June 5 by Eric Dreshfield
What is the purpose of a contract? Legal professionals would say they are legal documents designed to outline the rights and obligations of the contracting parties and detailing the specific methods of dispute resolution should problems arise. Non-legal, business folks would define contracts as commercial agreements outlining the details of the relationship of the parties… with a bunch of boilerplate, legal mumbo-jumbo thrown in to give the lawyers something to do. So who’s right? The answer is both.
A contract is both a legal and a commercial instrument designed to memorialize the mutually-agreed scope of the relationship and method for resolving disputes. It’s important to keep both in mind during negotiations to help minimize the risk of the deal falling apart later. One way to ensure that things will go as planned is to have a complete, single data model, contract management system in place.
Top 5 Ways a Contract Management System Impacts Risk Mitigation
• Single Data Model: Silos are breeding grounds for risk. Disparate systems, no matter how much you try to integrate them, always have some inherent risk for process failure, data loss, etc. Utilizing a CLM system with a single data model (with your CPQ, Revenue Management, Incentives, Rebates, etc.) eliminates the data silos.
• Analytics: There’s a saying that I’m sure most of you are familiar with, commonly attributed to Peter Drucker, “If you can’t measure it, you can’t manage it.” According to the World Economic Forum, data is now one of the most valuable assets on earth. Some say, “Data is the new oil,” but if you treat data like oil, as a finite resource by locking it away in secret locations, you are are not able to analyzing the data your system is capturing and you are leaving a lot of that asset hidden, thereby forgoing massive amounts of value.
• Artificial Intelligence (AI): Some of today’s state-of-the-art systems are embedded with various types of artificial intelligence, like machine learning and natural language processing, to do some the heavy data lifting for you. Still, not all AI is created equal. To get the biggest competitive advantage, it’s imperative to have a system that is proactive in nature and works around the clock, even though your sales teams may not.
• Clause Library: Standardization of clauses and storage in a common library (as part of the single data model discussed above) helps not only increase efficiency since only approved clauses are being used, it also helps minimize risk for that very same reason. Approved clauses have already been reviewed by the proper parties and provide the necessary clarity and protection needed for the contract. If your company already employs contract playbooks, then you likely have a clause library. This means you have pre-approved language along with rules guiding the use of that language. Automating this can increase efficiency exponentially by reducing not only the time involved in the process, but also in terms of training and knowledge transfer to new or more junior staff.
• Visibility, Control and Security: Sometimes increasing visibility means decreasing control and security. That’s a “gotcha” you need to be very careful to avoid. In a well-designed contract management system (operating on a single data model) this becomes a non-issue. The nature of the single data model addresses the control and security aspect very well, which easily facilitates increased visibility into processes, system utilization, and even bottlenecks. These bottlenecks, often times involving steps in a process where human interaction is needed, should not be taken lightly. They require careful analysis and thought, to ensure the best outcomes.
In an industry where new regulations are sometimes enacted in reaction to specific events, your contract management system must keep up, not only to enable you to drive desired business outcomes, but also to protect you from potential regulatory infractions and possibly heavy fines.