can also provide users access to existing contracts to prevent creation of duplicate or conflicting contracts.
5. Build financial review into the lifecycle of the contract prior to execution.
Revenue recognition errors are a frequent cause of a company's need to restate its financial reports. When the finance department has not been sufficiently involved during the course of contract negotiations or is unaware of executed contracts, or when there is no contract or insufficient documentation to support the revenue, the risk related to inaccurate revenue recognition increases. Early involvement of the finance department ensures appropriate pricing and collection methods, and can be incorporated into the automation process.
6. Evaluate "portfolio" trends to improve processes, allocate resources, and refine standard language.
Stratifying executed contracts allows a company to analyze how risk, negotiated terms, pricing structure, and cycle times are aligned or misaligned, providing useful information to renegotiate or revise standard language and terms, improve processes, or reallocate resources. Criteria to stratify the portfolio may include factors such as key commercial relationships, overall dollar value, high risk factors, new geographic areas, use of non-standard terms. For example, if the portfolio analysis identifies contracts with a relatively low value, but with terms that create an inordinate amount of risk, those contracts should be closely monitored and identified for renegotiation at the time of renewal. Another opportunity might be an analysis that reveals equal amounts of review time spent on low- and high-value contracts – this may indicate that the low-value contracts need standardized language to reduce the time they require.
7. Assess individual contract performance using available data.
A crucial step in making renewal decisions and evaluating vendor/client relationships is assessing the financial and business benefit of an individual contract. Innovative companies build management reports that will provide the necessary information to evaluate terms such as warranties, pricing, quality guarantees, service levels, and return policy.
8. Implement contract management systems as an enterprise-wide tool.
A variety of contract management software is commercially available to automate the contract process from contract creation and negotiation through approval, compliance, and renewal, and many organizations have automated aspects of contract management. For the same reasons many companies have a variety of internal contracting processes, however, many organizations also have multiple contract management systems in place within different business or functional units. Innovative companies move beyond departmental contract management and treat it as an enterprise-wide process, implementing systems that manage the company's full range of contracts throughout their lifecycle. The effectiveness of contract automation can be further leveraged when it is integrated and unified with other corporate systems, by sharing and ensuring consistency of information and reducing duplication of effort. For example, electronic contract request forms can integrate with a sales pipeline system or enterprise-wide master databases such as client, vendor, and product systems so as to eliminate dual entry into multiple systems and facilitate accurate data entry. Similarly, integration with corporate systems can reduce the possibility of error or unapproved changes to a contract. Corporate systems that manage pricing and margins can be tied to the contract management system to import relevant data into the contract on a read-only basis.
9. Centralize the contract repository.
Many organizations also have multiple contract repositories among various departments or business units. Multiple repositories can lead to duplicate and potentially inconsistent contract versions and can hinder company-wide reporting. A centralized system that includes a set of core data fields common to all contracts and an extended set of data fields specific to each type of contract will avoid these problems and can increase efficiencies. A centralized contract repository serves as the system of record for all commercial agreements – the sole location users can rely on for accurate and complete information about contracts, amendments, subordinate statements of work, etc. Such a system is the definitive, reliable source of information in the event of disputes or renegotiations, and can provide information yielding a comprehensive view of the company's relationships. The data fields in the central repository can be used to trigger performance obligation notices such as expiration dates, notifications, pricing changes, and volume requirements. Organizations that closely manage their supply chain to product delivery can implement a joint repository for both the buy and sell sides. Additionally, organizations with vendors that are also clients can use joint repositories to manage the full breadth of the relationship.
10. Automate the processes for approvals and signatures.
A system for electronic approvals of revisions to contract language and financial arrangements will streamline the approval process and also create an audit trail. For example, electronic approval requests, routed by the contract management system, can be delivered via email with relevant information and a link to the draft contract embedded in the message. Approvals, denials, or comments can be electronically routed through the contract management system. Alternatives to hard copy signatures, such as fax-back, registered e-mail, website checkbox, and digital signatures, can be used, as appropriate, for the type of contract.
These ten contract management innovations are not an exhaustive list and may not be applicable to all organizations, but they illustrate how taking a holistic, enterprise-wide view of contract management allows an organization to strike the balance between avoiding risk and meeting business objectives in a timely, efficient manner, spanning the contract management lifecycle. There are a variety of improvements an organization can make to its contract management program, and it is likely that some kind of technology purchase or upgrade will be considered. It is important to remember that the company's business goals and the processes that will best achieve those goals should drive the choice of technology, rather than vice versa. A company with a defined set of agreed-upon business objectives encompassing the entire enterprise can determine where investment in innovation will yield the most significant return.