Kevin van Tonder, Director, Cognia
Is there anything more business-basic than a contract? They’re the ties that bind companies to customers and consultants to clients — mutually-agreed vows that enable the exchange of products and services for money.
No contract, no cash. Simple.
But their importance can also make them a headache. Contracts take time to draft and negotiate. And for legal teams, signing on the dotted line is only the start of a process, not the end. Every agreement needs to be stored, tracked and managed.
That’s why Contract Lifecycle Management (CLM) is so vital to effective legal operations. Done right, it simplifies management of contracts from inception to negotiation, final signature, and beyond. CLM tracks contract expiry or renewal, and increasingly involves analysing the content of contracts to uncover new business opportunities.
In the digital transformation era, cloud-based technology tools define how the CLM function operates. But software can’t solve everything, and the things it can solve become limited if the implementation isn’t handled well.
Vital capabilities, vital considerations
Before taking steps to improve your CLM capability, you must know where your operational weaknesses lie and probe where new business opportunities might be hiding.
Ask, for example, how your legal operating model treats transactional versus strategic contracts. Do you know which contract types drive the most business value? Have you allocated highly skilled resources to manage those, or is the CLM approach un-differentiated? If it’s the latter, you probably have specialist legal teams handling too much low-risk work. In the Onit Enterprise Legal Reputation Report 2022, legal professionals reported that inefficient contract lifecycle management was negatively affecting high value, strategic contracts. Areas most significantly perceived to be impacted by over 40% were deal closure, revenue generation and vendor procurement contracts.
High-value contracts should therefore be the starting point for defining your CLM workflows. Low-value contracts can be handled by more junior members of the team, paralegals, or even outsourced to an external partner with templates and technologies that take out cost without sacrificing quality. One way or another, technology is going to play a role. In 2022, Gartner reported that data capture is a key focus for leading contract management (CLM) vendors. “Approximately 25% currently have capabilities to scan and interpret legacy contracts and third-party paper but they predict that 100% of leading providers will have this capability by 2025.” And that points to the importance of how contract data is handled. The value of digital transformation lies in analytics, automating workflows and creating repeatable processes. You need to structure contract meta-data properly to get these benefits. Otherwise, you’ll be stuck with an expensive garden-variety obligation management system.
For example, you should capture the expected contract value and track it against the current value. That way, you’ll be better able to flag underperforming contracts and review them for issues. This approach to the data structure can also help you identify areas where leakage occurs.
That will build triggers into the CLM system and make it the basis for a feedback loop, informing both the pre-signature phase and the post-signature contract management process. What was once a highly administrative workstream can rapidly become a way to drive improvement and help business teams reap the contract benefits they negotiated so hard to achieve.
Engage your stakeholders
Using CLM to support continuous improvement only works if your legal operating model is business driven. All the relevant stakeholders that legal hopes to partner with will have to be consulted. You need to understand what kinds of insights they want from the legal team, determine what information will drive those insights, and what data points the information will be based on.
All of this will take time and, for many, more commitment than they might have expected. Our experience is that the effort pays off. You’ll lose more value through excessive management time, extended implementation, non-optimised licensing, and low adoption rates than you’ll gain by simply digitising contracts.
The tech might be there, but the data model and processes around it won’t be. Involving stakeholders in the planning process for a new CLM system can also help you identify and avoid departmental siloes and ‘shadow IT’ that can undercut the new system’s value.
We often find situations where an individual department has, for example, quietly opted to run its own contracts, simply using ‘save as’ and making local copies on personal computers each time a new contract is required.
In one instance, hundreds of contracts worth millions of pounds had been created by a rogue department using out-of-date contract language. Key passages relating to GDPR — which had been updated in the CLM system’s library of contract temples — were missing.
Using CLM to make legal operations better
Once you’ve given serious consideration to the people, processes, and data that will underpin your CLM function, you can move on to selecting a contract lifecycle management system. The aim will be to automate contracting workflows in ways that recognise the key stages of the contracting process.
It is about maximising the value of contract data, designing repeatable processes, streamlining workflows, building templates, and creating a ‘single source of truth’ for the entire business.
That’s why we advise our clients to think about legal transformation as a multi-year project with CLM as its lynchpin. At Cognia, we understand how this works. Our multi-disciplinary teams combine consulting and legal expertise to help you define your requirements, streamline your workflows, select the right CLM platform, and configure it for your objectives. Getting off to the right start is key.
We share our insights on the fundamental elements required to effectively improve your CLM capability below and the five key steps to inform technology selection (see Figure 1):
- Understand your contract types
- Analyse where value can be lost or gained in your commercial contracts, considering areas like price escalation, ambiguous discount provisions, scope creep and change orders
- Build a data model that captures legal and commercial information that will drive value-added insights
- Investigate enterprise-level CLM systems to leverage your data model for more effective legal operations
- Build the business case for investing in better legal technology.
Figure 1: Selecting the right Contract Lifecycle Management system
As GCs and Heads of Legal Operations face the challenge of optimising their services, technology can be a catalyst for improving performance and integrating more closely with the business. In that context, improving CLM can strengthen legal’s position as a business partner. But choosing and implementing one needs to be part of a carefully thought-out strategic roadmap that properly engages with key stakeholders. Before embarking on a CLM implementation, you must first understand the corporate culture, your people, the data you want to collect and the change management required. Then you’ll need mature, tried and tested processes in place.
That’s the only way to drive the changes that will be required across people, processes and technology.