Red paper
Signed, sealed and delivered –
how acting now to manage your contracts
breeds benefits for the future
Signed, sealed and delivered –
how acting now to manage your contracts breeds benefits for the future
Recent research by LexisNexis and the CLO Network shows that contract risk is at the top of the agenda for UK GCs, with 75% of those
interviewed putting contracts in their top three areas of risk and 37% planning contract management initiatives over the next 12 months.1
An estimated 80% of business-to-business transactions are underpinned by legally binding contracts and agreements. Though many
of these contracts contain conditions, commitments and milestones that need to be tracked and managed over the contract’s life to
maximise business benefits and minimise risks, many organisations fail to actively manage these contracts. Instead, they are filed away
until either a problem arises or the contract expires.
So why change now? There are three main reasons:
- Risk
- Regulation
- Revenue
The impact of contract risk
Failure to monitor and act on both buy- and sell-side contract obligations could open your business up to the risk of penalties, timeconsuming disputes, litigation or over-payment.
For one large UK utility, poor contract oversight resulted in a costly unplanned expense when it was
discovered that a service contract they had intended to terminate had automatically renewed
without their knowledge. As a result, they were compelled to pay compensation to the vendor to
terminate the agreement, and bear the unexpected extra cost.
Current economic conditions make it likely that more and more of your suppliers will be forced to enforce auto-renew clauses in order
to maintain their own revenue projections, leading to extra expenses impacting your bottom line.
Keeping up with regulation
Publically traded companies and organisations that operate in highly regulated environments must comply with increasingly stringent
legislation and regulations surrounding the disclosure of corporate information, which is pushing compliance higher up the board’s agenda.
Increasingly, this means that organisations must provide evidence that they are in control of their entire contract process. This includes
the contract creation, storage and management processes required to satisfy internal controls regulations in legislation such as the US
Sarbanes Oxley Act, the UK Bribery Act or the EU Directive on Corporate Governance.
Failure to demonstrate adequate controls over commercial processes led to record fines for both
Willis Limited (fined £6.8M in 2011) and Aon (fined£5.2M in 2009) from the FSA. Prosecution doesn’t
depend on proving bribery took place – the lack of demonstrable control is enough for enforcement
agencies to act. 2
Capturing revenue and recovery opportunities
Having control over your contracts also creates new revenue opportunities. Tighter control over renewal dates, price increase clauses,
faster drafting and shorter negotiation times can all help to bring in extra business-as-usual revenue. If your organisation is seeking to grow
by acquisition (or profit from selling off businesses), contract management can also speed up the time it takes to go through due diligence
and complete transactions, which is particularly useful in times of economic uncertainty. Furthermore, keeping a tight rein over change
control or managing suppliers to contracted deliverables more closely can deliver extra income through compensation or extra billings.
1
“Lead the Evolution Report 2012” - LexisNexis/CLO Network research undertaken with 74 UK GCs in May/June 2012
2
Financial Services Authority, www.fsa.org.uk
Contract Discovery
The role of the In-house Legal Team
Whilst the responsibility for contract management may sit with the commercial owners of various contracts, in 74% of the companies
we spoke to final responsibility for contract risk sat with the legal team . Leading an initiative to increase control of the contracting
process not only helps mitigate this risk but also raises the profile of the in-house team and raises awareness of the contribution the
team makes to the order-to-cash process. Access to a repository of contracts also enables lawyers in-house to:
- Advise commercial colleagues proactively on obligations, renewal dates, recovery and risks
- Reduce time wasted on looking for contracts, advising on incorrect versions and on disputes and litigation
- Increase the speed at which you prepare for disposals
- Draft based on existing contracts – reducing time spent looking for clauses
- Demonstrate control to internal and external auditors.
The ability to easily review contracts at a clause level is increasingly important as companies are required to conform to more and
more new and changing regulation. Understanding where the company is exposed to the risk of non-compliance and how to correct
this in a cost-effective manner is increasingly the responsibility of in-house counsel.
A major global insurance company spent two months trying to identify all the contract types that
included a particular clause relating to the government’s definition of disability, so that it could be
updated and new, accurate contracts could be sent out to relevant customers.
Contract Discovery – the first steps to effective contract management
First, where are all your contracts?
In order to start to manage contracts more effectively, you first of all need to identify where all the contracts are in your business.
Traditionally contracts may be in desk drawers, shared drives or desktop folders across the organisation. With a large company having
thousands or even tens of thousands of live contracts, manually collating all these documents is a significant task.
Working with a contract discovery tool, like Lexis® Contract Finder, reduces this work by:
- Searching selected areas of your network
- Finding contracts – whether they are Word documents, image files or PDFs
- Copying these documents as fully searchable PDF files into one secure, online repository.
Specially tailored software “rules” identify likely contracts automatically, without disturbing commercial activities – massively increasing
contract visibility within a few days.
By scanning any paper documents into a designated folder (either yourself or by using one of Lexis’s partners), these can also be reviewed
– giving you a complete picture of all your contracts in one place.
One of North America’s largest energy suppliers ran this technology over 200,000 documents in a variety
of locations and identified 7,500 contracts (5,000 of which they were unaware of) in less than 24 hours.
Contract Discovery
Contract Discovery in M&A
M&A activity requires the seller to provide a full set of relevant contracts and other documents, typically in an online data
room. Lexis Contract Finder can be run over this data room to extract key data and create a contract summary snapshot
ready for review by the transaction teams. This reduces the time it takes to read through the contracts involved and reduces
the risk of important information being missed.
Terms discovered include:
- Non-compete information
- First right of refusal
- Change of control
- Indemnity
- Limitation of liability and more.
Contract Discovery
Now, what’s in all your contracts?
Once you have collected all your contracts, you can now start to analyse them. Manually reading and summarising all these documents
would take years, so tools like Contract Finder also automatically extract key information – allowing you to review documents in bulk by
searching and filtering.
Information provided includes:
- Start and end dates
- Governing law/jurisdiction
- Rights to assign
- Contracting parties and many more.
Automating this process has several benefits:
- It is much faster than using a Legal Process Outsourcer (LPO) or in-house paralegal team
- It eliminates inconsistencies and human error
- It can be done on premise, reducing any security risks
- It creates uniform data that can then be used to populate a Contract Management System.
Typically processing 5,000 contracts in this way would take up to a week, compared to roughly three months to do an equivalent job
manually.
Where the Contract Finder cannot find a specific piece of information it is looking for, it flags the document up for review. This can
either be undertaken by your in-house team or by a LexisNexis approved partner, depending on your requirements.
The end result? Key contract risks, milestones and obligations are made visible and accessible.
Depending on the size of your contract database and the rate at which you add to it, Contract Finder can be used on an on-going basis
to add to and report on your contracts. Alternatively, it can be used to populate a more complex Contract Management System which
will typically allow you to automate:
- Drafting and contract review
- Contract negotiations and approvals
- Alerting, workflow and integration with ERP/CRM.
Summarise
• Discover contracts from
across your business
• I dentify key terms
and clauses
• Finance, Sales,
Procurement, HR etc
• Prepare summaries
• Review contract information
Search
Contract Discovery
• Use Contract Finder as
on-going contract repository
OR
Move into a contract
management system
Manage
Start working out the value of improved contract visibility to your business:
Being able to easily access and manage your contracts increases your efficiency and helps the legal team add value. Answer these ten
questions for your business to start working out what this means for you.
• The business decides to dispose of an under-performing subsidiary, how long would it take you to pull together all the relevant
customer and supplier contracts, partnership agreements and intra-group contracts?
• Your internal audit team are preparing to review your controls, how much time do you have to spend preparing for their audit?
• How easy is to respond to the accompanying questions from your FD?
• When dealing with request from your commercial, operations and procurement colleagues, how much time is wasted on advising
on contractual questions which then turn out to be based on earlier versions or out-of-date documents?
• How much commercial time is wasted on understanding contract obligations?
• What’s the impact of missed contract milestones?
• When reporting the board, are you aware of your exposure to contract risk?
• What could this mean in terms of disputes, litigation and penalties?
• How do you plan for these and how much are you spending on settlements or external counsel?
• How much revenue could you add by more effectively administering the existing obligations in your contracts?
Planning for a successful contract discovery project
Software projects can often be political, complex and time-consuming, but they don’t have to be. To make sure you realise risk,
regulation and revenue benefits quickly and easily, we recommend:
- Obtaining buy-in from key stakeholders in your Procurement and Operations teams
- Securing sponsorship from your Executive team
- Creating a business case that documents the risks of not acting, the regulatory requirements, the revenue implications and the
return on investment of your initiative
- Pulling together a project team with champions from the business user community
- Planning for deployment with consideration – phasing implementation over a period of months may help you show the impact
more quickly and deliver better results.
When building your business case, items to document include:
- How much money is likely to be saved by preventing auto-renewals on supply contracts or leases?
- How much money could be saved by more effective negotiation and procurement?
- How much money could you recover by enforcing contract obligations such as price increases more effectively?
- How much money could be recovered by enforcing change control in customer contracts?
- What reputation risks could you avoid and what might the impact of these be in terms of lost revenue or penalties?
- How much cheaper and quicker will Contract Finder be than paying for administrative or legal staff to do this work?
Initial investment in organising your contracts will pay dividends in terms of protecting and growing your business, as well as freeing up
vital Legal time to focus on other activities that add value.
Find out more
marketingoperations@lexisnexis.co.uk | 0845 520 1166
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