Contract management has quickly and importantly developed into an area of focus for in-house counsel and business stakeholders. Effective contract management systems can increase internal accountability and decrease wait times and costs. Further, increased ownership and investment in the maintenance of contractual obligations allows for companies to better track data, including dollars spent, time spent, and results to report to key stakeholders. Given the benefits of effective contract management programs, it is unsurprising that leaders look to develop and implement their own contract management system.
But it can be difficult to know where to start. In this article, we outline the key steps for business leaders and in-house counsel to follow when implementing a contract management program, including inventorying current processes and identifying inefficiencies, and how to alleviate those issues by implementing a contract management process that (1) documents clear standards, (2) engages adequate resources, and (3) is sustainable.
Identifying Systemic Issues
To begin, the business needs to delegate a process development team (PDT) responsible for defining (or redefining) the contract management process. The PDT should consist of key business and legal stakeholders who possess different day-to-day responsibilities. In other words, obtain “buy-in” on the front end by identifying a PDT that will champion the contract management process, select any tools being implemented, and share the collective positive messaging around the process. A lack of unified messaging and goals for the contract management process will inevitably lead to disengagement, inconsistency, and frustration.
The core PDT may need to seek guidance from a variety of representatives across business units to identify global and localized processes and issues. Then, the PDT should obtain information on how contracts are currently managed throughout the life of the contract, from idea development/identification of need to termination of the agreement and expiration of post-termination obligations, identifying any inefficiencies or areas for improvement, by answering the following questions:
Are responsibilities clearly divided among the legal and business teams at each stage of the contract life cycle?
For example, who is responsible for (1) identifying issues in each contract provision, (2) ensuring the contract is signed before services begin, or (3) notifying stakeholders when a contract will expire?
If no one is allocated responsibility for the business and legal terms of a contract during its review and negotiation, the business could unknowingly accept and agree to unfavorable terms. This may increase costs to the business during the life of the contract (if the business agrees to higher prices or greater legal risks than would usually be accepted) and any renegotiations later (noting the increased effort required to negotiate away from terms agreed to previously).
Depending on the issue and the arrangement, regulatory compliance issues may also arise. For example, if no one individual is responsible for ensuring the agreement is signed before services begin, the parties may unknowingly commence services prior to the written agreement’s effective date. For certain health care services arrangements, this could subject the business to regulatory liability.
Further, failure to allocate ongoing contractual requirements may result in a breach of the contract. For example, a services agreement may require that the parties renegotiate hourly rates to comply with fair market value each year. If no one is responsible for ensuring updated rates are established each year, it becomes likely that the internal stakeholders will forget about this requirement and fail to negotiate in accordance with the terms of the agreement.
Does each business unit and attorney engage in the same process, or does the process differ based on the business team and attorney involved?
Failure to maintain consistency among business and legal reviewers (1) increases the time it takes to negotiate the agreement, since each party is required to learn and adjust to the other’s varied requirements, and (2) leads to future confusion as personnel change over time, as new staff will have no clear guideposts for determining why terms of a certain contract were agreed to and whether such terms are agreeable by the business in other contexts.
Are contract policies and procedures written?
If policies and procedures are not written, it is nearly impossible to regulate and maintain accountability and consistency in processes as identified above. Further, having these documented allows for efficiency in training and onboarding employees when inevitable turnover occurs within the organization. One cautionary reminder when creating the written policies and procedures: make sure your organization and the employees are prepared to and can comply. The goal is to avoid situations where you said you are/were doing something and subsequently fail to do so, which can cause audit and compliance complications. Again, the content of the policies and procedures should fit your organization’s needs and operations.
How are contract reviews currently staffed?
Inefficiencies may exist at either end of the staffing spectrum. First, if only one business and legal representative have knowledge of the contract review, (1) no one can step in to provide assistance if need be and (2) later on, if personnel change, no one may be able to identify the purpose for the contract or why certain terms were agreed to.
On the other hand, too many legal and business representatives engaged in the review may cause negotiations to slow, as each person becomes heavily involved in isolated issues. Plus, the business would be required to wait for each person to review the agreement prior to advancing negotiations. Each of these would lead to significant delays.
Ideally, one business and legal representative would be allocated primary responsibility for each contract. There should be a system in place for keeping others informed and for documenting the decisions being made.
Once the PDT inventories the current contract review and management processes and identifies any issues, it’s time to fix the problems it has discovered.
Documenting and Implementing Standard Procedures
So we’ve identified the issues with our current contract management processes (or we’ve identified that we don’t have current processes). Now it’s time for the PDT to create methods that resolve sticking points and improve contract workflows.
Documenting and Implementing Uniform Standards
To create contract review and management standards, the PDT must first allocate responsibility for each task in the agreement’s life cycle. To document workflow and allocation, the PDT should develop (1) a contract review playbook, (2) a preferred provision library, and (3) policies applicable to the legal and business teams.
A playbook defines the contract review process generally and allocates decision-making responsibility to legal or business stakeholders. Ideally, for each section of a contract, from contracting party to signature block and everything in between, it will (1) identify the internal stakeholder ultimately responsible for the provision’s accuracy and when other stakeholders should be involved, and (2) provide general guidance regarding permissible language. The playbook will generally not include standard provisions (those belong in the preferred provision library); rather, it will outline negotiation strategy and general guidance based on those preferred provisions.
For example, referencing fee increases in standard commercial contracts, a playbook might set forth (1) that the business team is ultimately responsible for identifying issues related to fee increase amounts, and (2) that fee increases over a certain amount are unacceptable, and applicable business stakeholders should be involved if the counterparty is unwilling to negotiate below the identified threshold.
Preferred Provision Library
The preferred provision library sets forth the legal reviewer’s standard or ideal language for each contract provision. It may also include alternatives. For example, the library may include preferred one-sided and mutual indemnification provisions. The preferred provisions may also vary based on the type of agreement and be flagged as such in the library (e.g., the indemnification obligations in a supply chain contract versus a technology contract).
Policies may fill gaps not addressed by the playbook and preferred provision library. For example, signature authority policies assist reviewers in identifying individuals with authority to sign certain agreements on the company’s behalf.
Additionally, the company should have a policy that outlines the business and legal teams’ responsibilities at each stage of the contract’s life cycle (not just during the review/negotiation phases), including (1) when legal should be involved in the contract development process, (2) standard draft turnaround times, (3) who is responsible for obtaining signatures, (4) who identifies and ensures compliance with ongoing requirements, and (5) who is responsible for notifying the other stakeholders of key agreement dates. The PDT should also consider any dollar threshold limits and any other approval authorities the company may have in place for various employees.
Together, the contract review playbook, preferred provision library, and contract policies set forth the uniform standards and processes for contracts within the company. This will streamline reviews by ensuring each reviewer knows and applies the same standards.
Now that uniform company standards are documented, the PDT should engage other resources as necessary to ensure the standards are met. Software, such as contract review and document repository systems, may have features that (1) easily advance contract negotiation workflows to applicable parties, (2) identify key contract provisions, (3) send notifications based on key agreement dates, such as expiration or renewal dates, (4) sequence drafts of documents, so negotiations are retained for future reference, and more. When vetting and selecting third party resources to assist in implementing a contract management program, the PDT should ensure that the resources meet the specific needs of their program.
Process Sustainability: Stakeholder Buy-In
In order for a contract management program to be sustainable, company leaders and staff must buy in to the program. The PDT should meet with leaders and personnel working with the program often during its development to (1) identify issues with current processes and (2) show how the current processes can be improved by the proposed changes and new standards. As mentioned previously, the success of any initiative that applies to and impacts the entire organization will be determined by having stakeholder buy-in, investment, and collective messaging.
If businesses work to pinpoint issues in their current contract management programs and develop solutions, they can experience increased productivity and teamwork among business and legal personnel and reduced costs of doing business.
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