Whenever companies outsource major business functions to third parties, they have to think about establishing the various terms of the agreement along with the responsibilities, obligations, and boundaries. They need to limit the various liabilities and payment conditions. More often than not, they also stipulate business guidelines, dispute resolutions, timing and failure conditions, as well as associated penalties.
Poring over contracts later for certain key terms may seem like a regular part of that outsourcing process. But doing due diligence and paying close attention to these details are crucial parts of a successful third-party contract review.
Naturally, all terms that need to be reviewed are determined by the scope of the outsourcing agreement, itself. Regardless, reviewing third-party contracts requires razor-sharp focus on items such as contract expiration dates; auto-renewal and assignment provisions; pre-paid expenses and annual fees; termination rights and fees; and, yes, those third-party use rights and restrictions.
The End of Manual Contract Review
Simply stated, managing contracts is not easy work. Contracts and cycle times can be lengthy. Contract data can get to be overwhelming. As such, contract review errors are far too common if a solid contract management process is not in place. There is the failure to properly plan a contract review; the maintenance of an ineffective process; and the neglect of quality control. This does not even raise the prospect of not having a proper system of record. On all fronts, hardly a proper methodology or picture of control. You cannot review contracts that you cannot find in the first place.
So, just how much is wasted on manual contract review? Research shows it costs businesses both time and revenue. That’s because it takes an average of 92 minutes to review a single contract. And a company can have anywhere between 20,000 and 40,000 active contracts at any given time, according to PricewaterhouseCoopers. As such, you can just imagine what it might cost to do a full review of all active contracts for a typical mid to large sized organization.
Naturally, Excel can be a useful tool here. It can serve as a reference guide for key provisions, providing an overview and comparison between third-party contracts. But reviewers need to insert applicable language from contracts into all of the appropriate rows or columns. To be sure, this is all still quite tedious work and prone to even more human errors. In fact, more than nine percent of revenue is lost annually resulting from not having a proper contract management system (CMS), according to IACCM. It stands to reason, that organizations adopting and implementing newer technologies like contract lifecycle management (CLM) software, will quickly move ahead. Those that remain stuck in manual review, on the other hand, will ultimately fall behind.
The Future of Contract Management
With new software and systems developed every single year, CLM solutions are evolving rapidly. And they are becoming more popular by the day. The numbers do not lie.
Generally speaking, contract management software supports contract review by keeping all contracts in a single centralized system. Having contracts stored in such a repository goes a long way toward proper organization and productivity – for both general counsels (GCs) and legal teams. They can access corporate contracts, and maintain control and consistency throughout the contracting process.
Yet, CLM solutions powered by artificial intelligence amplify the process even further. Robust contract management, removes some of those historic issues associated with the third-party review process. Better still, by using the latest cognitive technology, GCs and legal teams achieve ‘more with less.’ The system manages the full contract workflow and approvals, then automatically sets alerts and reminders for important dates. It reads, interprets, analyzes, and reports on key contract information. All of this is completed efficiently and effectively – sometimes in mere minutes. Essentially, this all means that legal professionals can fully review third-party agreements with just clicks of a mouse. No more manual data entry.
Aside from giving business’ productivity a huge boost, AI-based CLM software simply frees up time for in-house counsels and legal teams. It allows them to focus on crucial and challenging tasks needing more of their attention. And that represents a significant amount of their time. Ultimately, the use of CLM solutions by legal professionals reduces time spent on manual contract review by as much as 50%, a number of studies have concluded. Still, CLMs with machine learning and natural language processing, first need to be been trained by senior commercial lawyers. This service provided deliver higher levels of accuracy right out of the box.
Indeed, each third-party contract review presents a unique set of challenges. Merely knowing and avoiding the common pitfalls is a best practice onto itself. But with the right contract management software at your complete disposal, your contract review errors will soon be a distant memory – and, over time, a relic of a bygone past.