GreenPoint> Law & Compliance TAKING CONTROL OF YOUR CONTRACTS: BEST PRACTICES FOR CONTRACT MANAGEMENT. October A Division of GreenPoint Global

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1 TAKING CONTROL OF YOUR CONTRACTS: BEST PRACTICES FOR CONTRACT MANAGEMENT October 2013

2 Introduction Business contracts provide a fundamental building block for any organization. They are foundational texts, defining the terms, conditions, and cost for the products and services provided between a firm and its customers. According to PricewaterhouseCoopers, most organizations have 20,000 to 40,000 contracts. Yet, these all-important documents often go unattended. Terms can change, physical contracts can be misplaced, and renewals may lapse, causing a firm to expend valuable resources retroactively managing its contractual assets. Inadequate oversight may also expose organizations to potential liability when approved and updated terms and conditions go unused. Furthermore, maintaining proper control over contractual agreements is essential when regulators make inquiries, financial audits are ordered, and contracts are used as support during any litigation. In conjunction with clearly defined and standardized contract management processes, organizations have the opportunity to reduce costs, maximize revenue, and optimize the stipulated terms of a contract by developing accessible repositories of contracts, related documents, and amendments. In the absence of organized structures and processes for the control and management of contracts, corporate legal departments and managers will remain mired in redrafting and reviewing at the cost of analysis and negotiation. This all too common and inefficient cycle of contract management costs large organizations $215,000 a day according to the IACCM. Taking control is no easy task, especially when internal legal teams are continuously managing hundreds or thousands of different types of contracts. This white paper discusses the major challenges in enterprise contract management, highlights the key business drivers, and outlines today s best practices. Contract Management Frameworks: The Challenges Advancements in information technologies ease the challenges of effective contract management, offering organizations a competitive advantage through increased productivity and efficiency. Corporate managers are empowered with the dexterity to quickly access existing agreements for important and relevant information, including key milestones and provisions within the contracted terms. The implementation of these tools should limit the risk of corporations losing valuable time, money, and opportunity. Defining the correct expertise is essential. Here s why: Value leakage A recent study by Gartner Research found that 60 80% of business transactions are governed by contracts or agreements. These compacts often include provisions for discounts and other benefits that become available once certain milestones are reached. For example, pricing milestones may trigger volume discounts which are not automatically processed. With proper contract review and repository maintenance, managers are made aware of these inherent opportunities and will have the updated information to mobilize their teams to take advantage of such triggers or conditions. Exposure to unnecessary risk Corporate legal departments are being asked to manage and maintain hundreds if not thousands of legal agreements, amendments, and side letters from a multitude of sources. These agreements often vary widely in nature and form. Many departments have no singular tool to manage these agreements, terms, and related amendments, leaving businesses subject to potential risks and costly missed opportunities. Managers may not be alerted when a counterparty fails to meet its obligations, does not uphold service levels or turnarounds, or violates regulatory or contractual requirements. In decentralized businesses, departmental units are often given the autonomy to negotiate agreements with vendors and suppliers. In this model standardization is essential, but individual departments are often unaware of terms standardized by their governing units or divisions. Such limitations on information may 2

3 cause subunits to negotiate less favorable terms in their contracts or to agree to terms deemed unacceptable by their governing units. The organization as a whole runs the risks of costly contradictions and redundancies that are in direct noncompliance with its core policies. HiGH professional cause subunits to to negotiate AnD labor less favorable CosTs terms in their contracts or to agree to terms deemed unacceptable by their governing units. The organization as a whole runs the risks of costly contradictions and redundancies that are in direct Retaining noncompliance a team of skilled with lawyers its core to policies. draft, review, and maintain contracts can reduce risk for an organization. The decision to use in house legal counsel or an external law fi rm is typically based on budgetary constraints. using outside counsel High can HiGH easily professional professional exceed $450 per and AnD hour, labor labor accumulating costs CosTs thousands of dollars in legal fees. internal legal teams are generally Retaining time-constrained a team of of and skilled have lawyers specifi to c draft, areas review, of expertise and maintain that may contracts not span can all reduce aspects risk for of contract an organization. negotiation. The decision to to use in in house legal counsel or an external law firm is typically based on budgetary constraints. using Using outside Corporate legal departments continue to try to meet the challenge of legacy contract management by developing counsel can easily exceed $450 per hour, accumulating thousands of dollars in legal fees. internal Internal legal teams are contract management systems internally, using a dedicated team to manually search and encode contract details into generally time-constrained and have specific areas of expertise that may not span all aspects of contract negotiation. an informal database structure. This is costly and time consuming and does not allow the organization to process its Corporate legal departments continue to try to meet the challenge of legacy contract management by developing backlogged contracts, much less deal with ongoing or future agreements. contract management systems internally, using a dedicated team to manually search and encode contract details into Developing an an a informal technology database solution structure. with This a structure is costly that and allows time consuming fl exibility and reporting does not allow is vital the to organization ensuring the to system s process its effi cacy and backlogged durability. contracts, Given today s much less signifi deal cant with demands ongoing on or future technology agreements. teams, their availability to internal legal departments is signifi cantly limited. Appropriating existing employees to burdensome contract management tasks Developing a technology solution with a structure that allows flexibility and reporting is vital to ensuring the system s using a fragmented efficacy and or durability. disorganized Given today s system significant will compromise demands their on technology regular duties, teams, leaving their availability critical work to internal undone and legal causing the group s overall productivity to suffer. departments is is significantly limited. Appropriating existing employees to burdensome contract management tasks using a fragmented or disorganized system will compromise their regular duties, leaving critical work undone and REGulAToRy noncompliance causing the group s overall productivity to suffer. in today s highly regulated business environment, myriad laws and regulations require covered entities to ensure people or Regulatory REGulAToRy businesses they Noncompliance noncompliance deal with are in good legal standing. Regulations are continually amended and updated, creating In a in perpetually today s highly challenging regulated business compliance environment, effort. protocols myriad laws are developed, and regulations and require compliance covered staff entities work to diligently ensure to maintain people regulatory businesses standards they across deal all with departments are in good in legal their standing. organizations. Regulations For are example, continually health amended care companies and updated, are mandated creating to conform a perpetually to the governing challenging HipAA compliance rules effort. that affect Protocols protocols multiple are developed, business units and compliance and require staff maintaining work diligently specifi to c documentation maintain and regulatory procedures standards to refl across ect adherence all departments to the in compliance their organizations. standards. For example, health care companies are mandated to conform to the governing HIPAA HipAA rules that affect multiple business units and require maintaining specific unwanted documentation AuTo-REnEWAls and procedures to reflect adherence to the compliance standards. license and Unwanted unwanted royalty agreements auto-renewals AuTo-REnEWAls often contain automatic renewal or evergreen provisions, which result in automatic renewal even in the absence of express notice. Without a functional alert system to trigger and notify managers of key License license and royalty agreements often contain automatic renewal or evergreen provisions, which result in automatic renewal dates, departments may agree to outdated terms, incurring unanticipated expenses and liabilities. investing in renewal even in in the absence of express notice. Without a functional alert system to trigger and notify managers of key an organized renewal and dates, comprehensive departments contract may agree management to outdated system terms, incurring will prevent unanticipated these issues, expenses providing and liabilities. management investing Investing and in legal teams an organized the relevant and and comprehensive reliable information contract to management optimize their system time will and prevent expand these their issues, negotiation providing capabilities. management and legal teams the relevant and reliable information to optimize their time and expand their negotiation capabilities. TRAdITIONAL PRACTICES IN CONTRACT MANAGEMENT Traditional TRAdITIONAL Practices PRACTICES in IN Contract CONTRACT Management MANAGEMENT PARENT CONTRACT EXHIBIT AMENDMENT 1. CLIENT NEEDS FILE. MAKES REQUEST TO PULL FILE 2. SEARCH /SHARED STORAGE DRIVE 3. AMENDMENTS OR RELATED DOCUMENTS NOT SHARED TOGETHER 4. UNABLE TO TELL IF CONTRACT IS MOST RECENT/COMPLETE VERSION JANUARY MARCH APRIL STORAGE UNIT 3. WAIT TO RECEIVE BOXES 4. SORT THROUGH BOXES 5. CONTENT MUST BE SCANNED OR REPRODUCED BY HAND Legal A A Division of of GreenPoint Global A 3 Division of GreenPoint Global taking TAKing TAKinG CONtROL CONTROL COnTROL OF YOUR OF YOUR CONtRACtS: Contracts: COnTRACTs: BESt BEsT BEST PRACtICES PRACTiCEs PRACTICES FOR FOR CONtRACt COnTRACT CONTRACT management MAnAGEMEnT MANAGEMENT

4 Manual Until document digitization became the norm, the traditional way of managing contracts included a decentralized structure that relied on physical media such as paper, boxes, archive space, and storage rooms. This burdensome process resulted in excessive direct and indirect costs for organizations and made accessing, reviewing, modifying, and tagging any part of the contracts laborious. The consequences are obvious: inefficiency, poor quality management, incompatibility, missed opportunities, and increased exposure to risk. Businesses now operate in a fast-paced, online, and global business environment that simply makes this traditional approach obsolete. Still, according to Faulkner Information Services, more than 10% of all executed contracts are lost. Digital Many businesses have adopted a more modern approach to contract management. This approach employs technologies for document scanning, tagging, extracting data, storing files into in-house physical servers, and then making those files accessible over a local area network. Though a technological advance, this process only addresses a small component of the issue and is only one step above manual review. For example, if files are to be shared across business units, they must be located in a vast digital storage drive, checked for accuracy and updates, and then shared via . Though these contracts are in an electronic format, the ongoing problems of access and maintenance persist. The most recent and complete information is still hard to find. Further, database systems may not interface with other groups, such as finance or procurement, to alert the legal group when certain milestones are reached or when events affecting provisions in contracts occur. Key benefits are overlooked and missed opportunities continue to exist, risking exposure to unforeseen, incremental professional and labor costs, noncompliance, or unwanted auto-renewals. There is a better way. Today s Best Practices in Contract Management While enterprise resource planning (ERP), customer relationship management (CRM), and sales force automation (SFA) systems provide generic enterprise-wide solutions, they do not have the agility to handle the increasing complexity of contracts or to respond to the day-to-day requirements of contract management. Goldman Sachs estimates that ERP vendors only cover 20% 30% of the needs of most enterprises. As a result, most companies have relied on offline spreadsheets, standalone databases, or homegrown solutions. Still others have adopted a do-nothing or manual approach. For large organizations, a good enough approach is not sufficient to satisfy a corporate board or shareholders intent on seeing control and discipline injected into contract management. These solutions can also prove less than ideal when responding to regulatory inquiries. ERP, CRM, and the like bring substantial value to organizations, but a solid contract management system will offer open architecture, allowing easy integration with ERP/CRM and legacy applications. This solution ensures that your ERP/CRM investment is maintained while adding sophisticated capabilities. Today, cloud computing and other new technologies make it possible to conduct contract management in a highly accessible, automated, cost-effective, and secure environment. Key developments in the marketplace combined with technological advancement have resulted in significant strides in contract management. OCR (Optical Character Recognition) The process of transforming contracts from paper form into digital files is a crucial step. High-resolution OCR software will digitize an entire contract. Advanced OCR programs typically export to various industry standard document formats and operate on flexible platforms that support additional tools that further refine and clean scanned data. OCR systems must be controlled by a dedicated team with specific technical expertise. Many businesses do not have in-house resources for OCR conversions and associated quality assurance (QA) measures. These firms must partner with experienced vendors, reducing risk and ensuring accurate transfer of the information while providing cost savings. Intelligent data extraction and summary Once the data has been scanned, essential information must be extracted, collated, and summarized. 4

5 CUSTOMER RELATIONSHIP ENGAGEMENT STRATEGY NEGOTIATIONS DUE DILIGENCE ROUTINE NEGOTIATIONS TEMPLATES ELEMENTS OF CONTRACT MANAGEMENT ALL TASKS BELOW THE DOTTED LINE ARE OUTSOURCED. ACQUISITION INTERGRATION Request For Proposal RFP APPROVALS Non-Disclosure Agreement NDA DATA ENTRY STATUS REQUESTS RENEWALS CONTRACT ACTIVATION SIGNATURE Establishing the criteria for search, analysis, and are always backed by a team of document experts and Establishing the criteria for search, analysis, and are always backed by a team of document experts and reporting is critical to maximizing the system capabilities. lawyers who can cross-reference information, remove reporting is critical to maximizing the system capabilities. lawyers who can cross-reference information, remove Expert taxonomists and information architects establish false positives, rectify incorrect transcriptions and ensure Expert taxonomists and information architects establish false positives, rectify incorrect transcriptions and ensure search criteria and relevant data to be mined based on legal documents are as accurate as possible. search criteria and relevant data to be mined based on legal documents are as accurate as possible. the agreement type. organizations that fail to approach the agreement type. Organizations that fail to approach Document experts pick up where the information this task systematically will end up with disjointed pieces Document experts pick up where the information this task systematically will end up with disjointed pieces architects and technology teams leave off. After the of contract data. pre-established algorithms intelligently architects and technology teams leave off. After the of contract data. Pre-established algorithms intelligently ocr conversion and QA process, the results are sent identify patterns, extract relevant contract provisions, identify patterns, extract relevant contract provisions, through OCR conversion secure channels and QA to process, the legal the document results are experts sent and furnish key summary information as well as provide to through begin their secure work. channels The legal to the project legal team document will oversee experts and detailed furnish search key summary capabilities information further as analysis. well as provide the to begin management their work. of the The documents legal project and team evaluate will oversee the detailed search capabilities for further analysis. the management of the documents and evaluate the ADvAnCED search information being extracted for analysis to ensure Advanced search relevancy information and being accuracy. extracted for analysis to ensure The majority of contract management solutions on the relevancy and accuracy. The market majority today of have contract a standard management set of search solutions provisions. on the secure ClouD-BAsED DATABAsEs market However, today search have criteria a standard are not set customized of search provisions. and require Secure cloud-based databases Cloud computing is one of the key ingredients separating However, tailoring to search the organization s criteria are not governing customized rules and require legal the Cloud most computing advanced is contract one of the management key ingredients systems separating tailoring processes. to the using organization s advanced search governing criteria rules provides and legal an from the most the rest. advanced Cloud computing contract management allows the storage systems of all processes. advanced search Using advanced solution that search can instantly criteria provides find and an contract from the information rest. Cloud to computing be centralized allows and the enables storage these of all advanced retrieve entire search legal solution provisions that from can instantly a large collection find and systems contract to: information to be centralized and enables these retrieve of contract entire data. legal The provisions most advanced from a large search collection software systems to: of is contract flexible and data. can The be most taught advanced to recognize search new software types > Allow access from anywhere in the world is of flexible contracts and and can provisions be taught in to accordance recognize new with types client > support Allow access large and from scalable anywhere storage in the world of specifications. contracts and The provisions software in is accordance based on an with algorithm client > Maintain Support cost large controls and scalable storage specifications. that allows it to The learn software patterns is and based be on programmed an algorithm for > provide Maintain superior cost controls backup and disaster that different allows clients it to learn and tasks. patterns and be programmed for > recovery Provide functions superior backup and disaster different clients and tasks. recovery functions TEAM of DoCuMEnT ExpERTs AnD lawyers When contract information is stored in the cloud, it is Team Due to of the document sensitive nature experts of contracts, and management lawyers unnecessary to use to share documents with staff When contract information is stored in the cloud, it is is not an area that should be fully automated. The most or legal counsel. All interested parties simply log in to a Due to the sensitive nature of contracts, management unnecessary to use to share documents with staff effective and reliable contract management systems secure repository from almost any web-enabled device. is not an area that should be fully automated. The most or legal counsel. All interested parties simply log in to a effective and reliable contract management systems secure repository from almost any web-enabled device. Legal 5 TAKinG COnTROL OF YOUR COnTRACTs: BEsT PRACTiCEs FOR COnTRACT MAnAGEMEnT 5

6 1. Contracts converted to pdf files 2. Advanced OCR Conversion 9. Review, Search, and Edit FINANCE DATABASE PROCUREMENT DATABASE OPS DATABASE 3. QA (Quality Assuance) by document expert CONTRACT MANAGEMENT PROCESS OVERVIEW 8. Documents hosted and searchable in comprehensive databases 4. Upload into a Legal database 5. Smart Reader summary > Relevant Provisions identified and customized > Provisions extracted > Summary Created 6. GP Lawyer Supplemental Review 7. Corrections and Edits Made Contract CONTRACT Management MANAGEMENT Software SOFTwARE Advantages AdvANTAGES Contract lifecycle management software Contract lifecycle management software automates and streamlines enterprise business automates and streamlines enterprise business requirements and processes, providing contract requirements and processes, providing contract managers and other stakeholders with an accessible, managers and other stakeholders with an accessible, searchable online contract database. The effect is: searchable online contract database. The effect is: > Reduced costs Reduced costs > increased revenues Increased revenues > Maximized contract value Maximized contract value > Minimized contract risks Minimized contract risks > Assured compliance > Assured compliance once a new contract is entered, all information is Once a new contract is entered, all information is centrally located, eliminating misplaced or lost contracts. centrally located, eliminating misplaced or lost contracts. The central contract repository enables any authorized The central contract repository enables any authorized user to view the contracts without having to locate the user to view the contracts without having to locate the person who created or filed them. Armed with advanced person query and who reporting created tools, or filed sales, them. marketing, Armed with finance, advanced and query legal departments and reporting can: tools, sales, marketing, finance, and legal departments can: > Analyze current contract data > Analyze Pinpoint current potential contract areas of data concern > Pinpoint Assess sales potential and areas procurement of concern cycles > Assess Forecast sales key and critical procurement information cycles in > Forecast the contract key critical information in Because contracts the contract can contain highly confidential information, the best cloud-based solutions always Because contracts can contain highly confidential provide encryption that can effectively screen data and information, the best cloud-based solutions always keep it secure. These solutions are also equipped with provide encryption that can effectively screen data and authentication and authorization functions holding users keep it secure. These solutions are also equipped with accountable for all actions within the system. Events and authentication and authorization functions holding users activities can easily be traced back to individual users accountable for all actions within the system. Events and during audits. activities can easily be traced back to individual users ConClusion during audits. A complete contract management solution enables your organization to establish control contract management solution over critical business relationships while enables your organization to establish control over critical business relationships while Conclusion A complete maintaining best practices that make companies successful. maintaining best practices that make staffing companies the successful. contract management team with the appropriate professionals technical experts in Staffing the contract management team with the scanning and ocr conversion, document managers, appropriate professionals technical experts in and legal experts is the only way to ensure the scanning and OCR conversion, document managers, success of your document management program. and legal experts is the only way to ensure the Finding the right partner will allow businesses to quickly, success of your document management program. efficiently, and accurately capture original contract Finding the right partner will allow businesses to quickly, language and extract and summarize relevant provisions. efficiently, and accurately capture original contract With a typical contract manager making an average language and extract and summarize relevant provisions. TAKinG COnTROL OF YOUR COnTRACTs: BEsT PRACTiCEs FOR COnTRACT MAnAGEMEnT Legal 6 6

7 With a typical contract manager making an average salary of $85,000 a year, cost is an ever-present concern. Companies must choose a dedicated partner with advanced technology and an experienced team of professionals to manage the process and control costs. The return on investment (ROI) promises to be significant. Recent data shows that companies with stringent contract-management partnerships displayed increases in productivity, savings, revenue, and market competitiveness (IACCM). PricewaterhouseCoopers estimates that a company can save 2% of its annual cost through diligent contract management, especially in compliance. Without an effective system of access and review, businesses cannot fully understand the obligations and benefits of each contract to which they are a party. Companies can limit exposure to risk and increase efficiencies in negotiation and compliance by having a clear handle on the scope of their enterprise contracts. About the GreenPoint Legal Contract Management Solution GreenPoint s comprehensive approach to contract management integrates seamlessly into your organization s workflow. Using the latest developments in information technology, our team guarantees that your data is secure, searchable, and most importantly readily accessible. A successful strategy takes out the guesswork and establishes trust in the contract management process. A strong legal software framework combined with a team of hand-selected experts virtually eliminates system and process failures and enhances your overall time management and cost efficiency. GreenPoint s optimized contract management strategy provides: > Clear visibility into the universe of existing contracts > Comprehensive summaries of terms and provisions > Search capabilities within existing documents Our state-of-the-art software allows our team to compile, review, and edit customized summaries in a fraction of the time it takes outside counsel or in house staff. The results are tangible and measurable: significant cost savings, less waste, reduced risk, better quality, and higher performance output. 7

8 For further information, please contact JACKLYN A. KARCESKI CEO Office: x559 Mobile: David t. kinnear Managing Director, Legal Services Office: x565 Mobile: William H. Anderson, ESQ Director of Commercial Development Office: x586 Mobile: A Division of GreenPoint Global GreenPoint Legal is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means electronic, mechanical, photocopying, recording, or otherwise without the permission of GreenPoint. Copyright 2013 by GreenPoint Global advisor. GreenPoint Legal, its affiliates, and related entities shall not be responsible for any losses sustained by any person who relies on this publication.