At Contract Wrangler we spend a lot of time with department leaders and their team members charged with keeping track of contracts, and more importantly, the terms in those contracts. Affected teams include Finance, Legal / Legal Ops, Procurement, Human Resources, Customer Success, and IT --and the solutions range from nascent to more-advanced depending on variables including company size, culture, regulatory environment and other perceived risks their industry faces.
The continuum of solutions in place is broad, and generally breaks down into four main categories that we're sharing below and as summarized in this Infographic. There's also a risk and cost profile that accompanies each point on the continuum --sometimes understood by their stakeholders -- but often not!
Risks are related to the possibilities that a phenomenon such as the following occurs:
i) a vendor contract auto-renews, when you'd prefer to terminate it
ii) you lose a customer because you didn't enter into renewal discussions soon enough
iii) you fall out of compliance, or fail an audit, because you didn't have a handle on laws or regulations
The more sophisticated your approach to managing contracts and terms, the lower your risk.
Costs on the other hand are related to:
i) the inefficiencies of managing contracts and terms when you don't have a system in place; these costs are offset by:
ii) software licenses and labor costs of maintaining these systems, most of which are fairly unsophisticated themselves, and about which we’ll discuss more below.
Here's how we break it down by category.
Buried in Email:
Most common with smaller companies, but not unheard of in larger organizations. In this scenario there's no formalized program for managing contracts or terms. Contracts are stored in email, and business or department leaders are generally responsible for managing termination or renewal dates and other terms.
Risks are very high -- there's no reliable or scaleable means of knowing about key upcoming dates, requirements you may or may not have met, or other terms that need attention. In a world of winners and losers, companies tracking their contracts and terms in email folders are often on the losing side of the equation.
With respect to costs: software costs are minimal, but costs of keeping up with terms can be high due to the effort required to track a contract down across the organization which can require numerous emails, followed by manually intensive activities of flipping through contracts page by page to locate key terms.
Stored in a Drive:
Companies often adopt an electronic drive-based storage system for contracts once they get to a certain size and level of growth --typically in the 50-person range. Most common drive systems include Google Drive, Box, DropBox, or a proprietary in-house server-- some companies are using e-signing services such as Docusign as their contract repository. Often times a company will have an email alias where employees will send completed contracts, and personnel in Legal or Finance functions will file the documents. Access is usually limited to Legal and Finance personnel unless a request for a certain contract is made.
While unsophisticated, this approach is a big step forward in risk reduction, as the company mitigates its dependency on any individual employee's organizational practices. Risk levels remain high however as the approach still lacks the ability to easily identify terms before it's too late, or without heavy manual involvement.
With respect to costs, software costs of this approach are low, though day-to-day maintenance costs are moderate-to-high as there's significant effort required reviewing contracts for detailed terms such as when there's an audit, revenue recognition or compliance change, or a need to research particular contracts on a one-off basis.
Stored in CRM:
Many companies are storing customer contracts in CRMs such as Salesforce.com or Microsoft Dynamics, attaching the contract as a file to the account record. In some cases companies will track certain terms generated by their CRM's "quote-to-cash" module, which builds terms into the database during the deal process. In some instances companies will have staff members manually enter key terms such as renewal dates or pricing into the CRM, which allows them to create custom reports or alerts. Some companies use CRMs for storing and tracking terms related to vendor contracts, as well, requiring manual entry of terms.
Companies who use CRMs for contract storage, but aren't extracting or tracking terms, are still at high risk, as they're lacking a method for quickly surfacing key dates and other terms. While they can find their contracts, this lack of visibility into terms constrains their ability to proactively manage relationships, be they customer or vendor relationships. Those companies who are tracking terms in their CRMs have substantially lower risk of a contract disaster assuming they've developed reliable mechanisms for reviewing those terms such as through alerts or usable reports.
Costs, however become more of a factor for companies in this category. Software costs can include the CRM software and cost-per-quote software, as well as any manual costs of entering data into the CRM. Offsetting those cost increases, companies making these investments may gain efficiencies when it comes to navigating terms, assuming they've extracted and are tracking the terms that need navigating. This is difficult to do comprehensively and most often companies are just tracking a handful of terms in this manner.
Stored in a Database:
We've seen a trend particularly with larger companies (5,000+ employees) attempting to modernize their contract technology and workflow. Notably, they'll either develop a system in-house that allows them to enter data into a database for signed contracts, or, they'll use the databases that are frequently licensed with "Contract Management Systems" ("CMSs"). CMSs are often helpful for streamlining and formalizing negotiation and pre-contract-signing workflow, helping to ensure proper approvals, tracking of red lines, encouraging use of certain pre-approved. Tracking terms in those databases can help reduce risk as it gives you a method for quickly accessing terms. We often hear that the empty database solution often has no normalized data format which limits the usefulness of the reports.
Costs in this scenario are often high, however. Notably the CMS software itself can cost hundreds of thousands of dollars per year. The costs of maintaining a CMS database can also be high when factoring in the labor costs of paralegals, other staff members, or outsourced firms whose time is required to enter data into these databases. These manual labor costs have been prohibitive to project success as often times companies will forego entering historical contract data, giving them only partial visibility into their universe of contracts.
As we hope this analysis illustrates, there has not been perfect solution for managing risk without prohibitive costs. As such, companies have been excited to learn about new ways that machine learning technology specifically built for post-signing use cases can help them address this dilemma. If you're someone looking for an appropriate balance of risks and costs for your company, think of Contract Wrangler as a resource available to help guide your journey.