December 13 by Patrick Wolf
What is Contract Compliance?
While you’re handling all the obligations created by your contracts, there are plenty of other things you need to do with all your contract data. You need to provide regular reporting to internal and possibly external parties about the contracts you have and your performance to your obligations. You also might need to locate specific contracts to comply with industry requirements, government regulations, audits and responses to lawsuits.
To meet all these needs, it’s important that your repository have detailed search and reporting capabilities. You want to be able to search for business terms, contract clauses, performance to obligation and—when all else fails—for free text. Without a repository searching for information in your contracts can be costly, time-consuming and distracting.
The quicker you can access the information inside your contracts and take necessary action, the more money you’ll save, the more you’ll reduce overall risk and the less you’ll pull the business away from its key activities.
Major Contract Compliance Changes in 2017 / 2018
ASC 606 / IFRS 15 is the Big One
What is ASC 606:
ASC 606 is a new standard for recognizing revenue designed to reflect the reality of modern business transactions. It requires that revenue for each obligation within a contract be attributed to that obligation, regardless how it is bundled in the sales process. ASC 606 and IFRS 15 (Europe) are substantially the same, and will come into effect at about the same time. This is why nearly every company must pay attention to the new rules.
How Does it Affect Contract Compliance and Legal Professionals:
The legal department’s job as it relates to customer contracts is managing risk. In most companies, the commercial terms (sell price, discounts, length of contract, etc.) are worked out by the sales team before Legal ever gets involved. The customer agrees to these terms and then Legal reviews the contract. Legal then deals with the terms such as liability, privacy, termination rights, etc. With ASC 606, there is a new wrinkle: legal terms can now affect the deal value if they create or modify the performance obligations.
According to the new rule, every separate and distinct obligation has to be considered in revenue recognition. This could include things that Legal adds or changes. For example, are there marketing considerations on either side? Is there a free consulting service included? Shipping? Additional fees? The value of a deal is now likely more than just sell price plus delivery terms agreed upon by the sales team and customer. The parts of the deal that only take shape in the written contract can now affect value by either slowing or speeding up revenue recognition for the entire contract. Bottom line: revenue recognition is now embedded in legal terms which requires much more detailed collaboration between Finance, Sales and Legal.
2 Contract Compliance Trends Driving Change in 2018
Contract Management with AI
AI-driven contract management empowers legal teams to automate routine contract compliance tasks so legal professionals can spend more time on high-value activities. Extracting insights from large volumes of data, AI enables legal decision makers to weigh trade-offs as never before possible, allowing the legal team to execute corporate goals such as accelerated deal velocity and cost savings.
AI-driven contract compliance software offers several unique capabilities that are not possible without this technology:
Agreement Risk Management
Contract Cycle Time Reduction
Third-Party Paper Automation
Intelligent Central Repository
Smart Contracts Explosion
Smart contracts, based on blockchain technology, have the potential to upend existing institutions and processes related to contract compliance.
Some companies, particularly in financial services, are beginning to use smart contracts coupled with artificial intelligence (AI) for multi-party secure transactions.
The contract automation and efficiency benefits of smart contracts are being realized with leading contract management technologies available today.