Commercial Contract Management During A Downturn

Commercial contracts are the lifeblood of business but can overwhelm corporate legal departments. In-house contract lawyers get bombarded with requests to review, negotiate, and approve commercial contracts and often struggle to keep up with the immensity of the challenge. Sending contracts out for review by a law firm is not always feasible or advisable due to budget and time constraints. But attempting to do all the work internally can grind business to a halt. It’s a big problem, especially at a time when the economy is slowing, and legal departments are being asked to do more with less.

While businesses are being forced to make tough choices about how to allocate resources in a more challenging economic environment, contract management should remain a priority. According to research from World Commerce & Contracting, poor management of contracts can cost a company 9% of its annual revenue.

There’s a lot to be gained from having an efficient and effective contract review and management system, but it won’t happen by accident. What’s required is having better systems and processes (and the right commercial contracts outsourcing partner) in place to streamline and improve contract review. With better systems, which lead to better allocation of resources and improved results, in-house lawyers can extract themselves from perpetual contract review busywork and immerse themselves in more sophisticated, value-added legal work. And that’s important at any time, but particularly when economic headwinds are creating new challenges.

The Promise of Better Commercial Contract Management

The idea that better, more structured commercial contract management systems provide businesses critical benefits is more than mere conjecture. In addition to the potential for capturing more revenue cited above, PWC found that a business can save up to 2% of their annual costs by investing in proper management systems, which can help avoid errors and mitigate the risks of non-compliance. In addition, Goldman Sachs estimates that automating contract management can accelerate negotiation cycles by 50%, payments by 75-90%, and trim operating and processing costs by 10-30%.

In order to realize these and other benefits, businesses must continue to invest in contract management systems, which is the only way to truly measure contract performance.

Increased Speed of Negotiations

Without clear processes and playbooks in place, businesses spend an inordinate amount of time and resources on routine negotiations. With more standardization, the negotiation process can be more simplified and occur more rapidly, thereby increasing the speed at which cash flows to the business and reducing costs.

Better Analytics and Visibility, Which Leads to Better Performance

Better systems enable businesses to identify actionable insights from their commercial contracts. For example, they allow (1) in-house counsel to determine what types and quantities of commercial contracts are moving through their department, (2) contract submitters to easily access contract information and report up to management, and (3) members of the C-suite to gain a holistic view as to the company’s contracting processes.

Reduced Risks

A good contract management system helps to mitigate business and legal risks by standardizing contract terms, making them easy to review and update, and allowing contract performance by all parties to be tracked across the entire lifecycle of a contract. Businesses who lack these types of systems run into problems big and small, such as getting locked into unfavorable terms when they miss an auto-renewal date or failing to update contracts with mandated provisions from new laws or regulations such as the California Privacy Rights Act.

Better Results When the Economy Rebounds

Vilfredo Pareto was an Italian engineer, sociologist, economist, political scientist, and philosopher who came up with a simple but powerful insight which suggests that 80% of results come from 20% of efforts; 80% of outputs result from 20% of inputs; and 80% of effects come from 20% of causes. The 80/20 ratio of cause-to-effect became known as the Pareto Principle or 80/20 Principle.

For most businesses, commercial contracts are among the 20% of assets that matter most and drive results. Accordingly, as businesses evaluate how to allocate their resources in an economic slowdown, contract management is not an area to cut. In fact, now is the time to invest. When the economy rebounds, as it always does, businesses that invest now in better systems and processes will reap the benefits. Others will be playing catch up.

As Wayne Gretzky famously said when asked to explain his uncanny ability to be in the right place on the ice at the right time, “I skate to where the puck is going, not where it has been.” Set your business up for future success with a structured and streamlined contract management system. Contact Lexitas commercial contract outsourcing team for assistance.

Is your corporate legal department being forced to do more with less?
Lexitas can help.

Meron Hewis is the President of the Legal Talent Outsourcing Division of Lexitas. Ms. Hewis has over 20 years of experience in legal consulting, project management, and alternative legal talent outsourcing solutions. She is a thought leader in the industry, providing unique legal solutions and designing the operations of various legal programs internationally.

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