October 15, 2009

The 4 key challenges of contract management for law departments

Well known legal department consultant, Rees Morrison, reminds us of the four key challenges contract management poses for in-house lawyers:
  1. Standardizing and simplifying contract drafting.
  2. Setting policies regarding legal department review of contracts.
  3. Streamlining contract negotiation.
  4. Facilitating the company's adherence to its contractual obligations.
Morrison notes the role of document assembly in addressing the drafting issue. Interestingly however, all four issues can actually benefit from a document assembly solution.

1. Contract drafting
Most legal departments try to improve contract drafting by using MS Word templates. However, these create problems for all parts of an organization:
  • Business users hate Word templates. Their eyes glaze over when they see square brackets and verbose user instructions. Instead, they either ask Legal to do the work, or they cut-and-paste from a previous agreement.

  • The lawyers are unhappy too. Word templates are too risky. Often, business users can't get the substantive terms right and Legal has no visibility into the deal.
In contrast, document assembly enables drafting to be pushed out to the business as a self-service model, while ensuring the generated agreements are legally compliant. The business users are guided through an intuitive web interview. The lawyers retain control by pre-determining what content is included. Further, PDF output ensures that the business user can't modify the document post-production.

2. Contract review
For legal departments with contract review policies in place, document assembly systems can enforce those policies by embedding them into the system as rules.

When there is non-compliance with a rule (e.g. in answer to an insurance question, a user might respond that the counter-party has insufficient insurance), the system automatically routes the contract to the legal department for review.

3. Contract negotiation
Document assembly can improve negotiation in two ways:
  • By building commonly negotiated fall-back scenarios into the system (with different answers triggering the inclusion of particular provisions) the negotiation process is made much faster.

  • Some systems can actually capture all edits made to a document after it has been generated. That ensures any changes made by a counter-party are visible (even if MS Word Track Changes has not been used). Further, these negotiated positions can even be applied to subsequent agreements such as renewals.
4. Contract tracking
Typically, there is both a functional- and system-separation at the point of contract execution. Pre-execution work (drafting, review and negotiation) is controlled by Legal, while post-execution tasks (obligation management) are usually handled by a contracts department or business unit.

For companies that have implemented a contract management system, the right document assembly system can provide huge advantages via integration. They are able to:
  • Automatically push the execution version of an agreement into the contract management system in electronic form (even if the document has been heavily negotiated).

  • Flag the extent to which clauses have been modified; which changes are simply approved fallback provisions, and which contain bespoke wording.

  • Enable analysis and reporting on the risk profile of an organization's entire contract portfolio.
Conclusion
Currently, a few innovative legal departments are realizing the full potential of document assembly. For various reasons, most organizations have not yet analyzed contracting the same ways they have other business processes. However, when they do, they will discover that the contracting process is highly inefficient, and that the potential cost savings from automation are just too great to ignore.

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