It was only a handful of years ago that most companies had no method for organizing their contracts – they lived on servers, individuals’ hard drives, in file cabinets, or email inboxes. Contract lifecycle management (CLM) providers began evangelizing the importance and benefits of pre- and post-signature management of contracts with promises of reduced risk, commercial acceleration, and snappy visuals. As a result, many corporations began the difficult process of digitizing and storing legacy agreements and establishing a process for including new agreements in the CLM system. However, while the presence of agreements in a centralized repository is a necessary first step to wrangling contract intelligence, it will only go so far: to fully utilize the business intelligence contained in contracts, the first necessary step in any initiative is to create and maintain structured data.
Structured data is the end result of taking dense legal prose and translating it into easily understood categories and answers that can be reported and graphed. Benefits of structured data include:
- Understanding Your Rights and Obigations: When structured data is created from the content in your contracts,it becomes possible to organize, search, and analyze the rights and obligations contained in the contracts. This enables your organization to make data-driven decisions about your relationships with your customers and suppliers.
- Enhanced Risk Management and Compliance: Making a proactive decision to create a database of structured contract data enables an organization to strategically use contract intelligence to prepare for predictable, urgent events such as a divesture, regulatory change or data breach.
One benefit of creating a contract repository is the ability to use search functionality to identify specific items of concern within the portfolio of contracts. However, in many instances, the ability to glean contractual information from searching alone is limited for reasons including that: (1) searches return only exact language hits, not conceptual ones; (2) search results provide information on the document-level, not the contract family-level.
The fact that searches return only exact language hits does not pose a problem for issues like finding references in agreements to specifically defined legal terms, such as GDPR (General Data Protection Regulation), since all agreements will use the same language; however, searches are less useful for concepts that may be expressed using a broad variety of terms. For example, it would be extremely difficult to identify subcontracting restrictions through searching alone, since subcontractors and subcontracting can be referred to using many different terms, including subcontractor, independent contractor, offshoring, outsourcing, or even something as anodyne as third parties (e.g. if supplier uses a third party to fulfill its obligations under the agreement…).
The fact that search results are provided on the document level also limits their utility. A document-level search cannot tell you how different documents relate to each other or how language in an amendment can change the meaning of a clause in a master agreement. Locating the renewal clause in an MSA is useless without identifying and integrating a later amendment that made significant changes to that section.
The solution to the limitation inherent in general search to easily access information in your contracts is to create structured data. Structured data is more than just extracting clauses from documents – it involves analyzing those clauses within a contract family (i.e., the MSA and related amendments and addenda). Structured data at the family level enables you to quickly and accurately answer questions about your agreements. For example, creating structured data around assignment clauses enables you to run a report in your CLM to determine your obligations if you wish to assign your contracts to a third party due to a divestiture. Instead of simply regurgitating the dense legal text from the agreement, the structured data provides a simple, reportable answer – consent is required, notice is required, agreement is silent.
Creating structured data around your contracts allows you to both understand your risks and obligations on a macro level and to react to changing circumstances.
Data Breach Prepartion
The prevailing view is that it’s only a question of when, not if, an organization will have a data breach. An important part of preparing for a data breach is to understand the obligations to counterparties when a breach occurs and to be able to access that information quickly. Structured data can facilitate a quick response to a data breach incident. The structured contract data that can help a company respond to a data breach include: (1) the definition of a data breach (e.g. does it involve any security breach or must this customer’s data have been impacted to activate notification requirements); (2) if the customer must be notified of a data breach; (3) how soon the customer must be notified (typically 24 – 72 hours after the breach occurred, making it essential for a company to have this information on hand immediately, as there will not be time to page through thousands of agreements to identify obligations); (4) how the customer must be notified (e.g. email, fax, etc.); and (5) the contact information of the individual who should receive the notice.
Reactive and Proactive Events
The decision to understand the rights and obligations in a company’s contracts is either reactive or proactive. Reactive events include an M&A event, regulatory change, and data breach. Those scenarios are typically expensive and the urgency to answer the questions at hand often precludes using the opportunity to create a strategic digital access. Conversely, making a proactive decision to create a database of structured contract data enables an organization to strategically use contract intelligence to make better business decisions and to prepare for predictable, urgent events that require immediate access to structured contract data.
We urge you to review contracts to create structured data in order to understand your rights and obligations, react quickly to changing circumstances and manage your business for maximum profit.Taking the first step of creating and maintaining structured data creates long term benefits, allowing your organization to make data-driven decisions in the midst of evolving circumstances.
By: Beth Anderson, Director, Contract Solutions at Epiq, has more than 15 years of experience in contract review, abstraction and analysis. She has managed contract reviews in connection with M&A due diligence, financing transactions, and contract management system implementation projects. Beth works with clients to understand their specific business needs and builds targeted processes to provide useful and meaningful data from their universe of contracts.
