Post #1 of this series looked at how Brett Hart, General Counsel at United Airlines, became their interim CEO. He not only understood risk, and how to intelligently manage it, but he also had a deep understanding of the company’s business and strategy, and how to deliver. In this next post we’re taking a closer look at how the role of General Counsel has matured. We covered examples of impressive success and are now looking at some distressing failures.
In The Social Network, Justin Timberlake’s character asks the fictional Mark Zuckerberg, “You know what’s cool? A billion dollars.” Normally, yes, a billion dollars, or euros, or British pounds is cool, but if that billion refers to your company’s lost revenue due to contract leakage, it’s not cool at all. A general counsel can neither effectively manage risk, nor drive revenue or cost reductions without having a firm grasp of the company’s underlying contractual commitments.
For medium- to large-sized organizations, the sheer volume of buy- and sell-side contracts can bring a legal department to its knees. Gartner estimates that nearly 80 percent of all business transactions are governed by contracts. Price Waterhouse Coopers, an international professional services firm, suggests that most medium- to large-sized organizations have anywhere from 20,000 to 40,000 contracts in effect at any given time. Faulkner Information Services estimates that nearly 10 percent of all executed contracts are lost.
And no wonder they’re lost. At many organizations, these tens of thousands of contracts are documented across a wide variety of formats including Word documents, emails, PDFs, and even faxes. This cornucopia of formats is often stored on an array of hard drives, flash drives, inboxes, and the dreaded metal filing cabinets (that no one has opened in years as if the very act of opening the drawer will lead to the escape of previously contained risks). Every individual author on a contract — a sales executive, an IT executive, or even a lawyer — means a potential new version of a contract. Soon more contract versions have proliferated than covers of the song “Brown Eyed Girl.”
While contracts can originate from human resources, finance, procurement, IT, sales, and marketing, it is incumbent on general counsel to guide, organize, and centralize the contract process. In addition, these contracts need to be created, approved, executed, stored, managed, amended, and renewed. And, lastly, they need to be searchable to guarantee compliance, secure incentives, and reduce risk.
Mistakes can literally ruin a business. Take the unfortunate case of Park City Mountain Resort, in Park City, Utah, once one of the world’s top ski resorts. Park City Mountain Resort leased the land on which it operated its famous ski slopes. In the spring of 2011, as the renewal of the resort’s 20-year lease extension was looming, nobody within the company seemed concerned. Disastrously, they missed the renewal deadline by two days. The improper renewal allowed the landholders to lease the land to Vail Resorts, which increased the annual lease payments from US$155,000 to US$25 million (note that this also includes the rent for a second resort in Park City). Because of this error, Park City faces an uncertain, litigation-filled future.
Park City Mountain Resort is a harrowing example, but this lack of process and organization means real revenue loss for most companies.
The International Association for Contract & Commercial Management believes that organizations miss out on 9 percent of revenue every year because of poor contract management. For a business with US$1 billion in annual sales this translates to approximately US$100 million in lost revenue. A general counsel capable of finding an additional 10 percent in revenue each year is more popular than US country singer George Strait at a Texas honky tonk.
The solution: Contract lifecycle management software
Due to the sheer volume of contracts, no lawyer, not even one as talented as Lionel Hutz, can effectively manage a company’s contractual obligations all alone. General counsel need new tools in the form of enterprise-level solutions to manage and predict risk and compliance across all buy- and sell-side contracts. Only through this type of robust organization, centralization, and analysis can companies maximize the value of their contracts and protect themselves against losses.
Full disclosure: I am the general counsel of Determine, Inc., a global provider of software-as-a-service enterprise contract lifecycle management, strategic sourcing, supplier management, and procure-to-pay solutions. I like to sleep soundly at night, and I want you to as well. Instead of an Ambien (that’s Stilnox outside the United States), may I suggest contract lifecycle management software? Every day, I work with general counsels that are looking for tools that will help them manage risk, and support their company’s strategy.
The impact of contract lifecycle management software — or lack of it — on legal teams can be profound. In the span of a few months, I have seen legal teams go from participating in 50 percent — or less — of buy- and sell-side contracts to actively driving more than 80 percent of these same contracts. Beyond keeping track of the data and documents, legal teams and their business-side counterparts are using enterprise-wide contract lifecycle management to collaborate with suppliers and stakeholders, to close deals, and to win business.
General counsel need new tools in the form of enterprise-level solutions to manage and predict risk and compliance across all buy- and sell-side contracts.
Only through this type of robust organization, centralization, and analysis can companies maximize the value of their contracts and protect themselves against losses.
Most contract management software has two principal functions. The first is a trackable workflow for requesting, creating, negotiating, and approving contracts. The second is that of a repository — an archive — where a company’s contracts can be stored and easily searched.
One estimate by Forrester Research suggests it takes almost 3.5 weeks at a typical company for a contract to be requested, created, negotiated, and executed. However, wizards and templates with contract management lifecycle management software enable companies to automate and streamline contract creation. These templates can include pre-approved clauses and controls to ensure company-required language is not changed or removed. If a change is made to this language, an alert can immediately be sent to a manager or legal representative for approval. General counsel can be certain executed contracts are in compliance with appropriate policies and business objectives.
Legal teams want to make sure they are allocating the right resources at the right time. Another major benefit of automation for a legal team is that a lawyer no longer needs to review every word of every new contract. Lawyers can instead focus on contract deviations that the software has identified. Anecdotal estimates suggest that time spent on negotiating and reviewing contracts by a legal team can drop by as much as 90 percent as a result of automation and trackable workflow. Shorter cycle times for contracts means improved efficiency and an acceleration of revenue.
Anecdotal estimates suggest that time spent on negotiating and reviewing contracts by a legal team can drop by as much as 90 percent as a result of automation and trackable workflow.
Enterprise-wide contract lifecycle management software also gives legal teams and senior management insight into a company’s executed contracts. Dashboards can provide overviews of when contracts are up for renewal, when incentives kick in, or when discounts should be applied. This information insight allows general counsel to proactively partner with their business counterparts to identify revenue generating and cost containment opportunities.
General counsel are the ideal executives to preside over contract management solutions. General counsel work across almost every facet of the business, so they are in the best position to deal with the holistic contracting needs of the organization. And, general counsel tend to have the skills and authority to bring a diverse group of leaders together and serve as an impartial arbiter.
A business-focused general counsel that understands the company’s strategy and that effectively partners with senior management to drive that strategy is a powerful member of the executive team. And, perhaps one day, a CEO.
* In this webinar Dan O’Connor, GC at Kellogg Company, and Prashant Dubey of The Sumati Group, talks about how General Counsel and Procurement Are leading the adoption of Contract Lifecycle Management.