Most legal teams have a contract repository but if yours doesn’t, make that first on your to-do list if you’re engaging in a cost-out initiative to help your organization save money and increase efficiency, in-house contract specialists say.
Research shows organizations typically lose around 12% of the value of their contracts annually by missing expiration dates and performance milestones, or failing to adjust prices or miss other negotiating opportunities, Parker Eliot, a senior implementation manager for ContractWorks, said in a webcast hosted by Corporate Counsel Business Journal. “Obviously this means lost revenue and higher cost for the business,” he said.
As in-house attorney, you can say you have a repository if you have contracts consolidated in a folder on your desktop, but ideally you want an automated system in which the key data in each contract is tagged and made searchable and you’re alerted to when performance milestones and expiration dates are nearing, said the speakers.
With that kind of system, you can exercise the kind of post-execution management that helps you stop leakage and reduce time spent on secondary tasks, like searching, sorting and monitoring contracts, and also enables you to create a function that lets people outside the legal team access information embedded in the contracts or even handle much of the negotiations themselves.
“People can get their answers quicker so the legal team isn’t constantly being pulled away from strategic work with business partners,” said Sumi Trombley, a senior advisor at UpLevel Ops.
Once you have a repository, other good steps as part of a cost-out initiative are cleaning your data and devising a way to track baseline statistics.
“Look through your contracts and make sure you have your fully executed versions and, to the extent there are duplicates, eliminate those,” said Bridgette Housley, senior corporate counsel at Nkarta, a bio-tech. “Then you can track baseline metrics: how many contracts are there, what types are there.”
If you can design your metrics to show the amount of value the legal team brings to the table, you can show the broader organization why the team doesn’t need to be thought of as just a cost center, said Stasha Jain, general counsel of Onit, a workflow management software company.
“Show value back to your leadership,” said Jain. “Did you know we do 100 contracts a month? Did you realize my small team handles this volume? Or show over time how your volume is increasing – how many contracts, over what time period, and maybe how much revenue: my department handled x millions of dollars in revenue.”
It’s a good practice to design the metrics with an eye toward what’s important to the broader business, said Trombley.
“It’s all well and good to say, ‘I do 400 contracts a month,’ but if they’re concerned about how much revenue is coming in the door in these contracts, or why they’re not getting paid, you can deliver these reports to address these concerns in an easily digestible fashion,” she said.
You might also track the number of reviews contracts go through when they’re being negotiated, because that shows how much work goes into each contract, said Housley.
Negotiations for a master service agreement, for example, will tend to be far more involved than something like a confidential disclosure agreement, and that distinction is important in making others aware of what the legal team is doing to increase contract value.
“It’s one thing to say I did 100 contracts this month, but [it’s another to say] I did 400 reviews,” said Housley. “One contract for a master service agreement or a license agreement could go through multiple rounds of review in a month, so I tend to use reviews as the metric to make a case for resourcing rather than just agreements.”
Metrics can also pinpoint bottlenecks in the contracting process, an especially important insight if there’s a perception that the legal team tends to hold things up.
“The legal team didn’t take a month,” said Housley. “It responded in three days. The vendor took three weeks. There’s the gap. I think that’s a really compelling metric to have.”
The metrics can also help the team see what processes can be replaced with a self-service component by revealing the questions legal gets asked on a regular basis.
“Start with these frequently asked questions,” said Trombley. “What’s the address for this subsidiary? Where do I find this policy? A lot of that comes in the door to the legal team and becomes a matter for the team. Now you have the data to see you have 15 questions a week coming in about this; maybe you can create some self-service around it. Eliminate that piece and people can get their answers quicker so the legal team isn’t constantly being pulled away from strategic matters with business partners.”
Self-service can even be used in the negotiating stage of contracting to the extent you can put guardrails around allowable provisions so business partners know what risk level the organization is willing to take on matters.
“We’ve created a checklist for the business,” said Jain. “What happens if you want to get out of this agreement? Do you have a way to terminate early? Are you satisfied with the pricing? Do you need service level agreements of any kind?”
Bottom line: The legal team’s contribution to a cost-out initiative can be most effective when it’s built around the contracting process and the post-execution management of the contracts. Technology can play a role in that but the team's processes are crucial as well for stemming value leakage from inefficient negotiations and managing the contracts over time.