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Spark joy: Creating value from your contracts
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- Contracts are critical to business life, but they are often ignored — locked in drawers or in a state of digital disarray.
- Using contract life cycle management, lawyers can unlock their value, stop leakage and provide crucial organisational insight.
- Enabled with technology, the legal department can become more efficient and play a much larger role in the business.
Marie Kondo would make a great lawyer. If ever there was a need for some tidying up, it’s with the contracts in a company’s legal department. What Kondo knows, and what every CFO should understand, is that the act of tidying isn’t about surface pleasantry.
Embedded within the pages of contracts is the history of relationships and activities that give an enterprise its value. But the most important aspects of these legal documents are often inaccessible in companies today. Either the contracts are hidden away in filing cabinets or they might as well be — trapped in unsearchable digital systems.
Worse, the leverage that the legal department could bring to the business through contract management is generally unrecognised and untapped.
Creating value with contract management
In the life cycle of a typical contract, the legal team is involved only twice: at the start, in drafting, negotiating, and executing the document; and at the end, in renewal, termination, or management of a dispute. Yet the vast majority of a contract’s value exists in between where the legal team typically plays no role.
But by overseeing contracts throughout the life cycle of a deal or relationship, the legal department can provide real-time data, monitor value leakage, reduce risk, and help reduce the barriers among business units. It can shift from being a reactively task-focused function to an integral source of value creation.
Contract lifecycle management (CLM) software can enable this. Once documents are scanned into a digital format, they are supplemented with searchability, metadata tags, and structure, and can then be read and administered within the CLM. The ultimate advantage of such a system is that contracting becomes quicker and more efficient.
Visibility and collaboration will also be improved across departments and the CLM can be integrated with their other IT systems. Digital contracts can be tracked for variations; if a negotiation goes off track on a standard contract, it is easy to identify where. They can be standardised, version control enacted, workflows maintained, and tracking allowed so that key dates aren’t missed.
And this is important, because otherwise, your business is likely losing money.
Preventing value leakage
The degree to which companies leak revenue or incur unnecessary costs in contracts varies greatly. The International Association for Contract and Commercial Management (IACCM) estimates that the average direct contract value leakage for all companies is around 9.3 percent. Those that do contracts badly can have as much as a 40 percent loss.1
Typically this is due to issues of contract robustness, from unrealised pricing adjustments, incorrect invoicing, and noncompliant work. Indirectly, missed renewals and poor customer experience also cause loss. But through active monitoring, cost leakage on existing contracts can be identified and mitigated, leading to substantial savings. Contract management software can alert the legal team to opportunities for savings, or to collect revenue, by avoiding missed deadlines for payment or collection, overpayment, and penalties.
A changing regulatory environment
Digitising is not only about working smarter, but working safer. The more contracts a company is dealing with, the more legal risk they are potentially exposed to. Knowing what and where risk lies is critical for due diligence, and a dashboard drawing from key contract data can easily enable this.
With a digital system, the legal department can see how many contracts it has, what type of agreements there are, and which channels or segments they’re located in, and catalog the material risk and value each contract holds to build a risk profile for the business.
In the current climate, this function is particularly important. Worldwide, regulations are proliferating, the complexity of compliance is increasing, and the cost of noncompliance is becoming steeper. Legal teams are being asked to go back and redo contracts, changing terms and policies as laws change. Ignorance of what is in past contracts will be no excuse, not to mention costly.
What’s the holdup?
The reason why some businesses are not embracing contract lifecycle management is partly cultural, which will come as no surprise to lawyers and C-suite executives alike. When it comes down to it, legal departments, and the risk-averse lawyers that they are made up of, often just don’t want to change.
In truth, though, they haven’t needed to. Contracts have been around for thousands of years, and although their interpretation and execution have varied over time, the basic process remains the same. It is only in the sheer scale of what is being asked of contracts (and lawyers) in the current digital and multi-jurisdictional era that the usual way of maintaining them is beginning to falter.
A lack of technological skills in legal departments is also a contributing factor. Asking that legal experts, who are highly educated in their own field, become technologically savvy as well is a hurdle. This lack of capability leads to a lack of confidence, and can set back efforts to change the way work is administered. Change management skills are in short supply, so even where a positive attitude toward a change program exists, the ability to enact it may not.
How to achieve joy
Companies that wish to digitise their legal department should focus on six steps:
- Have the conversation. Ensure that everyone is on the same page when it comes to contract digitisation and management. Even though it could be seen primarily as a tidying-up exercise for the legal department alone, the consequences for the business as a whole should be considered in order to maximise the potential benefits.
- Map the road ahead. Having decided upon an end state for digitisation and management, outline how to get there. If the implementation of a contract management system includes moving from paper contracts to digital ones, an extensive period may be needed to simply find the contracts in question.
- Decide who is going to run the change program. If the scope of the digitisation is to be larger, a senior staff member should be selected to run, deliver, and embed the change program. It may mean bringing in an external person with change experience to steer the program.
- Know where the technology fits. Before scanning documents, give some thought to their use once digitised. The kind of lifecycle management technology the scanned documents will sit in, or connect to, after digitisation will need to speak directly to what the company and department wish to accomplish.
- Bring in (or build) the skills and capability. Legal departments rarely have data or analytics people on staff, but lacking that expertise or ability to upskill, it will be necessary to bring tech skills in for the life of the project, and perhaps beyond.
- End steps. Technology and processes that enable the old ways — such as unindexed data repositories or documents being emailed outside the new system — should be turned off or modified as soon as practicable to encourage the use of the new systems.
A tidy future
Tidying is not about cleaning out the cupboards, and digitising contracts is not about technological upkeep. The real benefits are far more useful and multifaceted. They include making space to grow, to build confidence, to change, to pivot, and to accelerate.
A technologically enabled legal department is one that is quicker and more efficient and that has a much larger role in the business than has traditionally been the case. Risks are reduced, opportunities acted upon, and money saved. Deals get done faster, with a focus on the most important aspects, and regulation is adhered to quickly and with minimal labor. Contracts are consistent and no longer leak dollars.
When contracts are digitised, managed, and working for the company — not simply behind it — joy will be sparked not just for the legal department, but for the company as a whole.
This is an abridged version of an article previously published in strategy+business. View the longform version for detailed insights on digitising the contract function.
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References
- https://s3.eu-central-1.amazonaws.com/iaccmportal/resources/files/10151_iaccm-elevatewebinar-leak-proofingyourcontractprocesses-8may18.pdf
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