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“Disagreements over acceptance or delivery are the number one cause of contractual claims and disputes. So it is not surprising that the parties to a contract focus so strongly on the question of who will be liable for the consequences of failure.” So says the opening statement of the International Association of Contract and Commercial Management’s (IACCM) report “2011 Top Terms in Negotiation”.
Each year the IACCM conduct a survey to establish the most frequently negotiated terms and conditions of contracts. For many years, the top three have consistently been:
- Limitation of Liability
- Price/Charge/Price Changes
Now this raises a question – if so much effort is placed on these three elements of a contract, then surely these must be important to an organisation? Why else would they expend the effort to negotiate the terms into the contract to begin with? But therein lies a problem – perhaps there’s a need to change behaviours going forward, but what about the hundreds, maybe thousands or even tens of thousands of contracts that are already in place?
Does any organisation truly have control over these top terms for contracts that have perhaps been in place for many years? Contracts that have renewed many times and may have been the source of many a price hike!
Are such organisations getting a fair deal, at least in terms of the contracts that they fought so hard to negotiate in the first place? Probably not is the common answer that we see. If you don’t know what’s in the contract, or even how many contracts are still effective and binding, how can you possibly know if the terms you sweated to enshrine are working for your benefit?
Dolphin Software specialises in locating, analysing and reporting on contractually binding documents by first ensuring, through a contract discovery process, that all contractual terms are fully understood. For example in M&A environments, the top two terms identified by the IACCM, were also among the top terms that our clients requested in our add on M&A rule pack. (cDiscovery Metadata M&A Rule Pack) Make sure you understand the entire contract landscape of your organisation.
The full report, “2011 Top Terms in Negotiation”, is published by IACCM (www.iaccm.com).
The IACCM study was undertaken in the period December 2010 – April 2011 and the results are based on input from 1,123 organisations, representing more than 8,000 negotiators. Individual contributors came from procurement, legal and sales contracting functions in more than 60 countries. Input typically represents large international corporations.
A single source of the truth – If you are not in control of your contracts, you are not in control of your futureFebruary 24, 2012
As information is the most important asset for many industries and organisations, the race to manage information, in a proactive way has never been more challenging. The biggest challenge of all emanates from the sheer volume of information inside any organisation today.
Over recent years, contract management processes within global enterprises have become increasingly important and more complex. Many drivers have contributed to this change, such as increased business-to-business transactions and the need to lower supplier risk, due to potential corporate litigation and penalties for breaching industry regulations.
A major challenge for most is poor visibility into contracts and a lack of tactical and strategic intelligence, combined with the fact that contracts today typically do not reside in a central repository. More likely these contracts reside in multiple locations, in both digital and hard copy files, in paper archives, and even in some cases, outside the organisation’s physical boundaries.
Contract visibility creates a paradox for most organisations. On the one hand this requires management and monitoring of access and protection to ensure accuracy of data. To ensure integrity, contracts need to be locked down from a security perspective. But, on the other hand, contracts must be accessible to support the business and to make sure the contracts are adhered to, with visibility both inside the organisation, and at times, also for parties outside the organisation.
It is not hard to imagine and appreciate the challenges this could create in large or midsize organisations, with thousands of contracts spread out across major divisions/departments, over geographically disparate locations. The issue of contract visibility, security and risk management is beyond the scope of management by humans, with only fragmented manual processes to support them.
Contrary to the famous saying, “What you don’t know can’t hurt you”, this approach to performance management leads to “under-the-radar” problems, hidden costs and liabilities, which can remain unobserved within an organisation for years. These time bombs can have major impacts in reducing profitability; by increasing cost through inefficiency and leaving the organisation open for unsuspected disputes or litigation.
The picture doesn’t need to be so dark, there is hope and help for all. The Aberdeen Group has in a recent customer study http://www.seal-software.com/aberdeen_group_press_release.php shown what Best-in-Class organisations do compared to the laggards. The study outlines some very pragmatic and straightforward actions that in most cases are readily achievable and provide a rapid return on investment (ROI).
Once an organisation has implemented a contract life cycle management (CLM) system, that provides both total transparency and visibility to contracts and their key metadata, together with some well defined processes for review and approval of contracts, you have created a Single Source of the Truth!
Right now, most organizations are trying to finalize budgets and plans for 2012 and it’s more challenging than ever. These times of financial turmoil and uncertainty put unprecedented pressure on revenue planning, cost-control and investment during 2012.
Critical planning assumptions will be based on the judgment of which contracts can bring in revenue and what cost has been contracted already.
Knowing and understanding all of your contracts is vital to your organisation being able to plan proactively and accurately.
A monumental effort goes into creating contracts and negotiating favorable terms and conditions; without systematic controls in place much of this negotiated advantage is squandered.
Budget and planning are critical to your business and yet many companies still lose control of their contracts and pay the price. The objective of tightly controlled budgets and controls is to put the business in the driving seat;. the worst scenario is to discover an unavoidable contracted cost that has not been included in the new budget. I think we’ve all been there.
Can you answer the following questions?
- Do you have visibility of all contracted costs?
- Which customers have the right to terminate their contracts this year?
- Which supplier contracts are due for renewal; can you terminate or re-negotiate?
Poor contract visibility creates lack of tactical and strategic intelligence
Contracts today typically don’t reside in a central repository and are not accessed via formal retrieval procedures. More likely, they reside in multiple locations, in both digital and hard copy, often outside the companies’ physical boundaries.
Contract management creates a paradox for most organizations. On the one hand, contracts must be accessible to ensure data accuracy and integrity, contractual compliance and monitoring, with the flexibility for the contract owners to make revisions, addendums, measure contract performance and support internal and external audits. On the other hand,data protection, contract access monitoring and security is of paramount importance.
Large and midsize organizations have thousands of contracts spread across countries, divisions and departments. It’s not hard to imagine the scale of the challenge in pulling together the relevant contract information that proactive business planning requires.
Resolving the issues of contract visibility, security and risk management with fragmented manual processes is a recipe for failure.
Ineffective monitoring, reporting and management of compliance
Most companies have not implemented a system to monitor contracts from a compliance and financial perspective. The lack of such a system typically results in rear-view monitoring and ‘brushfire management’ with little chance of avoiding increased operational cost and risk as consequence of non-compliance.
Inadequate analysis and follow-up of contract performance
“What you don’t know can’t hurt you,” might be a successful strategy for your personal life, but in business it’s a strategy for going out of business! This haphazard approach to performance management leads to under-the-radar problems of hidden costs and liabilities that can remain undetected within a company for years. These time bombs can have a crippling effect by reducing profitability, increasing cost through inefficiency and leaving the company exposed to unexpected disputes and litigations.
So how do we avoid these problems and address the challenges surrounding contracts?
“What you can’t measure, you can’t manage.”
This classic performance management quote is the corner stone of a proactive contract management solution. While some contracts may still be simple many that are pivotal to the day to day running of the business are multidimensional. These complex contracts have tremendous impact on the bottom line and a company’s competitive position in its industry. Proactively managing contracts requires a system with the following key functionality:
- Discover: Automated discovery of existing contracts currently in both paper and digital form. Search for key terms and load into contract management system.
- Store: Central secure searchable electronic repository for all contracts
- Report: Sophisticated management reports and alerts connected to electronic calendars.
The above is a minimum requirement for you to be in control of your budget and destiny during a challenging 2012.
To learn more about our unique and market leading solution of Contract Discovery and how it can help you within a couple of days, take a look at our online demo.
We are delighted to invite guest editor, Ian Furlong who has extensive experience in managing contracts as part of major program project management with Intel. Ian has recently written a white paper outlining three ways in which contract management technology solutions can add value to complex project management. This article summarizes the key ways in which Contract Management software solutions, like Dolphin Contract Manager, can help major program managers to maximize the value that can be extracted from long term contracted relationships.
In the contract management world we sometimes overlook how managers responsible for project delivery engage with contracts. After all Project Managers govern work with budgets as big as the turnover of a medium size corporation and the contracts are the fabric of what needs to be done.
In this white paper we take a visionary look at the interaction of Project Mangers and their project contract portfolios, in particular three ways where we believe Contract Lifecycle Management software can help deliver business value.
At the highest-level contract management software helps to master the complexity both of managing multiple contracts for a single business relationship as well as in building a portfolio of sub-contractors to deliver the work. The ability to shine a light on the interdependencies of these relationships is important in reducing the risk associated with interrupting the flow of the project once work has started.
Looking within the contract documents themselves we see Contract Lifecycle Management software as a means to document unstructured as well as structured obligations. This rich picture of obligations gives the project team greater leverage in its exchanges with contractors at all touch points but particularly when renegotiation of the contracts takes place.
And finally we look at the different management perspectives on the contract documents and how Contract Lifecycle Management software can help project team members to communicate more effectively with one another and with project support functions.
Dolphin Software wrote this white paper together with Ian Furlong a co-founder of Oxford Major Programmes Ltd. Oxford Major Programmes, a new company specializing in establishing ways of improving the management of the largest projects and programmes, has been established by a group of experienced industry leaders participating in the Masters in Major Programme Management at the Oxford University Said Business School.
A free copy of Ian Furlong’s white paper: Three ways contract management technology can add value to complex project management can be downloaded at: http://www.dolphin-software.com/downloads_ian_dl.htm
The following article was recently published in Business Computing World Magazine: http://tinyurl.com/3hvke4y
We may not realise it, but contracts help to drive and shape pretty much every business: Gartner estimates that between 60-80 per cent of all business transactions are governed by contracts or agreements in one form or another, particularly across finance, IT, legal dept, purchasing, sales, operations and HR. So, whether we are aware of it or not, contractual agreements are an important part of organisation’s underpinning structure.
And contracts aren’t just about ‘laying down the law’ with third parties and employees: on a more positive note, they provide the framework for how we work with people and other organisations, they provide the rules and guidelines for obligations so that everyone should be clear what is expected of them. And when managed properly, contracts can even help organisations to reduce costs and improve profitability, as well of course as mitigating risk.
So if contract management is so important, why hasn’t everyone been doing it for years? The problem is that traditionally, most contracts are created by individuals or departments, with no single central ownership or control. Forrester Research reckons that contracts take 3.4 weeks to create on average – not surprisingly, considering that they so often rely on unwieldy email communications or in many cases, snail mail and fax. The legal or procurement function will probably only get involved if a non-standard requirement or problem arises.
Once created, contracts are stored in multiple locations and formats – electronic and paper-based- making them hard to centralize and find again. Faulker estimates that 10 per cent of all contracts are actually lost.
Does this matter? Yes, because lack of cohesive contract management can lead to problems and missed opportunities. Here are some examples: automatic renewal of contracts can mean being tied into unwanted contracts; lack of foresight meaning that the chance to re-negotiate better terms were lost; lack of compliance or regulatory breaches, not to mention expensive litigation. Indeed, Fulbright & Jarowski has estimated that 60 per cent of corporate litigation in the USA and UK is caused by contract breaches.
Get it right and contract management has multiple benefits. Again, some examples help to demonstrate this: observing an early repayment clause leading to a discount; enterprise-wide favourable terms with the same supplier; only paying invoices on goods and services actually received.
Yet this situation is changing fast, as companies increasingly realise the importance of management contracts, as well as the advent of contract lifecycle management systems, a market sector that Forrester Research says is growing at 23 per cent per annum. Numerous vendors have now entered the fray, with systems on offer that range from simple cloud-based sytems for SMEs through to large solutions based on Microsoft SharePoint, which now adopted – or in the process of being adopted – by over 90% of large organizations worldwide.
Different vendors (and there are quite a few now) offer different feature sets, but a comprehensive solution might include: A contract clause tracker; compliance monitoring & regulatory requirements; automated alerts; tracking of price rebates; reporting; contract negotiation workspaces; workflow and reporting tools; author workspaces; contract drafting and storage; tools that support collaboration on contract with external parties.
The latest generation of contract lifecycle management systems also include e-discovery of legacy contracts. This is an important point, because while it is tempting to rush into implementing a contract lifecycle management system for all new contracts, unless existing contractual milestones and obligations are included, then an organization does not have the full picture.
Research shows that around 80% of companies admit to not having full knowledge of all their legacy contracts, yet considering that contracts many last for many years, then it is reasonable to assume that a large organization will have thousands of legacy documents. (I’ve recently helped a media organisation audit 30,000 contracts and their situation is certainly not unusual).
Who owns contracts? The organizational split
All well and good, but who owns all this stuff? Well, as I said earlier, contracts are traditionally very dispersed throughout an organization. However, the advent of contract management systems gives companies the means by which to remedy this and in theory, to everyone’s benefit. What do I mean? Well, if you were in charge of all legal affairs – perhaps you have the title of company secretary or general counsel – you’d be able to see the advantages of having overall visibility of all contractual obligations. After all, it’s your job. But you’d probably be worried about opening the floodgates.
The benefit of a contract lifecycle management system is that it allows individuals to still retain control over creation of a contract, as well as management of resulting milestones and obligations. But you, as the legal professional, would be able to keep track of status and through system alerts, be made aware of any impending problems. For instance, a particularly enthusiastic sales person may be able to agree to terms that are not appropriate.
Similarly, if you are the sales person (or the procurement officer, or the IT director, or the HR manager) you can see the commercial and performance benefits of contract management, but aren’t too happy about the idea of losing control to the legal department. Again, contract management lifecycle systems mean that you are still in charge of creating the contract, but you know the legal expertise is on hand if required.
Let’s also not forget the fact that many organizations spend huge amounts of money with third party legal firms. By automating much of the contract creation process – for instance, standard clauses and templates – then this area of expenditure can potentially be reduced.
So what should companies be looking out for when implementing contract management and looking for a system that fits their needs? Here are a couple of ‘best practice’ suggestions:
- Find out what already exists – without full visibility of all existing contracts, then implementing any contract management system is only addressing part of the picture. Invest in a contract audit or choose a system that has an e-discovery element that can automatically locate legacy contracts and extract milestone and obligation data.
- Assign roles and responsibilities – technology can only do so much. Since contracts have rarely had a single point of overall ownership, this is uncharted territory for many organisations. Regardless of where they sit in the organisation, the best contract gatekeepers are people who understand that contract negotiation is a ‘people’ process. Get these champions on board and think about creating cross-function working groups to help facilitate the adoption of contract management across the organisation. After all, contract management processes and systems are going to touch on most departments in one way or another.
- Find a system that suits your organisation – if you are a small one-man band, then a simple cloud-based system will probably fit your needs. But if you have potentially thousands of contracts stored in multiple formats, locations and systems, then obviously you need a system that will scale, but ideally one that will sit on top of existing IT infrastructure, rather than adding an additional level of complexity or investment. For instance, if you are using Microsoft SharePoint, then there are various SharePoint-based contract management solutions now available. Also consider the usability of the system for staff without legal or IT expertise: are there management dashboards that are easy to use? What about reporting tools? Can the system link with existing organisational KPIs? Will it integrate with other systems?