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Contract management: the importance of looking in the rear view
Rick Teague |
May 31, 2023 |

 18,668 total views

Eight ways to improve legal and compliance risk management

In the 1981 film, “The Cannonball Run”, a driver gets in his Ferrari, yanks the rearview mirror off of the windshield, and throws it away declaring, “What’s behind me is not important!”  While they would never say those words, the behavior of most companies demonstrates that they have precisely this same attitude towards their commercial contracts.  With their teams, policies, processes, and technology investments almost exclusively focused on the “next negotiation”, they fight doggedly over every dot and tiddle during the negotiation process and require painstakingly-detailed approvals for every non-standard term, but as soon as an agreement is finalized it disappears into the abyss of undisciplined behaviors, inadequate technology, and general indifference.

The irony is that focusing technology spend on the next negotiation instead of bringing order and insight to the mountains of executed agreements is completely misguided, and results in poor contract management practices.  New negotiations happen on a human scale.  A simple agreement may only be a couple of pages in length – short enough for someone to read and redline in a few minutes.  Even a complex contract rarely contains more than a couple thousand words.  Executed agreements, on the other hand, exist at a scale that dwarfs human capacity.  A Fortune 100 company may have literally millions of pages and billions of words of executed agreements.  Far too many for people to understand and manage without sophisticated tools and technology – which most do not have.  As a result, companies are not staying on top of and properly managing those millions of pages and billions of words.

Decentralization has only exacerbated the problem

As legal departments have been pressed to do more with less, they have been forced to empower businesspeople to negotiate many of the company’s contracts.  Commercial teams and procurement departments are spread all over the world – and so are their contracts – trapped in departmental ERP or CLM systems, SharePoint sites, and/or, worse yet, individual desktop and laptop computers.  For large customers or suppliers with long-standing relationships, the Master/Base Agreement may have been negotiated by the legal department 10 or even 20 years ago with dozens or even hundreds of subsequent SOWs, schedules, amendments, and addenda negotiated by teams in multiple business units on multiple continents and now scattered, piecemeal, across their systems.  Need to understand your complete set of rights and obligations with that counterparty?  It could take weeks just to track down and gather the pieces – before you can even begin to figure out how they all fit together.

Things are so bad that 80 percent of companies struggle to find their contracts when they need them

Chances are that you are one of them and your executed contracts are a disorganized mess.  Sure, some of your employees can find some of your contracts some of the time.  But that is not good enough.  Because what is in those millions of pages and billions of words really matters!  Your contracts contain some of the most valuable information in your entire company.  Your revenue is governed by those words and those words give you rights that you fought hard for – but how are you making sure you are resetting volume discounts each contract anniversary, and charging as agreed for ad hoc customer requests, and not missing opportunities to increase prices when the contract auto-renews, if the source documents are not easily accessible, in seconds, to whomever needs it wherever and whenever they need it?  The answer is, you’re not! 

Billions of dollars are at stake

Study after study indicates that billions of dollars of revenue is never invoiced – BCG pegs the number at 10 percent of revenue annually – largely because the right to do so is lost in the mountain of contract text.  Similarly, most companies – probably including yours – are unable to fully capitalize on the hard-won terms in their vendor agreements so they are spending billions of dollars more than they should.  The devil is in the details – and those details are simply unmanageable when your employees can’t even find the contract when they need it.

Oh, and the final irony about only focusing on the next agreement?  Not only do your executed agreements contain the details governing 80 percent, 90 percent, or even more of your revenue and procurement spending, they are also the basis for most of your “new” negotiations.  In most large corporations there are relatively few truly greenfield contract negotiations.  Rather, most negotiations are tied in some way to previously executed agreements between the parties.  The first thing a negotiator needs to do to prepare for their “next” negotiation is to understand all that has come before between the two parties – so even in that situation the contracts “rearview mirror” really is important after all.

Author: Rick Teague

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