Your contract portfolio isn’t just a collection of agreements your organization has made with other parties. It serves as a snapshot of your organization’s performance, a database of the most fundamental markers of a business’s success: vendor relationships, deals, acquisitions, supply chain agreements, financial arrangements and more. But most stakeholders don’t realize contracts serve as more than just agreements between parties. Regrettably, this failure to realize the potential value of your organization’s contract portfolio translates into missed opportunities, a lack of clarity and consistent underperformance. There are insights hiding in your contract repository — you just have to look for them. Through contract analytics, the legal department can do more than just protect the business from legal risks. Let’s explore some of the tangible business insights that can be derived from a contract portfolio.
Opportunities to Minimize Business Risks with Contract Analytics
When legal departments think of minimizing risk to the business through contracts, counsels place their focus entirely on contract construction. In-house counsels are concerned with finding and closing loopholes, adding language to account for external events, stipulating certain levels of service, clarifying responsibilities and generally reducing ambiguity as much as possible.
There’s no doubt that attention to detail and thorough accounting of every possibility before signature is essential. But it doesn’t capture the full scope of what’s possible in risk mitigation.
For one, no legal department is perfect; mistakes, ambiguity and loopholes find their way into contracts. If your organization isn’t taking a proactive approach to analyzing its contract portfolio, these errors will expose you to risk. It’s essential that counsels identify errors and ambiguous language after signing and determine what steps can be taken to mitigate risk while the contract is active.
Contract analytics can uncover another significant risk to the business: underperforming or nonconforming vendors.
It’s not always easy to square the abstract obligations laid out in a contract with real-world services and products. Some counter-parties are better than others at meeting their obligations. Without a rigorous assessment of your contract portfolio, you could renew a partnership with a vendor that isn’t being faithful to your agreed-upon terms.
Methods to Plug Revenue Leakage with Contract Analytics
Avoiding cost is all well and good, but earning additional revenue is even better. Unfortunately, few in-house counsels and business stakeholders realize the potential their contract portfolio holds for the business’s top line.
Commonly, this comes in the form of missed incentives, performance-based rewards and rebates. These potential revenue sources are often buried in single clauses among thousands of contracts. Finding and identifying these clauses are one of the many use cases for AI and natural language processing in contract analytics and management.
Organizations lose out on revenue in another, often surprising way: inconsistent pricing. It’s hard to believe that your organization could be purchasing the same product or service from the same vendor for different prices, but it does happen. Inconsistent pricing could arise when hold multiple contracts with the same counter-party, for instance. Or, your internal teams could be asking for differently priced variations of the same product or service, such as consistently asking for rush orders of supplies or fast turnaround times. In either case, you won’t know unless you examine the contents of your contracts and compare them with the reality on the ground.
Trends and Future Outcomes
Identifying risk and opportunities for additional revenue are certainly worthwhile applications for contract analytics, but its greatest value lies in its ability to help inform your organization’s future strategy.
By analyzing your contract portfolio, you can identify patterns and trends that can be used to adjust strategy. For example, do contracts with vendors in a given geographic area tend to result in a poor relationship? Are certain types of contracts consistently resulting in missed milestones and delays? If so, why? The answer could be an unreliable vendor, a poorly organized branch, external difficulties disrupting a certain market sector, a pattern of non-standard contract clauses — anything.
Discovering these answers and acting upon them ultimately strengthens the business and leads towards a legal department that acts less like a reactive defender of the business and more like a strategic advisor.
How can you actually gather these insights?
In most cases, legal departments have already made the first step — centralizing and storing their contract portfolio into a repository. If your repository is hosted within a sufficiently sophisticated contract management system (CMS), you’ll also have access to the contract analytics capabilities you’ll need to identify, extract and analyze key data points from across your contract portfolio.
Through machine learning and natural language processing capabilities, you can gather data points such as:
- Dates related to renewals or expirations
- Non-standard clauses
- Contracts with similar geographic, service or vendor characteristics
- Incentives, rebates and performance-based rewards
If your legal department has mainly thought of their CMS as a contract repository solution, then the prospect of jumping into a data analytics project might seem daunting. We’ve put together a primer on the role of data analytics in a corporate legal team — read the guide to learn more about this subject.
