Contracts are the lifeblood of businesses. They’re also sucking the life out of businesses.
Large corporations are swimming in a sea of contracts. Walmart, for example, has contracts with more than 100,000 suppliers globally. Proctor & Gamble has tens of thousands of partners they work with on a daily basis. Meanwhile, a typical Fortune 1000 company maintains 20,000 to 40,000 contracts at any given time. Even small to mid-size companies rely on a strong partner ecosystem to expand their reach into important market segments.
The responsibility for first creating and then managing these contracts is, increasingly, landing with the companies’ corporate legal departments (CLDs). Essentially a business unit in and of itself, CLDs are comprised of teams of in-house counselors who handle an organization’s legal matters.
Yet, as a business unit, CLDs are being asked to do much more than just handle legal issues. They’re responsible for managing costs and efficiencies while also driving corporate value. This means the CLD likely needs or has its own operations team.
How can CLDs achieve these legal and business goals while creating and juggling thousands of contracts? They can’t. At least, not without changing their approach to contract management.
Contracts: The enemy of efficiency?
Make no mistake: a change is certainly warranted. The antiquated contract process in place at many companies undermines efficiency. Managing contracts throughout their lifecycle—from initial development and review through expiration, renewal and assessment of effectiveness—eats up a tremendous number of hours both from legal counsel and operations staff. This is time that could be spent doing more valuable work.
Consider that the average contract takes 2.5 hours of time just for an attorney to create and review. That (likely conservative) estimate may not seem like much—but extrapolate it to 50,000 - 100,000 contracts and the problem is evident. That’s potentially hundreds of thousands of hours spent creating, reviewing and approving contracts! Not to mention managing them for compliance over their lifetime.
What’s worse, all of this time is costing organizations considerable money. The average cost of creating a contract of a medium level of complexity is over $20,000, up about 40% over the past several years.
Contracts have to get done, yet doing so successfully requires a well-staffed CLD. Many companies don’t have that luxury. Instead, they must minimize administrative costs, and they certainly can’t increase their budgets.
Hear that bell ringing? That’s the death knell of inefficiency. To stop it, CLDs must prioritize developing a strategic, streamlined approach to contract creation and management that allows the organization to be the high-performing business units they’re expected to be. This means upgrading their contract management processes.
Upgrading the contract creation and management process
An old-school contract management process can be extremely labor-intensive. It’s not unusual for teams to rely on spreadsheets, emails, and even paper to track and share contract status. Many CLDs do not have a centralized repository for completed contracts or a defined process that is applied to each new contract or renewal. Others lack a clear understanding of the obligations contained in these contracts. Manual, non-standardized processes for contract management add to the hours spent and increase the potential for errors and security risks.
As with many manual processes, technology alternatives exist to help. Instead of shuffling papers and sending emails, CLDs should be looking for ways to automate, standardize, and optimize the contract management process from start to finish. (Full disclosure: Wolters Kluwer ELM Solutions develops one such solution.)
Ideally, CLDs should have the ability to manage all contracts from a single, centralized location. From here, stakeholders can track the status of their contracts, manage workflows processes, search for and retrieve contracts, receive information on impending renewals, and more. Time that would otherwise have been spent reviewing and managing contracts can now be applied to other business initiatives.
Making contract management smarter
But CLDs can do more than just increase efficiency; they can make the entire contract management process smarter by automatically applying their organizations’ unique business rules. Teams can set up workflow processes to automatically adjust contracts based on the changing needs of their businesses. This alleviates the need for a “hands-on” approach to monitoring workflow every step of the way.
Workflow process improvements can include the integration of the contract management system with matter management, which is the process in which legal issues and their related data such as type of legal work, attorneys involved , budgets, and invoices, are tracked and reported on. This connects the data around contracts, legal matters and other work to ensure full visibility into the impact and outcome of those legal matters, which can result in better business decisions about future legal matters.
Contracts themselves are also becoming smarter, and you should be aware of what is on the horizon. Soon, we’ll see artificial intelligence and machine learning become more integrated into the contract management process. Some corporations have already successfully used AI to analyze their contracts and provide them with actionable recommendations on how to create, better manage, assess compliance and risk, and analyze value from those contracts.
For example, CLDs and law firms often create new contracts based on similar ones they’ve worked on before. But AI can be used to apply templated language to contracts based on the legal approach that has worked most successfully in the past for similar types of contracts and legal matters. It’s a way of putting data to work for your legal department—just like your company is likely doing throughout the organization.
Cutting down on the chaos
According to Gartner, 60% of organizations now work with more than 1,000 third parties. Undoubtedly that percentage will continue to grow—which means the number of contracts that CLDs need to manage will expand, too. That means there’s no time like the present to get a handle on contract chaos.
By automating and optimizing contract management, CLDs can save time, reduce risk, add value, and make smarter decisions to help their businesses grow and meet their strategic goals. In short, they can bring order to the chaos.