Traditionally, legal departments haven’t spent that much time and energy on contract management. When your day is filled to the brim with risk and compliance management, legal research, litigation cases and more, it’s no surprise that there are few resources left over for the (seemingly) less important task of managing your organization’s contract portfolio. But when it’s relegated to the back burner, it’s easy for in-house counsel to make mistakes in contract management — mistakes that can pile up over time, eroding value and growing risk exposure. The first step toward improving your process is to understand where the greatest pitfalls lie.
1. Excluding the commercial teams from contract negotiations
Protracted contract negotiations don’t lead to good outcomes — stakeholders tend to make poorly considered decisions out of a sense of urgency and frustration. For many contracts, legal doesn’t involve relevant commercial teams until the very end of a negotiation, if at all. The thinking is that the organization faces greater risk when there are too many cooks in the kitchen.
The reality is that while the legal department is best positioned to ensure that any risks that occur are mitigated by negotiating for favorable terms on liabilities, indemnities, IP, price and more, the relevant commercial team has the greatest insight into how to prevent those risks from ever occurring in the first place. They know best what scope is feasible, what responsibilities are manageable or excessive, what changes they will need to make in order to meet obligations and the many other details of the work involved.
To put it another way; the greatest risk in a contract is its misalignment with the realities on the ground.
Not only does excluding the commercial team from the contract negotiation process create this misalignment, but it also opens up a communication gap. Like playing a game of telephone, if the commercial team only learns about their obligations second-hand rather than directly from the negotiating team, there are going to be misunderstandings.
2. Treating pre-signature as the most important stage in the contract lifecycle
It’s a natural trap to fall into: The pre-signature phase gets all of the attention because the organization is locked into its obligations as soon as all parties sign. But pre-signature and post-signature are equally important phases in the contract management lifecycle.
Legal professionals believe that performing a perfect job in the pre-signature phase makes it less likely that there will be any post-signature contract management needed. But this assumption has two fatal flaws:
- As little as lawyers might like to admit it, perfection is an impossible standard to adhere to 100% of the time.
- Even if a contract is perfect from a risk mitigation perspective, there is still crucial work to be done post-signature.
Legal departments need to focus on their hand-off process, storage, deadline tracking, obligation management, evolving risk profiles in response to external and internal events, incentive opportunities, maverick spend, vendor performance as compared to agreed-upon standards — the list could easily go on for pages.
Many legal department members might cry foul and insist that those tasks aren’t legal’s responsibility. That could be the case. Some organizations have procurement teams or other separate business units that handle aspects of the contract management process. But this raises some key questions: are those separate teams best-suited to carry out contract management, and are all of those crucial post-signature contract management tasks actually getting done? Without a satisfactory answer to both, the organization will eventually lose out on revenue and raise its exposure.
3. Making assumptions
Nobody intentionally makes assumptions, but it’s also true that busy, demanding professions like those found in the legal industry don’t leave much room in the day to ask questions and investigate suppositions.
It could be the case, for example, that the legal department has set out and distributed general contractual standards that must be met anytime a department makes a deal with a vendor or leases space or equipment. One such common standard is that all agreements must be made on company paper, and if not, they must be run by legal first.
But this assumption can’t be tested without visibility into the total sum of your organization’s contract portfolio and without the time to investigate. After an organization reaches a certain size, it’s all but guaranteed that standards aren’t being met.
As another example, it might be assumed that your organization is meeting the key dates in their contract portfolio and tracking any agreed-upon incentives. But with hundreds, thousands, or even tens of thousands of contracts in an organization’s portfolio, some of those agreements are going to automatically renew when they weren’t supposed to be, expire when they were meant to be renewed, or hold hidden incentives that aren’t being taken advantage of.
Why mistakes in contract management happen
Two major factors create the conditions that all but guarantee these mistakes will be made, no matter how diligent the legal department is.
The first is culture. If legal departments are seen solely as cost centers whose purpose is to prevent and react to contract risk, it can be difficult to generate the momentum necessary to, say, conduct internal audits of the contract portfolio or to revamp your hand-off process.
The second factor is a lack of tools. It’s patently impossible to regularly report on several thousands of contracts at once without a centralized repository of those contracts, a sufficiently advanced search tool that goes beyond hitting ctrl + F, dashboards, analytics tools and more. Organizations get away with using spreadsheets or point solutions when there are only a handful of contracts in their portfolio. But as they grow larger, it becomes significantly easier to make these critical mistakes in contract management, which is why a holistic contract management system (CMS) is key.
While addressing these two factors will help you prevent making these mistakes in contract management, the road towards a stronger contract management strategy still lies ahead. We go into greater detail about how in-house counsel can strengthen the contract management process in their organization in our eBook, “How GCs can thrive, not just survive.”