Reading contracts is a skill unto itself, and one that not everyone learns. Contracts do not particularly care to discriminate between ‘people who can read and analyse contracts’ and ‘people who cannot’ - regardless of your skillset you will be interacting with contracts, dealing with contracts, and be participating in tasks mandated by previously signed contracts every single day. Every part of your professional life has involved, does involve, or will involve a contract.
Everyone wants more data and analytics to help drive smarter decisions, and ,to achieve this end, many companies have become increasingly creative to get the information that they are after. However, one of the most data-rich resources you can possible access may be closer to hand than you think and may be currently overlooked: contracts. The selfsame contracts we talked about at the start.
As the bedrock of business, contracts are a goldmine of information. Capturing every transaction, customer, vendor and all potential partnerships—contracts are a read-receipt of what is happening in the business. Contract lifecycle management (CLM) software can help companies view this data in aggregate and recognize important patterns. They can also leverage artificial intelligence (AI) and machine learning to reduce the amount of manual work needed to create value from contract data. In this article we are going to talk about what makes up a contract, how you can read contracts, why you should look at contracts more closely, and how a CLM solution can help you unlock the true power of your contracts!
The Three Stages and Four Elements of a Contract
You will often hear mention of the three stages of a contract. The first stage is the pre-award or the preparation when each party comes together to develop and discuss the offer and/or services and, ideally, find some sort of common ground. Next is the award or the authoring of the contract, which many think of as the negotiation stage but also includes the approval and finalising of the contract. Finally there is the post-award where the contract is fulfilled and eventually closed out.
All of these stages (and the secret fourth stage: renewal) are captured in a CLM and the more robust the features of that solution the better the user experience and the benefits to operations.
Now, the three stages are something we talk about in more detail here - but lets have a look at the four key elements that go alongside the three stages:
The first element is an offer, which does not need to contain all the details but must contain all the critical information that a legal professional would ask you—enough to move discussions to the next step. The next element is an acceptance. This is a final and unqualified acceptance of the offer. The next element is an intention to create a legal relationship. The final element is a consideration which is usually represented by an exchange of money.
All of the important components here are seemingly straightforward; however, if one stage or element is overlooked or mishandled, it puts the transaction, possibly the organisation, at great risk. This is where the benefits of a CLM can help companies leverage analytics to stay on top of current operations and pin-point problems as they arise.
Revealing Problems and Finding Solutions Through Contracts
Before you can accurately analyse a contract lifecycle, you need a way of capturing every step of that lifecycle. Without a contract management solution, companies are prone to have a misconception of those steps and the responsibilities associated with them. This leads to challenges in executing to timely approvals, ownership of renewal dates and ensuring that the right agreements are discontinued. On the procurement side, it can result in failing to build in new performance requirements that would address vendor concerns or hold the vendor to better standards.
A CLM offers tools that automate all the workflows associated with initiating, approving, and monitoring. The result is a reduction in purchasing cost, accelerated sales cycles, and visibility of legal and compliance threats.
What Goes into Contracts Determines what Comes out in the Business
Some of the areas where contract management software has proven most effective in resolving problems relates to the language in the contracts themselves. If your contract language does not reflect the current state of your company or current laws and regulations, then you have an inaccurate view of your business state.
For example, if contract clauses lack specific language, this could expose your business to unwanted breaches and unforeseen outcomes. It’s possible that the legal team has taken the time to draft the exact right clause to suit each precise need but the work may not have been done to ensure that these versions are used in their correct context for all future contracts.
This same issue can extend to protection around liabilities and limited or missing language on terminations. Another area of exposure relates to contracts that are conflicting - agreements that are exclusive or require disclosure among parties that have not been fully met. These can put the organisation in regulatory or legal trouble; at a minimum they are a threat to the on-going success of that business relationship.
Contract management software addresses all of these concerns by increasing visibility of all contract data across the organization and ensuring that contract templates and clause libraries are in use. Users can easily run contract analysis reports to assess threats and determine which contracts fall outside the bounds of the organisation’s requirements.
How do you Conduct a Contract Review?
There are two types of analysis in play when it comes to contracts. The first we have already discussed in depth, as it relates to contract lifecycle management (CLM) software. The second is analysing contracts as stand-alone business documents and making sure that both parties’ interests are properly represented and protected.
The truth is that a good CLM will support you in this form of analysis as well, it will remove the manual steps of ensuring that all the proper terms and information are included. However, if you are just beginning your business, it is a good exercise to understand the fundamental elements of a contract before you start deferring to your software to do the work for you. Particularly if you are starting-off or are very unfamiliar with contracts it is best to engage the services of a trained legal professional to review any binding contract - especially if there are any contract terms or clauses that are unfamiliar or which cause you hesitation.
CLM is a tool, and a powerful one, but to use any tool effectively you need to know what you are using it for and why - that's why at SaaSam we make sure to get you on a call first so that we can understand what shape you want your implementation to take, and what, exactly, you want to get out of your contracts.
If you're interested in exploring a CLM solution that will help you gain visibility on all the elements of your contracts, and help you unlock the power hidden inside your own organisation's paperwork please contact us at firstname.lastname@example.org and start your CLM journey today!
Original article by Jefferey Miesbauer (https://www.agiloft.com/blog/what-is-contract-analysis/) additional words by C. Redpath