Friday, March 9, 2012

Contracts Systems

When companies get to a certain size, they consider investing in contracts systems. Frequently the decision is driven by:
1.Inefficiencies in the contract preparation process.
2.Failure to use standard terms that subsequently caused problems.
3.People using outdated formats they had stored on their computers.
4.Problems with failing to meet deadlines or exercise options such as renewals.
5.A blizzard of paperwork that is not being managed well or consistently.
6.Not being able to find agreements or not having access to an agreement when the contract owner isn’t around for a variety of potential reasons.

There are a large number of commercial contract management systems that are available. The key in selecting one is what are your goals in implementing the system and what functionality to you need.

A simple contract system would be one that allows you to simply store all contract information on line where it can be used or viewed by others in your company. The more complex ones are tools that allow you to:capture information; track the progress of the contract preparation; author and create draft agreements from standard templates; get approvals; provide advanced notice of key dates; capture all information related to that agreement until the contract is closed; and then store the closed agreements for the standard retention period. No matter how good a contract system may be designed,contracts systems are only as good as the discipline in place for their use. Without the discipline all the reasons why you invested in the system in the first place will still exist. This means that the system needs to be simple and easy to use. It also needs to drive the right behavior.

Having systems function as authoring tools is fine if they are established properly. I’ve seen many companies include standard template that people had to use. The first problem that I have with standard templates is that when you use that approach people don’t learn about contracts. There is no thought process in the creation of them. Just find the right template and you are done.I prefer a framework to build contracts. You have a framework that outlines in total what is recommended for that type of agreement. For each section you have a standard or preferred clause and you have a number of alternative clauses with instructions on when and how to use them. I prefer that as the risks may be different based upon what you purchase and they will also vary based upon the supplier. Most templates are designed for average risk procurement activities with average risk suppliers and I believe that contracts should be tailored to manage risk. I also believe that during negotiation when you are forced to assume cost or risks, a good contract system would include alternative clause to add to help manage those costs or risks.A good contract system will also provide additional terms and identify what terms are needed if you need to do something different than was intended for that template. For example a standard agreement for the purchase of goods would contain one set of terms or one framework. A standard agreement for the purchase of goods under a vendor managed inventory program requires some additional and different terms. You need the terms to match the way you are doing business. For companies located in multiple countries, terms that are needed for that specific country would be alternative clauses.

Should you track how long an agreement is in process? Many systems have that functionality. To me the key is what is the risk with the delay? A good system should allow you to make that distinction so management attention is focused on delays that have significant risk associated with them. In one of my jobs we had to replace every agreement we had with new agreements as the agreements were old and didn’t match the way we did business. We also needed to simplify a number of tasks such as adding new products to the agreement or changing pricing. We already had agreements in place that covered all the major risks, so the creation if the new agreement wasn’t high risk. We also had no additional help and had 200+ agreements and doing that was going to take a while. Since our system made no distinction regarding risk of delays all that would occur is it would show up as an aging agreement and get management attention that would waste their and our time.

Should the system provide the ability for others to access the information? I think that functionality is an absolute necessity for a good contract system. I also think access needs to be controlled based upon a need to know basis. Managers and other up the management chain should have access so if they need information they can access it. Only the owner should have the authority to add or change things in that file. How the need to know is managed is important. I think a good system would send notice to an owner when someone has accessed a contract file that they own so they can notify management if they think there was abuse. It’s great to allow others to have access but remember it is sensitive information that you don’t want people to take with them when they leave or share with others.

Should the system be used to check conformity? My opinion is that functionality is not needed. What the system should have is a location to store approvals where as part of the approval process any exceptions must be identified and explained as part of the approval process.

Should the system have the capability to store letters and emails? Many times in claims or lawsuits the documentation behind the correspondence between the parties is key. As lawsuits can occur at any time until the applicable statute of limitations has run out, anything you would store in a desk file should also be able to be stored in a system. The key to this functionality being valuable is there need to be discipline and consistent use. Groups need to identify what types of correspondence must go in and what may optionally be added so you know exactly what you will find as a minimum.

Should you only have current versions of agreements in the systems? The answer to that depends upon how you structure your agreements. If your agreements are made up of multiple documents such as a master agreement and a separate statement of work you can have potential compatibility problems between different versions of the two. If you try to use a new version statement of work with an older version base agreement the two may not be compatible and key terms may not be established. A good contracts system would have any issues with using a new SOW with an older version of a base agreement identified so the user can make the necessary changes so they are compatible.

What about amendments? Every system should have the ability to capture amendments and change orders. While it would be great if a system could capture the information from the amendment or change order and generate a new version of the agreement, I think most will only capture amendment documents and its up to the owner to manage the updating.A good system should provide two additional functions. First it should require the owner to provide key data about what is included in that amendment so you can quickly find information that you are looking for. I also believe that you should have the ability to have multiple amendment files. If you have ever managed a contract that had a huge number of amendments over time it can be difficult to understand what the current terms are without going through every amendment to see what has been changed. I prefer to do an “amended and restatement of agreement as an amendment periodically so it’s clear at that point in time what the actual terms are. Then future amendments work off that amended and restated agreement and should be added to that new folder. Many times claims are based upon what the contract term were at a specific point in time. If you don’t do an amended and restated agreement periodically you have to construct what was in place at that time.

Should a contracts system have automatic notifications of things like advance notices that the contract is expiring, and needs to be renewed, extended or closed or provide advances notice of key deliverables and milestones? Any good system should have that functionality and notices should be provided to both the contract owner and their manager with potential escalation of the notice to higher levels as the date gets closer.

Do contracts systems need to collect information about the other party? Whether you are in procurement or sales you need to have a database of all your third parties and their information. For sales this is especially important in terms of managing compliance issues. If you used your contract system to collect this information you would want the legal name and location of the other party, what product or service you are buying or selling, contact information, principals, location where work or services are being performed and any other information required by your policies and procedures. Since not all purchases or sales are done under contracts, I would recommend another tool be used to manage this. What contracts systems do need is to have the functionality to allow you to easily search for contracts by including things like the assigned unique contract numbers, the correct supplier or customer legal name on the contract, contract owner and contract status.

Having a good contract system and having the discipline in place so that it is used consistently and effectively is key to procurement and contract management operations. They provide efficiency by making it easier and faster to find information to respond to issues and problems. They help avoid the risks and costs associated with failing to take timely actions. They make it easier for transitions of agreements between owners and helping new owners understand the agreement the relationship and current status. I’ve been involved in a number of acquisitions and divestitures where contracts that are used by the business need to be collected, redacted to eliminate sensitive information, and be made available for the other party’s review part of the due diligence process. Many times the contract owner could be involved in the acquisition or divestiture and information surrounding the potential sale or acquisition needs to be closely managed. You can only do that when you have a good contract system in place and the individuals have the discipline to manage those files. From experience I can say that having a system helps, but would suggest groups have internal self audits of their contract files to ensure that the information is consistent, complete and current.

No comments:

Post a Comment