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6 Contract Management Software Myths to Reconsider

Dermot Whittaker contract management software, ROI

When organizations think about adopting contract management software, they often start with preconceptions. These “myths” aren’t always totally wrong – but they can be misleading. Here are six contract management software myths that should be reconsidered.

“My company is too small to benefit from a contract management system”
There are two reasons why this observation needs to be reconsidered: reduced costs and reduced risk. A simple time-and-motion analysis of your routine processes may surprise you. Contract searches, requests, routing and follow up, and obligation monitoring take more time from your staff than you or they suspect. The information exchange and tracking parts of these jobs are what contract management software reduces dramatically, saving time. Integration with e-signature reduces contract turnaround time and gets business happening that much quicker.

If your company uses outside legal counsel, a contract management system can save you money spent on redundant reviews of standard language; once you have the appropriate terms and conditions associated with the right contract templates, you can deploy these standard contracts without re-involving counsel. 

As for risk, ask yourself: Is my company too small to need to defend itself in court? Too small to worry about recovering funds for late delivery? Too small to be concerned if a profitable agreement expires? Too small to assign responsibility for deliverables? The terms of your contracts are tools to minimize risk and increase certainty as you pursue business opportunities. Setting up obligations with due dates and owners is a simple matter in a contract management system and creates confidence that you and your counterparty will live up to the agreement or have prompt access to the remediation you agreed to when the contract was signed.

In short: Collect some data and give thought to your return on investment over one-to-three years. An ROI model that takes into account reduced process time, elimination of redundant review, and reduced risk may point you toward adoption of a modern contract management system.

“Contract management software means substituting a vendor's process for my company's processes”
A common concern is that a contract management system will limit how your team creates and approves contracts. For instance, it can be hard to picture how a software program will safely provide business users with approved contracts while alerting contract managers to contract requests that need their involvement. Similarly, people question how the same system that routes a contract for one simple approval can stay on top of contracts that require multi-stage review and approval through legal, finance and executive levels of an organization.

The truth is that workflows that recognize “if-then” conditions can direct a contract document with ease once the process is clear. The two components needed for clarity are

  • the conditions that make a particular contract type (or choice of legal language) the right one
  • a list of persons authorized and assigned to approve contracts at appropriate levels

Your organization is already using this knowledge, even if your approval process is manual.

The key feature to look for in a contract management system is ability of your administrators to configure the processes themselves. With some CLM vendors, changes to a CLM system’s processes beyond what is offered out of the box is only possible through the vendor – when they can schedule it and for a service fee. Software with user-friendly configuration lets contract management automation get started on your terms and allows for quick adaptation as personnel and business conditions change.

A mature contract management system will be able to mirror any consistent contract process you are following now. As you look at software, be ready to test your process in a demonstration – and include in your demo scenario the need to change the process to meet a new condition.

“Contract management in the cloud is less secure than on premise” 
The fact is that contracts can be securely managed in the cloud or within an organization’s own network of servers. The security of either system depends on the application of up-to-date knowledge by trained, trustworthy IT professionals. In the case of your own on-premise servers (and probably you are backing your systems up with cloud-based servers), your IT personnel are trained to avoid system vulnerabilities, correct bugs and keep software up to date on both the servers and individual devices. Any document received into the system (say, a draft contract emailed to you for review) will be checked for viruses or malware – but only because your IT has kept the email scanning software up to date.

The cloud is fundamentally no different. For most organizations, the cloud means one of the large platforms such as Office 365/Azure or Amazon Web Services. Both Microsoft and Amazon have invested heavily in the security of these systems. Microsoft, for example, restricts physical access to its data centers, regularly backs up data, and encrypts data both at rest and via the network. Secure access to information can require two-factor authentication. Azure compliance services include FedRAMP and DoD compliance certifications, CJIS state-level agreements, the ability to issue HIPAA Business Associate Agreements, and support for IRS 1075. Microsoft’s Office 365 allows for security rules with alerts, custom permissions, IT device protection, anti-malware and anti-spam protection.

Technically speaking, the cloud is as secure an environment as your own on-premise server environment. One concern raised when cloud storage was new was the portability of your data – in this case, your contracts and related documents – in case you decide to discontinue service with your cloud provider. Cloud service providers offer security in this regard. Clear contractual agreements with all reputable cloud providers ensure that access to your data cannot be interfered with by the provider, and that your documents can be moved to another provider or environment at your discretion. Microsoft’s Trust Center offers more information on security concerns.

“Automating contract management means getting rid of the gatekeepers”
Trust in your contract management process – if it’s a manual process – means trust in the people who exercise judgment in drafting, approving, and executing contracts. To many observers, contract automation would seem to take these people and their judgment out of the picture. They envision many scenarios:

  • Sales has ready access to contracts and concludes deals without adequate oversight.
  • Contract terms change during negotiation, but legal and executive approvers are not made aware.
  • A counterparty uses negotiation tactics that only hands-on, experienced negotiators will spot.

The concerns are sincere, no doubt – but they are easily addressed. First, a contract management system enables permissioning that controls who can access contracts and who cannot, from entire categories of business users to individuals. Contract management software also controls whose approvals are needed for contracts to be created, moved forward, amended, approved, and signed, allowing for oversight by the “gatekeepers” at any stage. In fact, control of contracts is often increased once only in-system contracts are permitted for business to move forward.

It is true that a contract management system can open contract access and processes to business users who were previously dependent on contract managers or legal. To increase access securely requires some forethought and use of the tools available in a contract management system. For example,

  • A contract request form can require a business user to enter all relevant information to receive a well-understood, low-risk contract. That can free up time for trusted gatekeeper who formally had to field an email or phone call and follow up with the required document.
  • A contract playbook and access to a clause library, both parts of a good contract management system, can be used to train junior counsel and contract managers to negotiate contracts in line with company objectives.

The balance of openness and control that is right for your business is precisely what a good contract management system can deliver.

“Migration of legacy contracts can happen automatically 
For many organizations, getting legacy contracts into a single electronic repository is the point of purchasing a contract management system. They imagine that this will be a simple drag-and-drop operation, or at most may involve some scanning of paper contracts. With final executed contracts in one place, finding them will no longer require searching in one or more file cabinets and shared drives.

What this picture leaves out is the role of metadata and relationships in a contract management system. Metadata is contained in separate fields associated with a contract document, for example, contract name, contract type, counterparty name, start and end date, contract value, and administrative data such as approver, manager, and renewal date. Moving contracts into a new system requires moving (or providing) the metadata for each contract. Without it, the contracts are in passive storage, findable but not working for you. Metadata allows for speedy, exact searching and reporting on contracts, and filtering to narrow the results in a search or report. Metadata also drives workflows such as approval and fulfillment tasks, and review and renewal reminders. 

Document relationships are also important, especially between contracts and supporting documents such as SOWs, budgets, certificates of insurance, consent forms, and others. Some of these supporting documents may themselves require renewal or updating in the course of a multi-year contract, something a contract management system can make much easier..

Whether you are moving contracts from an old system to a new one or are starting from scratch, you will need a plan for migrating the contracts, their metadata, and their relationships. That process is often a technical challenge. Understanding from the vendor how the migration will happen is a key step in adopting contract management system. An experienced vendor will have tools (such as migration scripts) that can help to smoothly and reliably migrate thousands of contracts to a new system, along with the data that will make the contracts useful for search, reporting, and workflows.

“Artificial Intelligence (AI) routinely approaches 100% accuracy”
Not out of the gate. It is true that combined AI and human systems, adapted to particular documents, with trained machine learning and human quality control, can reach accuracy levels greater than 99%. But that level of accuracy also requires users to be clear as to their goals, organized in their approach, savvy in their application of this new technology.

Here are questions to ask yourself.

  • What is your goal? To discover inconsistent clauses? To identify known risks? To extract contractual obligations?
  • Has the AI software been trained to recognize commercial terms and legal provisions for your line of business? How well can it parse complex legal language?
  • How much learning will the software require?
  • Will you need to develop custom rule sets?
  • What form will the results take? Will your contract management system be able to incorporate these results immediately as data? Or will your contract managers still be required to make intelligent use of those results?

The answers to these questions make clear how close to 100% an AI solution will be for your particular contract management use case. 

Contract management software helps professionals save time and more effectively manage contracts. Overlooking that winning combination of people and software is at the root of many misunderstandings about contract management software. Understanding how CLM software has been successfully applied in real-life business settings (for example, through case studies) will help you take its measure – and move beyond the myths.