By Lexical Labs
Agile businesses scale fast. New opportunities are their lifeblood. Where other businesses see danger, agile businesses are exhilarated by untapped potential. Adapting and reinventing themselves again and again, these are the companies that competitors don’t notice…until it is too late.
But it is easy to forget that behind every exhilarating new opportunity, there is a somewhat more mundane component – a contract. And whilst most agile businesses have developed top notch processes for seeking out and capitalising on new business opportunities, they have often not invested the same effort in improving their contracting function. Which of course works fine…until it doesn’t.
This guide explores how to develop a best-in-class contract management function. Its concepts are relevant to any business that has at least one lawyer and is struggling to keep up with the ever increasing workload of a scaling business.
Before we look at the blueprint to improve contract management, let’s start with reviewing what a top-notch contract management function looks like.
What Does Good Contract Management Look Like?
Good contract management basically boils down to knowing a) what your business is doing, b) how to spend your time efficiently, and c) how to manage your risk. Characteristics of an ideal contract management system include:
- Being able to easily locate any contract the business has signed.
- Clear, robust and consistently applied approval and contract execution processes.
- A legal team that spends the majority of its time providing strategic advice to the business, not just getting contracts done.
- Tracking rights and obligations in contracts after they have been signed, so that nothing gets missed and no money gets left on the table.
- Having visibility of risk across the entire contract portfolio.
- Data-driven continuous improvement of the contracting process.
An agile business can scale big, and scale fast. And when that happens, the contract management function needs to be sufficiently agile to cope with a potentially huge, rapid increase in deal volumes. So let’s now look at how we can ensure that this can happen!
Get Your Processes Right
From the outset, you should have a clear understanding of what you want to achieve by optimising your contract management function. Do you want to free up the legal team’s time? Speed up time to revenue? Be more strategic? Or all of the above?
The first thing you should do is design the right process. The starting point is to understand how you are spending your time now. n our experience, this is often a huge blind spot – in their day jobs, teams spend their time frantically swimming to keep their head above water, and don’t have the time to think about how they are doing what they are doing, or how it can be improved.
So, start with a process map – write down what your process is now (draw a diagram if you like). You might want to do this for each workstream or contract type. Start from the beginning. A new deal comes in – where does it come from? Who gets notified? Who drafts, negotiates, approves, signs? Where does the contract go after it gets signed? What data do you keep track of, and where? Who deals with the ongoing relationship? What happens if there is a dispute?
Once you’ve mapped out the process, think about where you are feeling the pain points. Where are the bottlenecks? What slows the process down? Is the right person doing the job at each stage? Does the business have the data it needs to make key business decisions? If we lose a key supplier, do we know our total exposure across our portfolio?
Data is really helpful here. The more you can collect at this stage, the better. This can inform things like how much time you are spending at each stage of the process, where the key frictions are, etc. Contract management platforms and the like usually have lots of great data and insight here, but don’t worry if you don’t have this yet, that can come in time (and should be part of a full solution – see below). For now, simply collecting key data is enough.
Once we have a clear understanding of our current process, we are ready to start exploring how we can optimise it.
Do You Know Where Your Contracts Are?
This is the next question, and it is astounding how often the answer to this question is ‘no’. This is fundamental – without being able to find all the contracts across your business, it is impossible to manage risk across your contracts.
There is a whole gamut of options for keeping track of contracts, from simple contract tracking spreadsheets and shared drives, to full featured contract management systems. The right solution is different for every business. With the right processes, you would be surprised how far even a well-managed spreadsheet and shared drive can take you. Indeed, in a recent survey we found that 90% of businesses who responded used only a shared drive to manage their contracts.
It’s also key that you have visibility over everything that comes in. That doesn’t mean that everything necessarily needs to be reviewed by legal (more on this below), but all these contracts need to follow the right process and end up in the contract management process. Some businesses make the mistake of thinking that they can solve this problem by investing in an expensive contract management system from the get go. Whilst this may indeed be the best solution for some companies, the best contract management system in the world won’t help you find that sales contract that Bob keeps under his desk.
Whatever you decide, sort it out sooner rather than later. Customers often bring us large portfolios of legacy contracts that need automated review because they don’t know what risks lie hidden in them. Getting this right at the start can save a lot of time and unnecessary headache down the track.
Are You Managing Your Contract Risk Consistently?
Getting your templates sorted is a critical part of your contract management process. It isn’t unusual for around half your deals to be done on your paper, probably more on the revenue side. Technology that automatically generates the first draft of the contract can really help here. This means that potentially anyone in your business, not just the legal team, can take responsibility for preparing first drafts of contracts.
You also want to sort out your playbooks so that your team knows what they can and cannot accept when negotiating contracts. Playbooks are equally useful for reviewing both your own templates or third party paper (more on this below), and are critical to make sure that the entire team deals with contract risk the same way.
Finally, make sure that you have clear approval processes, everyone is aware of them, and they cannot be deviated from (other than as set out in the policy). Aside from the obvious in terms of corporate risk management, you can make this an inescapable touchpoint in the contracting funnel, which can be used to make sure that everyone in your business follows everything else in your process.
To make sure that you have covered off the key legal and business risks in your template contracts and playbooks, you need to have a firm handle on the business and legal risks faced by the business. Anything that has gone wrong in the past should be a candidate for inclusion here. It’s usually a good idea to stress test your list of key risks with the business teams. Mapping them against your risk register or similar is also a particularly useful exercise.
A final word on setting up risk guidelines for your templates and playbooks: these should cover off what you need to protect your business, but try not to go overboard, otherwise you’ll feel the pain during the contract negotiation. If you always start the negotiations with your gold-plated position, and end up falling back to something more market-standard, why not start there to save you both the negotiation pain? Starting from an extreme position on the legals so you can ‘meet in the middle’ is often a painful, and expensive, strategy.
How Do Your Contracts Get Done?
This is where you really need to think about efficiency. The question basically boils down to this: is the right person (or resource) doing the job at each stage, given the level of risk involved?
You need a clear grasp of what is coming through the front door. How many contracts come in per month? What type of contracts are they? Be clear about what needs to happen for each type of contract. Who needs to review them, and who needs to approve them? Which contracts can be managed directly by the business teams? When should legal get involved? If you are sending contracts to external lawyers, make sure this is being managed properly. For routine work, consider taking advantage of managed legal services and other cost effective solutions. With the right processes, would these be better done in-house?
Negotiating third party paper can be particularly difficult. In one of our recent surveys, almost 90% of respondents included this as one of their biggest pain-points when negotiating contracts.
Technology that automates the review of contracts against playbooks can be very useful here, enabling much more of the work to be pushed to more junior resources or non-lawyers. Similarly, collaboration platforms can also be very helpful when there is lots of back and forth happening amongst internal (or external) teams.
You might also want to consider the process you are using to negotiate contracts. Is the right contract being used right from the start? Are you jumping straight into the negotiation, or are you agreeing the key terms up front? Keeping the negotiation out of the weeds until the parties have agreed the key points can often help parties reach agreement much more quickly.
Finally, once the deal is done, keep the processes for approval and execution as simple as possible. E-signature technology is invaluable here.
What Happens When The Deal Is Done?
Once the deal is done, the real challenge with contract management begins. It’s easy for everyone to breathe a sigh of relief, lock the contract away and forget all about it. So it is essential that you capture the contract in a shared storage that everyone who needs it can access.
Equally important is making sure you track the rights and obligations in the contract. You need to make sure you comply with what you have signed up to. This means tracking dates, milestones or potentially contingent events that give rise to rights or obligations on one or both of the parties. Whether you decide to simply use a spreadsheet, use or build something more sophisticated into your existing systems, or invest in a heftier contract management system, will probably largely depend on size and scale.
But contract management is much more than just contract compliance. Contracts are a goldmine of valuable data to leverage, to reduce risk and improve business profitability. Where are you spending the most time negotiating your contracts? Which areas of your contract do you find get most disputed? Can you improve efficiency by changing your approach?
Similarly, this is where you can start tracking your aggregate risk across your portfolio. Parties may spend weeks negotiating a limitations of liability clause, but the real question is how exposed the company is across their whole portfolio. For instance, if there is a supply chain problem or a breach of third party IP, it is critical you can understand what the total exposure of the business is to that event across the portfolio.
Pulling It All Together
We’ve covered a lot in this article. Some key takeaways if you forget everything else:
- Know where all your contracts are.
- Map your processes and identify what you want to fix.
- Have a clear understanding of the risks faced by your business, and make sure that is covered off in your templates and playbooks.
- Have clear processes for what workstreams and contracts go where (ie. business team, legal term, external lawyers, managed legal services).
- Make negotiation as easy as possible, and use tools and processes to spread the work across the team (don’t make the legal team a bottleneck!)
- Don’t forget to mine your data – it’s incredibly valuable
Combining the right processes with the right technologies can make the contracting function as agile as the rest of the business. Once you decide what tools you need, it is important to integrate them into an overall solution. Many of the best-in-class tools above are point solutions, but integrating them together into an efficient overall system is key.
Agile businesses are the masters of constant innovation and adaptation. Much of their success can be driven by the incredibly successful processes, tools and methodologies they have developed within their business. Taking the same mindset to their contracting functions will deliver huge benefits, and enable their contracting function to scale when needed, along with the rest of their business.
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If you would like to learn more about this subject and how Lexical Labs can help, then please see here, and if you would like to book a demo please see here.
[ Artificial Lawyer is proud to bring you this sponsored thought leadership article by Lexical Labs. ]