The corporate contractual process is failing. Epically. And that’s a big problem.
Despite the swarms of people and astonishingly high spend devoted to this category, contract life-cycle management in most companies is a low-tech, disorganised process fragmented across numerous legal and non-legal functions. Very few general counsel can even tell you the number of contracts their company is party to, let alone understand the totality of their obligations, the interactions between them or their organisational risk implications.
That’s a threat on many levels. For GCs, it means they are lagging behind their boardroom peers in providing metrics on operational improvements. While other functions offer data-driven insights that aim to improve overall corporate performance, the GC is often limited to assuring their peers that they are pushing hard for discounts and doing their best.
But with increasing regulatory and board scrutiny of corporate practices, these contractual blind spots have become far more than the GC’s problem. Often, the business as a whole lacks an understanding of some of its biggest exposures, and is frequently just a regulatory inquiry or bad bounce away from having its blind spots exposed.
And then there are cases where contractual blind spots relate to potentially destabilising obligations like those seen in complex financial contracts. Poor visibility can become a global economic problem.
The worldwide regulatory environment has never been a more integral part of doing business. Nor has it ever been quite so volatile. The new regulatory landscape demands that GCs have deep and immediate visibility into the risk positions contained within contractual activities. It’s a level of insight that most organisations just don’t have.
What most companies have, instead, is an antiquated approach to the contracting process governed by a ‘more is more’ philosophy: contracts are negotiated by experienced lawyers; the better the lawyer, the better the outcome. More contracts equal more (expensive) lawyers. More compliance needs equal more lawyers and compliance professionals. More regulations equal more lawyers. More legal fines equal more lawyers.
This approach has led many legal departments to a hard-to-organise mass of hundreds of lawyers, negotiating thousands of contracts using inconsistent policies and processes, and then storing them in various databases and shared drives that don’t enable ready access to the crucial data they contain.
The results are just as one would expect them to be: skyrocketing costs, limited visibility, sub-optimal risk management and a compliance nightmare.
Despite this dire scenario, law firms, in-house departments and non-traditional providers haven’t managed to build a systematic, auditable, data-driven approach to contracts. Perhaps this is because in the corporation’s current state, contracting is a ‘homeless’ function, suffering from fragmented interests. With no single jurisdictional owner, contracts are at once everybody’s problem and no one’s at all.
Or perhaps it is because in-house departments lack the capital investment, technology infrastructure and appropriate process orientation to address the contract problem.