With the rise of e-signatures and an assist from AI, there's never been a better time to implement a contract management solution, according to ContractWorks' Albert Oaten.
CCBJ: What’s involved in establishing a good contract management solution?
Albert Oaten: It’s really about identifying the problem you’re trying to solve. Finance and department heads want to review vendor expiration and cost reports to eliminate or renegotiate expenses; chief revenue officers and professional services want recurring client revenue reports to ensure retention, identify growth revenue from true ups, or even just to verify that the fees in the contract equal the fees being billed. Legal is typically looking for opportunities to manage cost, but more importantly to review client contracts to evaluate risk in liability and indemnification clauses, as well as to be able to report on compliance so they can pass audits.
The combination of a centralized repository with all contracts along with automated reporting of all expiring or renewing vendor costs provides legal and finance an opportunity to renegotiate, amend and/or terminate to save the company money and mitigate risk.
On the revenue side, automated reporting of expiring client contracts helps the CFO, sales and customer success teams maximize retention, identify upsell opportunities and even renegotiate fees. For instance, healthcare providers focus on insurance payors.
How do contract management programs address corporate compliance requirements?
Compliance can mean different things in different industries. For example, in healthcare, compliance could mean that every one to three years the government may audit each one of their contracts to verify a monitoring component. If you need to prove that all of your vendors or contractors have insurance, you have to be able to run a report to show that is up-to-date. If you need to have business associate agreements (BAAs) in place down the whole supply chain, each one of those BAAs may have requirements about how quickly notification must go out after a breach.
Contract management systems can be critical in helping law departments identify and limit risk in key clauses relating to liability, indemnification or change of control. You can run reports that highlight all the client contracts coming up in the next 90 days, and by reviewing key terms – like “limitation of liability,” “indemnification,” “termination requirements” – the legal staff can validate, prior to renewing those agreements, that the risk is acceptable, or if they need to be amended.
Change of control is a big one too. In some contracts, if a company is sold and there’s a change of control, the contract can be nullified by the client. That may not seem like a big deal at signing, but if you’re a software company being bought out, and your five biggest clients are $3-million-a-year clients, that’s $15 million of revenue that may be at risk for the buyer, leading to a potential loss of millions in valuation.
What are some of the main challenges that customers come to you with regarding contract management?
The number-one challenge is a new general counsel or associate general counsel comes to a company and realizes that there’s no central repository where all the contracts reside.
Second, and equally important, there is no systematic reporting on end dates for vendor or client contracts, and no visibility on the level of risks and consequences that reside in those agreements. The reason why those are of concern to the law department is that they are often considered the responsible department in a company for tracking and managing cost, compliance and risk, and often looked upon to help with client retention and revenue optimization. Not having a repository or reporting can reflect badly on a legal department, as it suggests there are costs that may be occurring that they’re not managing. It means there may be revenue that is either not being collected or is at risk. There could be compliance items that could compromise the business, and there could even be options to enhance revenue opportunities. Without knowing what is in all those contracts, it’s hard for them to perform mitigation action, let alone revenue enhancing support.
How do e-signatures factor into contract management?
E-signatures have taken off for a very clear reason: They accelerate the rate of transactions and reduce time to money. If a public company can save one week in contract time by using e-signature, they can report two percent more GAAP revenue without any increase of cost or personnel. Instead of opening an email, printing an agreement, signing, scanning and uploading it, and sending it back, e-signature takes three seconds: Click date, click signature, click done. That’s it.
E-signature solutions help expedite contract signings for sales, but they don’t automatically provide reporting and data that could be of high value to other parts of the organization.
Contract management solutions help unlock information in contracts that can help other parts of the organization contribute to growth.
For instance, they can help marketers identify which company logos can be used; legal to review renewing client and vendor liability and indemnification clauses for unacceptable risk to the company, or, as is often the case, to identify change of control constraints that could significantly impact the valuation of the company in the future; and compliance run automated reports on all of the BAAs to make sure they’re up-to-date and still in use, or know about all of the associated insurance agreements in place related to a vendor.
When used alongside each other the two tools eliminate the need to scan and upload documents, and may even go as far as making an easy-to-find end date, but unless you are using a contract management solution that includes a built in e-signature tool, that is pretty much all you are getting.
The reason that companies like ContractWorks are choosing to create contract management solutions that include built in, not integrated, e-signature is that it enables automated tagging and reporting so that key information isn’t locked up in a drawer or hidden in some folder, but automatically reported to other parts of an organization – marketing, services, compliance, legal and finance – so they can extract relevant value from contract details to help grow the company and support sales efforts.
Where does artificial intelligence come into play?
A good contract management solution is one that is easy to use and allows you to get up and running right away, with all your contracts accessible to achieve costs savings, optimize revenue, and satisfy compliance and risk mitigation. However, without AI, even an easy to use system can take a user weeks or months to tag all legacy contracts, delaying the ability to effectively report on the information held in your contracts.
The AI fix is that you drop in, say, a few hundred or a few thousand contracts, and the system identifies what type of contracts you have, who the parties are and what the end dates are, in less than 24 hours. Now, all of those contracts can be automatically reported on so you can start reviewing them for more specific things. With AI, you radically reduce the time expense of loading documents, tagging them and so on. That type of speed benefits not just the law department that’s understaffed, but the rest of the company as well.
How can law departments gain buy-in throughout the company to deploy a contract management solution?
They have to say, “We have a problem, and here’s why it affects the company.” Revenue, costs, compliance and risk mitigation aspects affect everyone and the company’s ability to grow profitably. Identify the problem you’re trying to solve and share the consequence and/or benefits the system provides each user, and be sure to select a solution that will require as little training or onboarding time as possible. Resistance to and failure of the project will be proportional to the complexity and time expense of all parties getting up and running on the system.
In terms of the CFO, emphasize that there is no big implementation fee, and the ongoing fees are relatively trivial to the overall business relative to the consequences, risks, and/or revenue opportunities that remain locked up in contracts with no visibility.
Ease of use is really important. If you can say, “We can get this up and running inside of a month, with less than half an hour of everybody’s time,” then you really have something compelling.
Published May 15, 2019.