Good business practices, a desire for increased productivity, and the need for fiscal, legal, and regulatory controls should be driving more companies to standardize and centralize their contracting processes. When a single department monitors and maintains a company’s contracting processes, it becomes easier to ensure that all contracts meet corporate standards, are passed through appropriate review cycles, receive required approvals, are monitored for key dates and terms, and are quickly accessible by all who need access.
Despite these advantages, in many companies contracting remains a business unit-based function, and no single business unit wants, or is equipped, to assume the responsibility for managing contracts linked to a different business unit. For example, while procurement departments may be expert in handling vendor-side contracts, they are not well suited to handle sell-side, leasing, intellectual property, and other corporate contracts. Likewise, while many sales organizations maintain sales support organizations that effectively manage customer contracts, these departments have neither the expertise nor the inclination to address supply-side contracts.
Since a company’s legal department is often the single department that is required to review all of the company’s agreements, legal departments are a natural focal point for contract management. As a result, an enterprising legal department is in a unique position to add value to the larger organization while increasing its ability to manage the company’s risks profile by consolidating and managing the company’s contracting functions. In addition, by controlling the contracting process, legal is in a better position to protect the company from risk and ensure Sarbanes-Oxley compliance.
Risk Management: A Counsel’s Fundamental Function
The need for involving counsel in a company’s contracting processes was certainly brought home by Sarbanes-Oxley. But confirming that contracts conform to legal, internal and regulatory requirements is really only a partial reason why counsel should take the lead on contract management processes. Even without the control procedures required under SOX, legal departments frequently confront issues that are made more complex and difficult to resolve because of poor enterprise-wide contract management processes.
For example, to address a dispute from a customer or vendor, an attorney needs to be able to review the contracts and related documents that document the relationship between the parties. Without a central repository for these contracts, an attorney spends valuable time looking for the correct contract. Without central ownership of the contracts, there is also a greater likelihood that contracts are incomplete or missing all together. As a result, in best case scenarios, time is lost while searching for the correct contract; in the worst case, customer relationships (and legal disputes) can be lost because contracts could not be found or are incomplete.
Similarly, development of risk mitigation strategies and tactics cannot be effectively completed without involvement in, and ready access to, contracting processes and actual contractual documents. But again, control over these documents, which are at the heart of legal processes, is often left to other departments, some of which do not appreciate the importance of proper contracting processes.
Software Empowers Legal Departments to Manage Contract Management, Enterprise-Wide
While few would dispute the conceptual idea that managing risk is important, many would balk at the cost traditionally associated with proper contract management.
In many corporations, the role of managing contracts is entirely manual. As a result, a large staff is often required to process and manage contracts, whether the process is centralized or distributed throughout the organization. So, while a legal department may see the need to have precise contract management functions, it is unappealing for a group, already seen as a cost-center, to take on another function that is perceived as high-cost/low value by many organizations.
This no longer needs to be the case. With the advent of cost-effective, sophisticated contract management software, legal departments can now both minimize contract management costs, and optimize the benefits of centralizing contract management. At its most basic, contract management software solutions store contracts in a centralized, indexed electronic repository that enable authorized employees fast access to any contract and supporting documentation.
More sophisticated solutions, however, provide advantages that go well beyond the simple warehousing of contracts. These next-generation solutions have advanced search, reporting and contract creation functionality that can be readily implemented to create value as well as minimize risk, all without adding significantly to an organization’s headcount.
Among the enhanced features that can quickly provide a return on the initial investment in the software are the ability to auto-generate email alerts and reports when certain events occur, or are about to occur. These alerting and reporting functions can be used to save an organization money on such matters as auto-contract renewals. With paper-based contracts it is difficult and labor intensive to identify and report on contracts that contain auto-renewals. As a result, it is all too easy for contracts to auto-renew. This can lead to unnecessary (and often material) expenses for contracts that the organization no longer needs or the loss of an opportunity to renegotiate contracts on more favorable terms. A sophisticated contract management solution can resolve this problem—and head off any potential legal issues that may arise when business relationships break down as a result of unwanted contract renewals. These solutions can be set up to automatically send email alerts to business owners, notifying them of these important dates.
Other benefits of advanced contract management solutions include more efficient purchase and sales agreement cycle times, improved order accuracy (and an associated reduction in risk exposure), and unprecedented visibility into contract terms and conditions that enables expedited compliance with audits and faster, more precise drafting of new agreements. Further, contract management solutions all but eliminate human errors otherwise associated with labor-intensive processes while also reducing head-count required to author contracts and manage contracting processes. Contract management systems can be used to collaborate on documents and provide for consistent contractual language through the use of clause libraries and automatic contract creation through predefined clauses. Finally, some of the most advanced solutions can be configured to allow selected departments to create their own contracts autonomously, through the use of pre-approved alternative clauses and/or the use of contract creation questionnaires that can generate a contract for a specific scenario based on the business owner’s response to questions – this saves both time and money in the contracting process and empowers groups to be more self-sufficient.
Achieving these benefits may seem daunting to legal departments, which traditionally do not get involved in IT issues. But with a hosted contract management solution, legal departments can achieve the benefits of centralized contract management without incurring the IT headaches that normally accompany maintaining a business critical software solution. With the solution provider also maintaining the application, corporate legal departments can focus on expediting processes, proactively controlling risks, and delivering required information and judgments, rather than “pushing paper.”
A centralized contract management process can significantly reduce overhead by eliminating duplicate headcount in situations where contract management is dispersed throughout the enterprise; headcount can be further reduced through the adoption of contract management software. In addition, a contract management solution can enable departments enterprise-wide to achieve a wide range of other benefits. With access to the reporting function common in contract management solutions, sales departments, for example, can better predict revenue recognition and hold customers to minimum revenue requirements. Similarly, in procurement scenarios, improved tracking of vendor relationships can enhance negotiating leverage, provide for more consistent monitoring of service levels and other metrics and provide for the tracking of key financial terms, such as early payment provisions and automatic price increases.
A Paradigm Shift
Depending on the organization, a move to centralize contract management efforts in the corporate counsel’s office may represent a significant paradigm shift. But if done properly, it is a shift that will extend the value of the legal department, while providing benefits across the organization. To effect a shift to centralized contract management, the legal department will have to tread gently so as not to be perceived as either meddling in others’ departments or attempting a “land grab” (albeit of “land” that is likely perceived as pretty arid territory). You must educate other departments to allow them to understand that the underlying reason for the change in approach is not to undermine any department’s importance, but to instead reduce costs, improve efficiency, reduce risk and increase productivity. By consolidating the contracting functions, you should be freeing other departments to focus on their core-competencies, an opportunity that they should appreciate.
Business units must also understand that business functions associated with contracts, such as payment terms, service level agreements, and the like, will still reside with the business owner of the contract. But these individuals will no longer be responsible for storing and manually tracking the contract or associated documents. And, should the business owner need to access any information associated with a completed contract, he or she can be given secured read-only access to contracts and to reporting options specific to those contracts that come under his or her purview. In essence, other departments will maintain full business control over key contract elements, avoid administrative hassles, and gain an ability to easily create ad hoc management reports.
The legal department’s efforts will allow the organization to exploit the value of business-critical information that has traditionally been locked in paper documents. This in turn, can add significantly to the organization’s bottom line by optimizing and expediting the contracting process, reducing risk, providing for more flexible contracting solutions, preserving contractual relationships, and helping to minimize expenses and avoid unnecessary payments.