There has long been a tension between business units and legal departments over contracting. In many companies this tension has resulted in a “live and let live” environment, since the companies don’t have much contract-driven litigation and haven’t been slapped with sanctions.
However, this seemingly benign tension has flared into something more intense in some companies, and general counsel are finding that looking the other way is no longer an option. Audit committees of boards (especially at public companies subject to Public Company Accounting Oversight Board standards) are asking for audits of their companies’ contracting practices. Here are some of the circumstances that have prompted action:
- At a board meeting of a publicly traded Fortune 100 company, the GC and the CFO of a company were asked to succinctly state the “total value of all obligations contained in active agreements.” No one on the management team could answer the question.
- Elsewhere, a company’s management could not represent an overall “risk” level across all contracts.
- At the same company, during the pursuit of a potential acquisition, key common customer agreements could not be located—at least not fast enough to appease anxieties of the target company. The deal fell apart.
- When these agreements were eventually located, some of them were not even fully executed or had been executed by individuals without authority to bind the company.
- At another company, commercial groups in the company lamented the “delay in response” due to legal department involvement in contracting, and proceeded to exclude the legal department from the contract review cycle. This resulted in the execution of agreements that went significantly outside of the bounds of risk tolerance at the company—especially in areas such as indemnity and liability.
The situations above occur on a daily basis at a surprisingly large number of companies, significantly increasing organizational risk. In addition to risk, legal department professionals—especially senior lawyers—are spending too much time creating agreements from whole cloth or reviewing the same clauses in agreements on a regular basis. This not only has impacted overall legal spend, it also has contributed to lower morale in in-house departments due to the “nonstrategic” nature of the work.
What’s gone wrong? Management of the contract processes the company uses is decentralized. Procurement departments “own” buy-side indirect purchasing. Manufacturing groups own direct materials purchasing. Commercial units own sell-side contracts. Everyone owns confidentiality agreements. Not only does this federated model of ownership result in an inability to implement controls, it is especially pernicious in an environment where M&A activity in many industries is high and deals need to be put together quickly.
What’s the solution? Corporate boards and executive management are increasingly looking to the general counsel to take charge of contract management. This is a natural phenomenon due to the fact that the GC is the adjudicator of risk-value tradeoffs such as how heavy a hand is necessary to manage risk yet still enable business to be conducted efficiently. In addition, general counsel are well equipped to measure overall exposure created through contracts and establish a barometer for risk tolerance that can be adopted by the company at large.
Legal departments are increasingly involved in (and often are driving) technology decisions around enterprise document management, communications and correspondence (email, instant messaging, etc.), records management, data storage and archiving. Much of this is driven by the need for good discovery practices as well as fluid information governance—disciplines that have enterprise-wide impact. These same skills are relevant for contract management, also an enterprise-wide discipline, in which enabling technology—generally called Contract Lifecycle Management (CLM) —is key to helping corral contracting practices.
Here are 10 strategies that general counsel can use to increase the effectiveness of contract management:
1. General counsel need to acknowledge that they (should) have a point of view in every phase of contracting. Initiating a contract requires translating business discussions into a contract document to memorialize discussions. Lawyers are key to determining the right document to use. Negotiation typically centers on price, terms, liability, indemnity and remedies. Lawyers are key adjudicators of these items. Contract execution is key because without a fully signed agreement, there is no actual contract. Proper contract storage enables ongoing obligation management. The legal department should not apologize about stepping up to own this process.
2. Explore the implementation of a contract management business process, enabled by workflow and repository technology. Technology is not an elixir but can certainly put automated controls in place to facilitate approvals and bring visibility into new contracts.
3. Harvest lower-hanging fruit with agility. Execute a “sweep” of all executed agreements in the company that can be located. Then digitize the (active and material) paper documents, identify key metadata elements to be extracted from these agreements and store them in a simple, searchable repository. The value of “knowing where they are” is immeasurable when trying to scope the fury of the untamed beast.
4. Go through a quick exercise of “contract demographics.” How many different contract types exist (buy- and sell-side)? What is the approximate number of each contract type executed on a monthly basis? How many contracts are driven off a legal department-approved template (like nondisclosure agreements) versus ones that are sourced from the hard drives of nonlawyer business managers? Where do the in-house lawyers spend most of their contracting support time?
5. Present the “state of the contracting state,” and socialize the pain to the management team and the board in order to win their support.
6. Build a good relationship with procurement. This group is at the center of vendor management processes, which often represent the largest contract volume in companies. This group often has operational skills around contract administration, plus technology knowledge that is invaluable in managing an overall contracting process.
7. Increase knowledge of sales processes. What is prompting commercial groups to enter into contracts with counter-parties without (appropriate) legal review?
8. Focus on business impact. If the general counsel can shorten the cycle time for executing commercial contracts, thereby shortening the time to revenue, the chance of garnering support for controlling contract management will be much greater.
9. Embrace vendors as knowledgeable professional colleagues. These service and technology providers know where the bodies are buried in peer group companies. They will share their knowledge unabashedly as a guide for a company’s own approach.
10. Talk to peers. General counsel in almost every company have contract management on their minds. Some have made significant strides in this area, using some or all of the strategies outlined above. Learn from them. They are happy to share.
Contract management is a foundational tool for many companies. General counsel are recognizing the opportunities controlling contracts affords for decreasing organizational risk and also for contributing to the company’s revenue by making commercial processes more efficient.
Prashant Dubey is president and CEO of The Sumati Group, an IT-enabled services firm working exclusively with the general counsel to support business processes such at contract management.