Tapping into your organization's number one asset - your contracts
If contracts are your organization's number one economic asset, think of contracts as an untapped oil field in your own backyard. But, having oil in your backyard does not benefit you unless you discover a way to drill into, contain and distribute the resource. Same is true with contracts. You need a drill and container.
By Christina Wojcik, Esq, Practice Executive, Contract Management, IBM
IACCM research suggests that organizations lose 9.2% of revenue every year due to poor contract management and oversight. Erroneous overpayments, failure to apply discounts and rebates, and missed expirations contribute to substantial financial loss or missed opportunity for the organization to mitigate the risk and gain a competitive advantage.
- So, how do we go back and capture the information that has been lost, over time, in your contracts?
- How can we use the findings to mitigate the risk and gain a competitive advantage?
Why is the information “hidden” or lost?
Historically, after a contract was executed, the paper document was filed and information was likely lost. Some organizations had intensive ways of manually tracking key pieces of information but rarely would the information be easily accessible or even discoverable.
Very few options existed other than a substantial manual effort to discover, review, extract and abstract information from these documents. Teams of lawyers or contract review specialists -- either onshore or offshore -- would spend countless hours reviewing the contracts and putting the newly accessed information into an Excel spreadsheet or perhaps a contract management software solution.
The manual process equated to trying to extract oil from your backyard with your bare hands and then scooping it into milk cartons. Obviously, this is inefficient, expensive, and an implausible option for many.
Recently businesses have moved away from storing paper documents to storing contracts on hard drives or in shared folders. Theoretically, these documents should be easier to find and their information more easily extracted. Unfortunately, the theory proves to be invalid, because many organizations still lack visibility into not only the location of their contracts but also their contents.
Another challenge we face is ensuring that all relevant contractual documents are in one place and correctly organized, including all of their ancillary documents (i.e. amendments, exhibits, etc). Too often organizations find that they are missing ancillary documents and are forced to contact the counterparty to provide the information.
How to access “hidden” or lost information: the drill
Today, for the first time in the history of data discovery and analytics, a drill and a container exist that can help you easily discover previously lost information and then contain and distribute it in a meaningful way.
Most organizations, for better or worse, have had to become comfortable with electronic discover options (eDiscovery). This software is limited to discovering large quantities of electronically stored information (ESI), which is generally collected from specific custodians relevant in a matter. Organizations can then decrease the quantity of information through predictive coding or manual review.
However, the new software (being coined as contract discovery or cDiscovery) allows organizations to drill into specific contractual documents, regardless of the custodian. This allows the business to not only find potentially “hidden” or lost contractual documents, but it also turns images into searchable documents through the optical character recognition (OCR) process and extracts key pieces of information without manual efforts.
This new industry of cDiscovery provides the organization a starting point in contract lifecycle management by getting visibility into critical contractual information. Newly accessed visibility allows organizations to begin taking important risk mitigation steps such as allowing the organization to audit the contracts to ensure that they do not run afoul of regulatory compliance, internal policies or obligations and commitments.
Contract Management Software: The container
As mentioned, going through the cDiscovery process is the starting point (the drill) in contract lifecycle management. It is now time to properly contain the information.
The best contract management software was designed to hold vast amounts of data, distribute key information and report against the organization's contractual trends. The information extracted during the cDiscovery process can be uploaded into the contract management software to populate a usable database in hours rather than days, weeks, months and sometimes years.
The software enables you to better manage newly requested or negotiated contracts. By creating a contract in the system, you can track every edit made during the course of the negotiation. Your legal department can use the built-in tools to better educate your organization about acceptable provisions and practices.
For example, legal departments often leverage contract management software to ensure (1) regulatory compliance, (2) internal policy compliance and (3) commitment and obligation compliance through pre-approved alternative language, policy/guideline pop-up boxes and secure approval chains.
Once the legacy and current information is in the contract management software (the container) it is now distributed to the relevant individuals within the organization and it becomes possible to perform analytics. Analyzing contractual data and trends becomes imperative when trying to improve a process and recognize the full value of the contracts.
Contract Analytics: Legal behaving like a business
As organizations continue to look for avenues to do “more with the same”, legal departments face increased pressure to report on key metrics not only on the provisions or terms within a contract but also the process behind contract review, negotiation and execution. With the contract management software, a legal department can create a baseline and measure against that baseline as improvements are implemented.
By uploading contractual information or creating and negotiating a contract within the software, the legal department can now create reports to determine areas of inefficiencies and improve upon those areas. Examples include number of iterations, deviations from standards, average turn-around time, etc. With this level of insight, organizations can quickly start gaining a competitive advantage by turning contracts around more quickly and achieving additional cost savings.
By turning the contracts around more quickly, your organization can recognize revenue more quickly and avoid historical revenue leakage. Also, by tracking the information in the agreements, you can receive the full value of the expertly-negotiated terms, i.e. discounts or rebates, and avoid the penalties of lost information, i.e. erroneous payments or missed expiration dates.
The legal department can also use the information to build a business case for things like performance bonuses and increasing headcount.
So what does the future hold?
Predictive Analytics: Advancements in software and technology are moving so quickly that the future is only as a far as the next moment.
Today's technology allows us to more easily analyze the past and compare it with the present. This frees us to visualize the future, predict it and get ahead of it. Leveraging predictive analytics is only limited by our imagination. Accessing information allows us to answer or think about what happened, why, and ask, 'do causal relationships exist that could indicate probability of seeing them repeat again?'
Perhaps the legal department would like to search all agreements that had a dispute associated with the transaction or relationship. If the dispute rose to litigation or settlement, the legal department could then go back to the contracts and determine if different language could be used to prevent future disputes. Or they could at least flag similarly situated contracts to take preventative measures to ensure the disputes are potentially predictable and mitigated.
Automation of the future: One of the biggest challenges legal departments face is keeping up with or getting ahead of regulatory requirements or court decisions affecting the language in their contracts.
Using predictive analysis and the power of modern technology -- what would have taken months -- now gets paired down to minutes.
Imagine this: What if…
- We could use a super computer to scan all recent commercial transactions or contract-specific court decisions that would change the legality of certain provisions or positions.
- The computer would identify a decision directly impacting one or more of your contracts and notify you and your contract management software of that decision.
- Your contract management software would then identify all of the contracts impacted.
- You would adjust your provision.
- The provision would automatically be updated in all of those contracts and amendments which would then automatically notify the counterparty.
Using the right technology opens limitless possibilities
Through strong process and the right technology, organizations can access information driving the business like never before. They can now drill down into the wealth of information that has been accumulating and lost for years. This access will help legal departments get ahead of risk and plan for the future. Organizations who learn to tap into their number one economic asset will gain the economic benefit that will help push them ahead of their competition.
After all, as Ginni Rometty, IBM CEO puts it, "Data is the new natural resource."
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ABOUT THE AUTHOR
Christina Wojcik, Esq, Practice Executive, Contract Management, responsible for Contract Management Strategy & Best Practices at IBM. Christina works closely with Fortune 500 companies to replace high-risk, manually-intensive contract management processes with proven, scalable technology that delivers complete risk oversight and obligation management to legal organizations, while streamlining the end-to-end process, thereby increasing revenue and reducing costs.
Prior to this role, Christina worked in the Legal Process Outsourcing (LPO) industry (Thomson Reuters, Pangea3) as a Director of Legal Solutions, where her primary responsibilities included consulting in-house legal counsel on the evaluation and implementation of contract lifecycle management, corporate governance and litigation solutions by outsourcing legal work to India. Christina has also worked with CEB (within their General Counsel Roundtable and Compliance and Ethics Leadership Counsel) consulting and educating Fortune 500 companies on both innovative and time tested best practice legal solutions.
The IBM® Emptoris® Contract Management family helps companies structure more profitable contracts, streamline the contracting process and improve compliance. These solutions can automate and manage various stages of the contract lifecycle from creation, execution and renegotiation of contracts and amendments, through performance monitoring, analysis and renewal. The IBM Contract Management family enables companies to capture more revenue opportunities; improve supplier, partner and vendor relationships; and mitigate risks. See also Rethink Contract Management - IBM
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