Despite ongoing progress in the digitisation of contracts, corporate governance (or lack thereof) is still problematic in 2022. A substantial proportion of a company’s contractual commitments are often entered into without the scrutiny and approval that you would expect, and certainly not in accordance with that company’s own corporate governance rules.
Often this frustrating issue relates to confusion and lack of clarity over who owns a contract within an organization. Is it owned by legal, or procurement, or finance, or marketing, or HR? It can become very complicated very quickly, especially in big organisations with many stakeholders.
The governance gap is also often caused by the fact that the legal team simply do not have the bandwidth to review every contract in an organization. And that is particularly true of contracts of a more commercial nature such as order forms, statements of work and SaaS agreements.
SO WHY DOES ALL THIS MATTER?
This lack of oversight actually creates a lot of risk, including contract value risk, because most disputes within an organisation emanate from these commercial arrangements. We see a lot of disputes relating to what exactly should be paid, and when? What are the deliverables? And to what standard specification should they be delivered?
These common contractual disputes tend to arise from clauses in the contract types which are not regularly being reviewed by legal teams. This means that if there is an ambiguous term in a contract, it is not being spotted as a matter of course.
These oversights lead to contract value dilution and big issues being missed. Terms that would never be accepted were a contract to go in front of the legal or contract management team are being accepted by the business. We are talking about fundamental things like automatic price increases, automatic renewals and exclusivity issues.
NOT ALL DOOM AND GLOOM
One solution we have implemented which has been extremely successful for many clients is a form of AI-powered contract review, which looks for some of those egregious terms before digital signature. We build a workflow which enables a business user in the organisation to send a contract for signature and as part of that process the contract will be subject to a review; that review will look for risk. If risk is found the contract will effectively by put on hold and it will be triaged to an appropriate member of the legal team for review and approval before it can then be signed.
One of the benefits of this system, quite apart from creating additional governance and risk mitigation, is that you can capture a lot of information about the contract through that AI review. You can track who has initiated the contract, when it starts and ends, what the payment terms are, key deliverables, the list goes on and on. You can then actually use that information captured to enable the contract to be stored in a sensible contract repository and for that information to be catalogued so the contract can be actively managed.
I have spoken about this at length before but we believe that the active management of contracts is a significant contributor towards avoiding value dilution which is such a common issue for large-scale organisations.
At SYKE we have now implemented the contract triage system described above for a number of customers. We have noticed that it has very significantly contributed towards a reduction in the number of disputes related to contracts for those customers. In one case as many as 25 contractual disputes were avoided post-implementation, and that alone creates a business case to do this. It is not complicated and it is not even that expensive. It is something that I would urge everyone to take a look at in 2022.
Alistair founded SYKE in 2016 after developing a passion for legal technology. He was formerly Head of Contracts and Data Protection Officer for the UK retailer, ASDA. At ASDA, Alistair designed and implemented a digital contracting tool which reduced the average contract cycle from 17 days to just 5 days. Alistair thought there was a need for legal engineers to be an interface between legal teams and emerging legal tech. So, in 2016, Alistair left ASDA and formed SYKE.