Kevin van Tonder, Director, Cognia
Commercial contract management requires a joined up, end-to-end process that addresses the needs of multiple business stakeholders. Some industries and companies focus on maintaining, or even creating, business value through effective post-contract management – many do not.
Organisations and legal teams should manage post-award contract processes to identify and reduce revenue and spend leakage post-signature – both of which significantly erode business value. Legal teams, with greater involvement at the strategic and commercial levels of the organisation, can translate effective post-contract management directly to the bottom line of the business – in most organisations, addressing contract leakage represents an opportunity of 1-8% of revenue.
Commercial contract management in an organisation forms an integral part of two business-critical end-to-end processes. These are the opportunity-to-cash (sales) process and the source-to-pay (sourcing and procurement) process.
Complexity and Accountability
Within these two critical business processes there are multiple stakeholders each with their own interests and priorities. These different interests and priorities can add complexity, increase tensions, and create an opportunity for misalignment at the strategic level and throughout the process.
The temptation is for in-house legal teams to only focus on their perceived traditional role – the review of the legal terms and conditions in the contract.
Against this backdrop, contract lifecycle management offers opportunities to gain or lose value at multiple stages but all too often the legal focus is only on the pre-contract phase. The handover from the negotiation team to the delivery/fulfilment/contract management team may not properly highlight “must watch” provisions or capture critical nuances of the negotiation or contract. Accountability for achieving the provisions of the contract is frequently diluted or unclear.
Compounding these issues, there is simply not enough time or capacity in the legal team to do a proper job post-contract. Inefficient processes, lack of technology and/or too few lawyers mean that the focus is lost.
We should be clear. Any organisation not proactively addressing post-contract management in a meaningful and systematic way is essentially eroding shareholder value. For organisations with relatively mature commercial contracting processes it can be as much as 1% of revenue. Where contracting processes are less mature this erosion might be 8%.
Legal Teams Can Capture Business Value and Enable Business Growth
So how can legal functions set themselves up to create value during the entire contract lifecycle; what do they need to do to be more proactive in creating this value?
The answer lies in the fact that the legal function understands all the complexities of contracting. It is, therefore, best placed to reconcile the competing interests and tensions created by the various stakeholders within the businesses across the entire end-to-end process. This includes both the pre-signature AND post-signature phases of the contracting process.
So what needs to happen?
- Legal teams need to recognise the importance of post-contract management and organise and assign resources to deliver effective cradle to grave contract lifecycle management. This lifecycle management must employ a body of skills, knowledge, processes, and technology which are responsive to shifting demands and requirements.
But in the absence of unlimited budgets, we must also do things smarter.
- Pre-signature contract management can benefit from improved CLM technology, standardisation, automation, optimised processes, and alternative resourcing models to free in-house resources and meet shifting capacity demands. In fact, effective CLM systems and processes are a pre-condition to getting this right …. and of course, they must be digitised to enable easy access and review ‘intelligence’ captured by the business. Pre-signature contract management also needs to be able to draw on a database of best practice and past learnings.
- The whole pre-contract legal process, its data and technology needs to be designed with post-contract management in mind. Even if lawyers are unable to stay with a contract across its lifecycle, the understanding and “intelligence” of the pre-contract lawyers must be captured and secured for the post-contract phase.
- Post-signature contract management is a bit more complex making it less suitable for ‘jelly mould’ solutions. It must reflect the specific needs of an organisation, its industry, its commercial value chain and culture. In all cases however, it requires a systematic process that considers people, process, and technology, not only within the legal team but across the entire organisation. The aim is to build a high performance system where lawyers leverage data, technology and best-practice processes to improve efficiency and throughput.
- All contracts must have owners to ensure accountability. Key performance indicators need to be deployed and tracked in the post-contract phase so that under (and over) performance can be identified; fixes deployed; and lessons learned and shared with pre-contract teams to improve processes.
Success is underpinned by a solid practical understanding of the commercial drivers and operations of the business by the legal team. The legal team should have a proactive relationship with all commercial contracting business stakeholders. Their support will be critical during the post-signature process, especially when it comes to identifying, preventing, and recovering leakage. A structured post-signature process needs to be developed which encourages policy and process discipline and addresses contract ownership and performance accountability.
Rapid Time to Value
In many cases, implementing effective post-signature contract systems – supported by efficient pre-signature technology and processes – can offer a rapid time to value with returns on investment on 24-36 months.
In most organisations addressing contract leakage represents an opportunity of 1-8% of revenue. Perhaps more important, it transforms legal teams from “gate-keepers” to true enablers of business value and business growth. By deploying a truly digitised, data-driven contract management system legal teams can also establish a foundation to address another major business issue – the identification and management of risk.
Cognia can help legal teams move their contract lifecycle management up the maturity curve by providing:
- Proven expertise in designing an end-to-end pre- and post-signature contract management process including the transformation and change needed across an organisation to address the ‘value leakage’ opportunity.
- Flexible, agile sourcing solutions to add scalable capacity that is responsive to changing demand and free critical in-house legal resources to focus on realising business value.
- Process and standardisation skills, including the CLM technology needed to move pre-signature contract management up the maturity scale; and
- Real, post-signature contract management process and tool development to help identify, prevent or recover leakage.
Kevin van Tonder, a Director at Cognia, helps organisations to develop future-fit, business aligned legal teams.
