Identifying Contract Management Requirements
Surveying the landscape of contract-related burdens faced by legal departments, it is clear that the impact of ancient contract management technology is not benefitting either internal clients or company profitability. An internal legal department looks at several issues related to managing contracts: and the list is not exhaustive: is contract management decentralized? Who is the responsible custodian for the contract records, Office Admin, Assistant to Senior Officer, or Legal Department? What’s the state of their systems and their internal processes for storing paper and electronic files? What are the security protocols in place? Do you have complete contract metadata or only partial document record-keeping? Are contract signers truly aware of the operative terms and conditions? Are the digital contracts and contract processes fully automated, or in manual siloed silos?
According to a Wiley report, "Legal departments sometimes struggle to stay on top of contracts, approaching the management of these documents largely on a case-by-case basis with inadequate long-term tracking." They may be subject to non-standardized and inconsistent contract processes with negotiations taking too long; poor procedural learning due to a lack of effective contract management systems and processes leading to frustrated internal users.
In-house lawyers spend from 15-30% of their time on contract management and compliance. "Yet in-house counsel spend an overwhelming majority of their time (nearly three-quarters) negotiating due diligence and other matters internal to the company. A typical in-house lawyer spends only one-fifth of their time representing the company to the outside world. One quarter of that is spent on contract management and compliance." Jennifer G. Hill, Contract Management: The Dirty Little Secret of In-House Practice
Large Global Companies require a way to accelerate contract generation and processing to reduce litigation exposure, and to track documents and obligations for contract compliance.
One Big Law firm estimates the average Fortune 500 company has $20 billion in paper contracts. Few of these contracts are ever reviewed for risk, and only about 5% are ever amended or even terminated. ‘Some businesses never revisit contract terms, regardless of their value,’ said Jeff Robinson, of Cybersettle, an online claims settlement service. ‘The Savings from renegotiating your contracts can be significant.’ Jack Karp, 7 Ways to Improve Your Contract Management, ALM, Legaltech News.
In-house lawyers do not have the bandwidth to manage through contract data nondisclosure equivalence, and the exponential growth in paper and electronic contracts in recent years has necessitated more resources just to maintain contract systems . The forensic search and discovery of embedded contract terms are an ongoing task. Standardizing contract management processes are internal process concerns that need dedicated contract management software resources that are not a part of the internal IT program.
Contracts are in the top five list of items prone to fraud. "Organizations in a variety of industries have made the news when it is revealed that an employee created a new supplier within the financial or ERP system and began issuing payments to this fraudulent vendor entity." Simple things happen that create problems: such as sending a new contract to an old email address of a negotiating attorney. This can lead to clone copies and worse to do’s of control, which means a loss of contract integrity and security. "In fact, contracts are the most common type of legal document that are forged." Jim Steel, Contracts Have Been Hacked. Now What? Nitin Nohria, Co-Author of Re-Imagining Work for Enterprise Contract Management (2019).
"Many contract management solutions fail to take into account the enormous number of contracts that are constantly being negotiated at the same time for different agreements. The movement at scale with a large consortium of stakeholders that are working on mounds of contracts all at the same time is some of the most sophisticated hierarchy of work ever devised." Jason Barnwell, General Manager of Global Legal and Corporate Affairs for Microsoft.
Most contract software vendors have overlooked the rigid and unique structural requirements for software systems to handle sophisticated contract management. Contracting systems have been designed for contract creators like Sales and Marketing, but ignoring the equally important need of contract custodians in legal departments who must keep track of the contracts, store them and ensure they are managed properly and securely to maintain their integrity. Additionally, the need for forensic and deep query search capabilities of contracts has not been addressed.
Contracting arrangement with its customers is a two-way street that requires entire organization cooperation, and agreement reaching that requires multiple collaboration tools to harmonize the internal contract management system. Special business processes and legal requirements are set up and managed that are specific to the business entity or corporate unit. Real-time processing is required that includes query management and revision and approval of contract documents. Other contract team members include operations, finance, risk management, and IT.
Essential Features of Contract Management Software
There are a number of key functions that legal departments should look for when choosing a contract management system. Storage of documents is the most basic of these functions. Legal departments will need to be able to easily store and retrieve documents, both from a central location, as well as remotely. A properly selected contract management system will have anywhere, anytime access to these documents. While many contract management systems offer space to store the contract documents themselves, it is also important to look at what sort of storage options or capabilities are available for other documents related to these contracts. Contract management systems which allow for the importation of the related files into the system, may present a better option.
Tracking changes and version control are also essential components of contract management systems. A robust contract management software application should have the ability to track the changes made to these documents and note who made them, as well as maintain multiple versions of the same document. Many legacy contract management systems and home-grown solutions will only allow for document tracking to the process flow level. A more extensive system will allow for the ability to track every change made to the document itself.
Alerts and deadlines are essential components of any contract management solution. A properly configured contract management system will notify all involved parties when critical contract milestones are approaching, or when other important events are occurring. Much of this functionality can be automated, and many contract management software vendors offer the capability to customize these alerts for workflow, as well as for particular applications. While a minimum set of alerts should be included out of the box with any contract management system worth its salt, maximize your investment by ensuring you can customize and automate these alerts to fit your specific process needs.
Advantages of Using Contract Management Software
In addition to time and cost savings for the organization as a whole, contract management solutions provide legal departments with tools to work more efficiently and increase compliance, while simultaneously managing risk. In fact, most enterprise contract management solutions have modules that are specifically tailored to meet these challenges.
For example, by streamlining contract administration processes, companies can reduce contract cycle times. When contracts are administered through enterprise contract management solutions (e.g., streamlined workflows, automated notifications and alerts, and collaborative document editing and review mechanisms), the length of time it takes to execute a deal can be reduced dramatically, freeing up invaluable resources.
Enterprise contract management solutions also allow organizations to establish a contract repository for the organization’s entire contract portfolio. Organized storage of existing contracts is invaluable for departments that regularly review documentation (auditors, corporate secretaries, etc.). Contract repository database management is also an invaluable tool for legal departments. For decades, legal departments have had a reputation for being slow to adapt to new and innovative technologies, but savvy lawyers and legal executives have started using automated contract analysis document management systems to identify key provisions, exceptions to the organization’s standard position, and trends over time. Information gleaned in this manner can then be used to create a baseline for negotiations with internal stakeholders and external vendors so that efficiencies can be achieved on the front-end.
Another significant improvement is the organization and facilitation of periodic contract renewal and expiration process. Often companies miss renewal and expiration deadlines resulting in missed opportunities, penalties, and perhaps worst case—reputation loss. Legal departments that successfully manage a contract portfolio are able to track renewals early enough to secure best terms and avoid problems.
Contract lifecycle management (CLM) also facilitates the identification of privileged information for purposes of complying with information security standards. From a compliance and risk standpoint, knowing the location of privileged information within the portfolio is crucial for purposes of complying with rules on data privacy and industry standards on data security. Many industry standards, such as HIPAA, require that privileged information is stored separately from organizations other information and is noted by the company as information requiring additional protection. Sometimes, a standard contract template refers to the organization’s "Confidential Information;" controlling the use and disclosure of this data is more difficult if the organization has not prepared a complete inventory. In addition, negotiating with vendors and other third parties is complicated further if the organization has not developed a catalog of obligations that apply to its materials.
Finally, risk management and mitigation is also improved when organizations manage their contracts through enterprise contract management suites. Organizations implement extensive controls over their workforce, information systems and other valuable assets, but in many instances neglect to focus risk management efforts on contracts. Since purchased goods and services account for a high percentage of normal business expenses, spending money without adequate controls over the expenditure is risky business. Many vendors, especially those who provide IT or cloud based services, require that agreements be signed on a "take it or leave it" basis, which gives organizations little control over the types of risks to which they are exposing themselves. Contract management tools allow legal departments to review and manage contract clauses (confidentiality, indemnification, warranty, insurance/collateralization and the like), so that if and when these documents need to be reviewed, the relevant information is available to the proper decision makers.
Selecting the Appropriate Contract Management Software for Your Department
When it comes to choosing contract management software, it’s important to identify your primary needs first. For example, do you require a hosted or on-premises solution, and is it crucial that it integrates with other systems already in place? Other factors which affect the choice of contract management software can include the number of licenses required and the scalability of the product.
An integration with key existing systems such as HR, Procurement, and Document Management can be advantageous; however, an integration with ERP or Financial systems may not be as important for your individual business requirements. While many hosted solutions also offer some integrations, particularly with inbound (from other systems), there is often less support for outbound integrations (to other systems). Assessing your individual needs is critical for the success of a program; otherwise, what seems like a good fit for your business can quickly become like a square peg into a round hole, leading to poor adoption and success.
Like most software , contract management software is only as good as those who use it. So, if your program will require multiple and diverse users, it is vital to choose the right solution for your organization. If it is only used by select individuals, including senior management, in their opinion the solution may need to be innovative, seamless, and trouble-free. But, if it becomes too complicated to use and understand, retention of the program may suffer. The software must be flexible enough to adapt to changes over time. If it is too rigid, it can lead to frustration and lack of compliance throughout the business. A clear understanding of your businesses’ requirements will be instrumental in finding the best solution.
Finally, any successful contract lifecycle management (CLM) program chosen must allow for growth and progress. As your legal department continues to develop and grow, the CLM program should evolve with you and your needs. However, a balance must be struck between innovation and simplicity.
Addressing Common Implementation Obstacles
Implementing contract management software can be an expedition in human motivation as much as technology. Legal departments are often not staffed with experts in the field of change management, but that is essentially what is needed to implement contract management software and to do it long-term successfully. Resistance to change typically comes from human nature; most people – whether in a business or not – are susceptible to the fear of anything new. Think of the resistance in the early days of the mobile phone and how pervasive we now are with that technology. Contract management software is on the same journey and will change both the legal profession and how other departments and organizations interact with the legal department.
Before the project gets underway, stakeholders need to understand that a contract management system is meant to be a solution over the long term. If issues are not resolved in the implementation phase, those original problems will become ever greater as the organization grows. Once it becomes too easy to use the system to manage contracts, there will be more contracts coming in, and the enterprise will be at risk. Implementations are meant to be difficult and complex, and part of that complexity needs to be anticipated and solved before it derails the project.
Implementers need to understand that the changes legal departments go through during implementation need to be accepted, and processes must be changed. Legal departments are used to juggling a lot of things, and sometimes the wrong balls will be kept in the air. Applications are used for many different things at the same time, and they have little time for issues or mistakes. It will be important to have the tolerance, even safety, to make mistakes during the implementation process so that the correct way to handle the new system can be found and put in place before the new contract management system is set to go live.
Emerging Trends in Contract Management Software
The future of contract management software is intertwined with advancements in artificial intelligence (AI) and machine learning. AI will drive further automation in legal departments, streamlining the entire contract lifecycle – from initiation to renewal. Looking further down the road, self-executing contracts (smart contracts) will become the norm for many high-volume, low-complexity agreements, reducing the need for human review altogether.
As we look at current developments in contract management technology, we’ll start to see machine learning grow in maturity. For example, identifying exceptions in contract language or interpreting contract language will be increasingly managed by machine learning rather than manual forecasting and assumption by a human reviewer . This will help speed up contract review even further and reduce reviewer error rates.
Natural language processing (NLP) will have a big impact on contract management technology over the next several years. NLP allows for more dynamic data extraction whereas contraction management software today requires a static process. As AI and machine learning further develop within contract management, more robust processes will emerge and contract data may be updated fluently and seamlessly.
All these technology changes will ultimately lead to the reduction of redundancies and human error in legal departments. Legal departments will rely less and less on their outside counsel while contract management technology will completely revamp the legal field from a reactive to proactive posture.