Contract Management and the Bottom Line

Lowering Operation Costs

Given today's economic realities, legal departments must operate efficiently and effectively to lower operation costs. To do this, they must identify ways to operate smarter and more profitably through strategic initiatives that cover cost management, client service and information governance, particularly contract lifecycle management.

The predominant standard of contract management is a manual process with no centralized organization. Smaller legal departments engaged with fewer contracts may prefer such a model due to its initial simplicity ' its only price is the value of the time spent managing it, as well as any adverse costs of diverting effort from other areas of business. Many larger departments may have originally used such a minimalistic plan, which then grew more cumbersome as transactions accumulated with time.

As managing contracts evolves into a job of its own, businesses can resort to additional human labor investments. Employees fully dedicated to the process can assist in organization, maintaining and enforcing existing contractual terms, drafting new proposals, and renewing previous agreements. But this also can be costly.

The Benefits of Technology

In an effort to contain costs, managers increasingly have looked to technology. Recent software has enabled contract management to be electronically maintained through a centralized system. Modern contract lifecycle management guides contracts from inception through every stage until renewal. It drastically reduces the need for human input by delegating many tasks to the software, thereby removing the employee's burden of attending to tedious details. These tools free employees to pursue other work while simultaneously managing contracts with a smaller margin of error.

An independent study conducted by the International Association for Contract and Commercial Management (IACC) reveals that organizations can add as much as 9% to their profitability by improving revenue management in the following ways:

• Reducing financial and legal risk by improving contract visibility;
• Enhancing revenue-forecasting capabilities;
• Improving cash flow management;
• Ensuring the accuracy and completeness of financial statements;
• Improving revenue capture and maximizing revenue through audits and performance checks; and
• Augmenting business processes to speed sales and revenue recognition.

The effect of CLM technologies on fiscal management and results may be the differentiator that allows a company to rise above its competitors.

Inefficient Management Costs Time and Money

In many organizations, contracts migrate across divisions, departments and individuals. As contracts move, each department ' and the legal team ' applies its favorite language to the documents. Each stop along the trek becomes a “private island of information,” which makes collaboration difficult, and the contract becomes invisible to most of the organization.

For enterprises that want to grow revenues and compete more successfully, the failure to manage such a critical area of operations efficiently comes at a high price:

• Avoidable costs and misused resources;
• Delayed revenue;
• Missed deadlines;
• Unnecessary errors;
• Lost productivity;
• Reduced time for core activities; and
• Additional risks and liabilities of noncompliance (operational, supplier and regulatory).

Other issues include lengthy negotiations and approval cycles, and revenue leakage from underbilled services.

Uniform Templates and Language

Contract management software provides a hub for document storage, which makes it easy to produce standard language templates that have preapproved language options. The design capabilities of the CLM solution eliminate the need to reinvent the wheel for standard contracts. Simplified language enables the legal team to remove legal jargon and create contracts that are more understandable to staff, clients and customers.

Building a standard library of contract templates and legal clauses makes it easier to train nonlegal employees on the meaning of terms and the proper use. The legal team can elicit the input of the various stakeholders throughout the organization to increase employee “buy-in” and ensure that all departments operate on the same page when it comes to the organization's contract management strategy. An inclusive approach reduces obstacles and helps achieve a balance between business objectives and risk mitigation.

The software also facilitates revisions. Business goals evolve; circumstances change and lawmakers pass new regulations. These and other factors can render preapproved clauses outdated or ineffective, making it necessary to revise the specific language. Contract management software gives the legal department the ability to modify standardized “starting-point” documents and language quickly, without missing a beat. A CLM solution also simplifies the process for performing ongoing evaluations of the standardized language.

Determine When to Send Contracts to Legal

CLM eliminates the unnecessary routing of contracts to the legal department. This ineffective method creates workflow bottlenecks for the legal team and ultimately contributes to errors and delays, which contract management software, with pre-established criteria that determine when contracts should go to legal, can easily eliminate. In addition, CLM software automatically determines whom to route each contract, based on contract and customer type, contract stage and other predetermined elements.

This control feature allows for the assignment of straightforward, low-value, low-risk contracts to non-attorney staff, which frees up attorneys to focus on the most high-value, high-risk contacts.

More Value and Increased Profitability

An effective contract management process provides a central depository for contracts and enables the standardization of format and language. The digital format makes contracts easily accessible and assures that template and language are up-to-date. This results in reduced negotiation and less demand placed on legal teams, which translate into lower costs, increased productivity and greater profitability for the legal function and the company.

Judd Robins is the founder and executive vice president of TekStream Solutions, an Oracle consulting company. This article also appeared in Corporate Counsel, an ALM sister publication of this newsletter.

Vendor contracts, customer agreements, licenses, trademarks, leases, warranties and other contracts represent the most important documents for corporate legal departments. Companies must manage multiple contractual obligations that have continuously grown in number and scope. The globalization of trade and multicurrency business relationships makes contracts even more complex, and with many companies wearing the hats of the supplier, partner and customer simultaneously, the dynamics become ever more convoluted.

The problem for corporate legal departments is that contract lifecycle management (CLM), as currently handled, is manual, slow, inefficient and ineffective. In fact, 57% of legal technology and contract management professionals responding to a Huron Legal poll expressed concern about their company's contract management procedures. The “Huron Legal Contract Management Survey” mirrors the findings of many other studies. See http://tinyurl.com/ncjr5jy.

Many of these otherwise smart and innovative companies have hundreds, if not thousands, of contracts in force. The average Fortune 1000 company has in the range of 20,000 to 40,000 active contracts at any time, according to Forrester Research.

Lowering Operation Costs

Given today's economic realities, legal departments must operate efficiently and effectively to lower operation costs. To do this, they must identify ways to operate smarter and more profitably through strategic initiatives that cover cost management, client service and information governance, particularly contract lifecycle management.

The predominant standard of contract management is a manual process with no centralized organization. Smaller legal departments engaged with fewer contracts may prefer such a model due to its initial simplicity ' its only price is the value of the time spent managing it, as well as any adverse costs of diverting effort from other areas of business. Many larger departments may have originally used such a minimalistic plan, which then grew more cumbersome as transactions accumulated with time.

As managing contracts evolves into a job of its own, businesses can resort to additional human labor investments. Employees fully dedicated to the process can assist in organization, maintaining and enforcing existing contractual terms, drafting new proposals, and renewing previous agreements. But this also can be costly.

The Benefits of Technology

In an effort to contain costs, managers increasingly have looked to technology. Recent software has enabled contract management to be electronically maintained through a centralized system. Modern contract lifecycle management guides contracts from inception through every stage until renewal. It drastically reduces the need for human input by delegating many tasks to the software, thereby removing the employee's burden of attending to tedious details. These tools free employees to pursue other work while simultaneously managing contracts with a smaller margin of error.

An independent study conducted by the International Association for Contract and Commercial Management (IACC) reveals that organizations can add as much as 9% to their profitability by improving revenue management in the following ways:

• Reducing financial and legal risk by improving contract visibility;
• Enhancing revenue-forecasting capabilities;
• Improving cash flow management;
• Ensuring the accuracy and completeness of financial statements;
• Improving revenue capture and maximizing revenue through audits and performance checks; and
• Augmenting business processes to speed sales and revenue recognition.

The effect of CLM technologies on fiscal management and results may be the differentiator that allows a company to rise above its competitors.

Inefficient Management Costs Time and Money

In many organizations, contracts migrate across divisions, departments and individuals. As contracts move, each department ' and the legal team ' applies its favorite language to the documents. Each stop along the trek becomes a “private island of information,” which makes collaboration difficult, and the contract becomes invisible to most of the organization.

For enterprises that want to grow revenues and compete more successfully, the failure to manage such a critical area of operations efficiently comes at a high price:

• Avoidable costs and misused resources;
• Delayed revenue;
• Missed deadlines;
• Unnecessary errors;
• Lost productivity;
• Reduced time for core activities; and
• Additional risks and liabilities of noncompliance (operational, supplier and regulatory).

Other issues include lengthy negotiations and approval cycles, and revenue leakage from underbilled services.

Uniform Templates and Language

Contract management software provides a hub for document storage, which makes it easy to produce standard language templates that have preapproved language options. The design capabilities of the CLM solution eliminate the need to reinvent the wheel for standard contracts. Simplified language enables the legal team to remove legal jargon and create contracts that are more understandable to staff, clients and customers.

Building a standard library of contract templates and legal clauses makes it easier to train nonlegal employees on the meaning of terms and the proper use. The legal team can elicit the input of the various stakeholders throughout the organization to increase employee “buy-in” and ensure that all departments operate on the same page when it comes to the organization's contract management strategy. An inclusive approach reduces obstacles and helps achieve a balance between business objectives and risk mitigation.

The software also facilitates revisions. Business goals evolve; circumstances change and lawmakers pass new regulations. These and other factors can render preapproved clauses outdated or ineffective, making it necessary to revise the specific language. Contract management software gives the legal department the ability to modify standardized “starting-point” documents and language quickly, without missing a beat. A CLM solution also simplifies the process for performing ongoing evaluations of the standardized language.

Determine When to Send Contracts to Legal

CLM eliminates the unnecessary routing of contracts to the legal department. This ineffective method creates workflow bottlenecks for the legal team and ultimately contributes to errors and delays, which contract management software, with pre-established criteria that determine when contracts should go to legal, can easily eliminate. In addition, CLM software automatically determines whom to route each contract, based on contract and customer type, contract stage and other predetermined elements.

This control feature allows for the assignment of straightforward, low-value, low-risk contracts to non-attorney staff, which frees up attorneys to focus on the most high-value, high-risk contacts.

More Value and Increased Profitability

An effective contract management process provides a central depository for contracts and enables the standardization of format and language. The digital format makes contracts easily accessible and assures that template and language are up-to-date. This results in reduced negotiation and less demand placed on legal teams, which translate into lower costs, increased productivity and greater profitability for the legal function and the company.

Judd Robins is the founder and executive vice president of TekStream Solutions, an Oracle consulting company. This article also appeared in Corporate Counsel, an ALM sister publication of this newsletter.