The following is a guest post by Lloyd Alexander from Seal Software.
Twenty years ago, we used to joke that contract negotiation was a full-contact sport, an equal combination of brute strength and finesse to obtain the best possible terms for your company. Every term in the contract painstakingly “duked out” to take into account every possible consequence and corresponding action. The problem however was that once these contracts were executed, they were often shelved in a filing cabinet somewhere with little to no oversight of the terms that were so meticulously crafted. The same level of care and effort that went into the contract was not applied to the ongoing management of that contract.
Fast forward a number of years into that contract’s lifecycle and suppose that something occurs that either causes a breach of that contract in some way or that contract is now out of compliance with the changing policies and best practices of your company. Terms agreed to then are not necessarily terms that you would agree to now… Basically, without a way to keep track of where your contracts are and what’s in them means there’s no telling what legal and financial risks and costs exist at any point in time. “What keeps you up at night??” was an easy question for General Counsels, CFOs and Compliance Officers to answer…
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1. Unnecessary cost and expense
Three years after a takeover, a large energy company discovered it was auto-renewing a lease costing $400,000 per year on property it didn’t use or need.
Auto-renewals represent just one of many types of cost leakage that are rampant throughout contracts. These terms often sneak in under the veil of an M&A event when hundreds, if not thousands, of contracts are suddenly inherited by the acquiring party. By virtue of the extremely short timeframe to conduct due diligence preceding these events, and the lack of resources to sift through these contracts once acquired, these and many other detrimental terms go unnoticed and unchecked, leading to the kind of cost leakage (hemorrhaging) as experienced above.
2. Missed Revenue Opportunity
An IT company was losing 4-8% of its revenue by failing to enforce Retail Price Index increases that it had fought hard to negotiate – it just didn’t know what contracts they were in.
The revenue side of the house is just as susceptible to missed contract terms as the cost side, which is surprising when you would think that revenue would have the absolute full attention of the company – unfortunately not. I witnessed this first hand with software maintenance agreements in the past. We spent hours negotiating the renewal uplift percentage for future maintenance years – 10%, 5%, CPI + 2%, etc.
The next year or two later, the Support Sales person had changed, the contract couldn’t be found and the maintenance renewal date passed by without notice. Suddenly there’s a mad scramble to invoice the client for the current year’s maintenance but no one knew the correct amount to invoice per the contract. So they simply invoiced the same amount as year 1, leaving the negotiated percentage uplift on the table. Now multiply this times the hundreds of active software maintenance contracts that this happened with and you’ll get a sense of the magnitude of the lost revenue (read: $ millions). Most companies have absolutely no idea what legal risks and commercial liabilities exist in their contracts today and, frankly, hesitate for a split-second to open Pandora’s Box when we discuss the ability to suddenly gain a complete understanding of all their contract terms across their contract base.
But they know very well that (1) uncovering missed revenue opportunities and cost savings will deliver an immediate impact to their financial bottom line, and (2) it’s only a matter of time when one of these non-standard terms will flare up and potentially cause serious disruption to their business operations. Having the power of Seal’s technology to isolate these terms and take immediate action on them turns a once-Herculean project into a quick and effective exercise that can be executed in days versus months or even years. By bringing the risks of the unknown out of the shadows, General Counsels, CFOs and other key stakeholders within the company can sleep better knowing that through Seal, they have a much better handle on their contracts and the ability to access and analyze any terms within them when they need them.
For a deeper discussion on the Top 10 terms our customers have caught using Contract Discovery & Analytics, attend our session at Apttus Accelerate 2016 on Wednesday, April 13 at 5:15 pm.