Minimizing Risk Through Streamlined Contract Management Processes - Part II

Thursday, January 1, 2009 - 00:00

Editor: What is involved in establishing a good contract management solution?

Levy: A company should step back and look at how they're handling contracts currently. They should look at their processes and procedures if they have them at all, and determine what's working and what's not. So, for example, if it turns out that legal is a bottleneck, then they need to figure out why. Does legal have a bandwidth issue where they simply do not have the resources to handle the volume of work flowing through the department? Is there something else that's broken, such as lack of processes or procedures in place to best facilitate a good contract management flow? Perhaps part of the solution is to better streamline contract creation by using a technology that can help with contract generation. For example, software can enable business reps or contracts administration staff to create template contracts (with automated business and legal rules built into the software) so that the burden to produce contracts doesn't solely rest on legal's shoulders. Contracts can be produced and an automated process implemented so that non-standard terms can be approved by the appropriate business owners in a manner that leaves a solid audit trail. The chosen contract generation tool must be scalable to handle company growth. It should also be capable of being integrated into other solutions - such as contract management software like iManage by Hummingbird, Sharepoint by Microsoft, and/or a financial application to track revenue and deals from a revenue-recognition perspective. At CPA Global, we work with the technology solution that best fits our clients' needs. We help develop functionality requirements for their contract management system and based on that determine the best technology solution, which may include capitalizing on an existing technology already being used by the client's organization.

Editor: Is there any way of limiting a company's exposure by disseminating their responsibility to people other than lawyers? In other words, you could give them contracts to negotiate up to, say, $5,000.

Levy: Yes, or similar terms. For example, if the customer indicates they want to change the limitation and liability indemnity and warranty, perhaps you need to engage the legal department. However, if the customer wants to change the payment terms on the invoices from 15 days to 30 days or 30 days to 45, then maybe the sales representative has the leeway to make such a change under certain circumstances. So, a company could establish an approval process based on certain criteria and limits. For example, I worked with an organization to implement an automated approval process in which the salesperson would enter their opportunity into a "front-end" application, such as SalesForce.com. That opportunity would then be incorporated into a tracking database that contained certain parameters for deals without prior approvals. Anything that deviated from the norm or the standard provisions would automatically be routed to the appropriate managers for approval. Once all the approvals were received (which could all be done online) the salesperson could ultimately press a button and the template contract would be issued.

Editor: What are some of the factors and elements that an organization must consider before establishing/ implementing a contract management solution?

Levy: They need to sit down with the other stakeholders in their organization. They need to have a conversation with sales, operations, IT and most certainly, finance. Usually legal is the division that's driving this charge and must take into consideration all the other processes that their own processes affect.

Editor: I guess you also have to look at return on investment as you're looking at these contracts, so you need a lot of input from your financial group in the company.

Levy: Absolutely. I would say finance is a huge key player in putting together a contract management process. The finance process tends to integrate sometimes on the front end and a lot of times on the back end, especially the revenue recognition process. The quality of the contract is the most important factor. Most contracts involve repeatable circumstances with template language that has no modifications. For these, it's not necessarily important "who" has produced the contract. However, a heavily modified contract may require advisement from legal, sales, operations and finance. The "quality" of the contract could include getting the other party's company name and principal place of business written properly into the contract. The average sales representative may not concern him or herself with spelling out the full company name (i.e., ABC, Inc.) or identifying the true principal place of business. This could open a company up to certain risks, and potential adverse financial implications when it comes time to verify the contract and recognize the revenue. CPA Global's team will perform the necessary due diligence to verify the accuracy of contract information when drafting a client contract.

Editor: What are the first steps - especially for an organization starting from scratch?

Levy: The first step is to evaluate current processes and procedures; identify the stop-gaps and reasons for bottlenecks of workflow. A corporation should identify its "must haves" and its "nice to haves" with respect to a contract management process, keeping in mind what's realistic for their organization. A next step could be to evaluate the company's template library. Are there out-of-date forms? How are they accessed by legal or others in the company (if at all)? If it's determined that certain templates are constantly negotiated, perhaps it's best to take a look at terms that appear to be the most egregious and modify those terms with provisions that may be more palatable - especially to the company's customers. Finally, it's important for companies to find a way to consolidate their contract data into a central repository that can grow with their business, such as with a scalable integrated type of technology. There are a lot of contract management technologies out there. The quality of those solutions can range from the "Geo Metro" to "Cadillac." Which solution depends on what the company wants to get out of the technology, and how much of an investment that they are willing to make.

Editor: Who (or which organizations) do you believe have the greatest need for contract management?

Levy: Every kind of organization that writes a contract needs an efficient contract management solution. Companies from small to large need some form of a solution. This is what I've learned in my own experience. The bigger the company, the bigger the potential dysfunctions that are in desperate need of organization. A good contract management solution tends to be the last priority on a legal department's "To Do" list. Unfortunately, this results in contracts being shoved in drawers, never to be looked at again until someone complains or the company is faced with a litigation. Instead of having a "reactive" position, it's those organizations who take a "proactive" stance that land ahead of the game and who, ultimately, minimize their risks in contracts.

Editor: Who are the key stakeholders within an organization to ensure successful implementation of a contract management solution?

Levy: Certainly the Office of the General Counsel, the CFO's group, the VP of information technology, the CEO and the executive for sales and marketing, among other stakeholders. In fact, even facilities management is important due to contracts that concern the company's facilities, from buildings to desk and chairs and paper clips as well as leases. Departments like purchasing and procurement are also valuable to the process.

Editor: How does a contract management solution come into play with corporate compliance requirements?

Levy: A contract management solution, one that is well thought through, buttoned down and works well can really be the saving grace for a company that must comply with, for example, Sarbanes-Oxley. It provides a company with an auditable trail of decisions that lead up to the contract terms that got entered into. That is very important for a company when they are trying to prove compliance and for the CEO who has to sign off on the accounting each quarter, each fiscal year or even each month, that there is an audible trail that proves that the appropriate managers have thought through whatever provision has been entered into a contract and has agreed to it. I used to tell the CEO of my former employer that it was my job to keep him out of an "orange jumpsuit and matching bracelets." I took that job very seriously and took measures to make sure all of our executives were well-apprised of any risks the company was entering into in a given deal.

Editor: Now with your role at CPA Global, you go into a company and give them counseling on these matters. Is that basically what you do to help in setting up a contract management solution - you are the outside expert and they can come to you?

Levy: Yes, I consult with them, bringing my years of expertise working with both commercial and government contracts. I've seen a lot of things in my day and can call upon my experience and expertise to help design, develop and implement a best-in-class solution for contract management.

Editor: How does a contract management solution fit into an overall document retention plan?

Levy: Document retention plans are real hot buttons especially thanks to Sarbanes-Oxley. With document retention plans, companies determine how long they need to keep documents before they send them off to the shredder. A contract, depending on what type of contract it is and the contract term (period of time for validation), may need to be held for long beyond the document retention policy requirements. So contract management serves as a parallel policy that married with the document retention plan can provide companies some security and added risk management with respect to how they are handling the contract when they are audited by outside auditors.

Editors: If there is ever an investigation I'm sure it's very valuable. What are some of the benefits and returns on investment that companies can expect to see if they implement a contract management solution?

Levy: Being able to have a command of what obligations you have and, if you were ever to find yourself in a litigation situation, being able to have all the information available quickly for the general counsel or the outside counsel who might be defending or prosecuting certainly has its benefits and returns on investments. You don't want to be in a position where you have to ask the other side for a copy of the contract you are being sued on. If I were the general counsel, that would keep me up at night.

Many of our clients are seeing the volume of contracts they need to generate increasing, especially during month-end, quarter-end, or fiscal year-end. Their internal legal and/or contracts resources are overwhelmed and overworked resulting in many matters being farmed out to outside counsel at a significant price. The overwhelming demand also results in lost opportunity costs for those matters that cannot be addressed since legal and/or contracts resources are occupied on other matters. Time costs money. So, if it takes your legal department or contracts department a considerably long time, longer than it should, to negotiate a contract, then that means there are other opportunities that are probably being lost as a result. The return on investment of regaining those lost opportunity costs are realized immediately.

Editor: Can you give examples of some best practices for a contract management solution?

Levy: Some of the things we've talked about - consolidating, putting procedures in place that take into consideration the entire organization's business processes. Taking into consideration and having that flexibility so you can put a contract in place that doesn't assume a considerable amount of risk for the company but gets business done. So if you have to deviate from the norm a little bit, you at least have a process in place that affords you the ability to do that while still entering into contracts that aren't as risky as a result.

Editor: Can CPA Global help clients develop workflow policies and procedures that are scalable?

Levy: Yes, we can help clients design a process that can be scalable and grow with their business. We can help them consolidate information into a central repository, assist with drafting, and help them keep their templates up to date. What we cannot do is provide legal advice. We do not practice law in India. Therefore, it is important and prudent that our customers have a U.S.-based attorney either in-house or outside who can provide a supervisory role to review work product and verify templates. Further, CPA Global has the capacity to provide an on-shore solution that is still more cost effective than outside counsel services, especially in those instances where sensitive or export control issues are concerned.

Editor: What are some of the basic inquiries that an organization should ask itself before implementing a contract management solution?

Levy: They should take a hard look at what is missing from their current process and where they are exposed to risk. Typically when companies find the need to put in a contract management solution they are in reaction mode - something has gone wrong that exposes the need for a solution and they are focused on fixing the immediate problem. But organizations shouldn't wait for a fire to put out to take action. They should take proactive steps now. They need to ask themselves what do we want to accomplish and who do we need to involve in the process - who are the key stakeholders? How can we improve our procedures to alleviate some of the strain experienced by internal legal and contract resources? Should we automate the approval process? These are the questions we ask clients so we can provide guidance on how to establish and implement procedure improvements.

Editor: Is there anything else you'd like to tell our readers about CPA Global?

Levy: CPA Global has been providing outsourced legal solutions to clients for nearly 40 years and is the world's top intellectual property management specialist. Our longevity, solid reputation in the industry, financial strength and exceptional attention to quality processes and client security make us a sound choice to partner with for outsourced legal solutions. We have embarked upon a number of different types of contract management projects ranging from contract review for due diligence purposes in merger and acquisition transactions to consolidating information in a central repository. We review the contract, we extract key data and we enter them into the repositories. We also have projects where we are drafting contract templates from scratch as well as managing template libraries. We can also assist in the ongoing contracts administration duties and tasks like establishing appropriate processes and procedures that can help streamline the contract management process for an organization. We're also working as an extension of internal legal departments assisting our clients in producing day-to-day contract documentation. The bottom line is the value clients realize from our contract management solutions: increased efficiency, significant cost savings, improved strategic focus and reduced risk for the company.

Please email CPA Global at legalservices@cpaglobal.com with questions about this interview.