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Do these issues sound familiar?


How often do you encounter some or all of these causes of contract under-performance?
1) Failure to establish and / or communicate clear objectives is a major issue in subsequent contract negotiation and contract management, causing delays, disagreements and loss of value.
2) This lack of clarity, often accompanied by late engagement of commercial resources and the imposition of industry or corporate standards, frequently contributes to the use of risk averse contract terms that distract from establishing key performance criteria and processes.
3) Problems with defining project scope cause subsequent disputes and disagreements over change management, charges and payment.
4) The use of traditional, legally-driven forms and documents renders most contracts of little practical use to
delivery teams and project managers, thereby undermining their primary value as instruments of communication and understanding.
5) Few organizations appear to make effective use of past contracts as a source of learning. Procurement contracting is especially weak in this regard.
6) Only 16% of respondents feel that their contracting process ‘always’ achieves a positive impact on the relationship between the parties – suggesting there is major opportunity for improvement.
And the consequence is …..
According to the experts surveyed for IACCM’s ‘Attitudes to Contracting’ report, these weaknesses in the approach to contract terms and negotiation have a major impact:
63% report that they are frequently a cause of cost overruns
59% report that they are frequently a cause of project delay
28% report that they are frequently a cause of reduced future business opportunities

Top tips for an SoW


Statements of work, scopes of work – the growth of services contracting means they are becoming steadily more important. And we know from IACCM research that disagreements over scope are the most common source of claims and disputes – so getting them right is important.

IACCM has produced a short podcast, available in the Member Library, with suggestions on how to improve the quality of an SoW. It builds from this checklist of ‘ten tips’.

  1. Understand whether it’s a Statement of Work or a Scope of Work – or a combination of both
  2. What contracting/commercial model should you use and how does this impact the SoW? (Hardware, software, SaaS? GaaS? Performance-based? Outcome-based?
  3. Be clear about what your RACI is around your SOW. Is there clarity over who will draft the SOW and their competence to do it?
  4. Be clear what is in and out of scope
  5. Ensure thorough understanding of requirements (too many SoWs are fundamentally flawed by incomplete or imprecise proper requirements analysis – and a tendency to suppress or ignore inconvenient requirements)
  6. Validate the capabilities of both sides (can the requirements be met?): who is best equipped to do what? Is the scope realistic? Cost and risk efficient?
  7. Ensure adequate review of the draft SOW (stakeholders)
  8. What is the likelihood of change and how will it be managed?
  9. What are the roles and responsibilities in ongoing implementation – obligation extraction and management
  10. Think about setting milestones, and whether the SOW might need redefinition when a particular milestone is reached – do you need an agile approach?

 

Research shows that lawyers lack intelligence


I think most people would agree that lawyers are in general very intelligent people. But that doesn’t mean they are always equipped with the right or the best intelligence – and recent research suggests that they are ignoring changes that could equip them to deliver better results.

Lawyers today base many of their decisions on opinions, rather than facts. That is because their access to data is inevitably limited – there are a finite number of precedents or examples that can realistically be accessed. It is also because some key aspects of legal work are based on personal taste and judgment – for example, what clauses to include in a contract or what words to use in its drafting.

An element of personal judgment is always valuable in any professional discipline, but the more that this judgment has a sound base of analytical data, the more likely it is that the right outcome will be achieved. It is in this context that lawyers are facing a remarkable opportunity – but it is an opportunity that many consider to be a threat. It’s time to think differently.

Awakening to a new world

According to a recent report published by Thomson Reuters (“Ready or Not: Artificial Intelligence and Corporate Legal Departments”), less than 5% of in-house counsel are actively using or considering the use of artificial intelligence. Less than 10% see artificial intelligence having a role in identifying risk or predicting outcomes. For most, any real impact from this technology is viewed as being at least five years away – and even then, they think it will largely affect costs and efficiency. So it is perhaps not surprisig that few feel any great sense of urgency to understand more.

I think they are wrong – very wrong. And I will explain why with an example.

AI is fast coming of age

Last week, I sat through a demonstration of an artificial intelligence system, developed by an in-house lawyer and in enterprise-wide operation at a US$33 billion corporation. Drawing from a database of multiple past contracts, with some 30,000 terms and term variants, the system undertakes automated analysis of any incoming customer contract (about 80% of the corporation’s business is undertaken on customer terms). The output from this analysis is a color-coded report on the extent of individual term variation from accepted business ‘norms’. More than this, the system also suggests pricing actions based on those variations.

At present, if the report identifies significant departures from the norm, it then goes to a qualified contract management or legal reviewer. They undertake a risk and mitigation analysis, using a pre-formatted approach which then feeds back into the system. Behind the scenes, that system is quietly storing and learning, readying itself for the day when much of the mitigation work can also be undertaken by the machine.

Intelligent … but redundant?

So does this mean artificial intellligence will soon replace the need for lawyers? As the example illustrates, an AI-based system can indeed make better use of data because it is not limited in terms of volume or speed. Therefore it will offer not only more fact-based information, but it will also be far more astute at assessing probability and consequence.

However, what all that data offers us is the chance to use human intelligence in different ways. Our work will increasingly be focused on interpreting the ‘facts’ that AI offers – for example, in identifying where a change of policy, process or practice might give us a source of cost reduction or competitive advantage. We will also be able to undertake risk scenario planning, not just on an individual agreement, but across entire portfolios (for example, a business unit, a geographic region, a customer set or contract type). And of course, an AI system cannot anticipate or deal with change or unexpected events (though it can help us quanify their consequence – often within minutes).

Artificial intelligence will rapidly become pervasive. Successful businesses will be those that are most effective in marrying AI with human intelligence – in other words, equipping intelligent people with intelligence. It is time for the 95% who believe that change is somewhere in the distant future to awaken, prepare and ensure they are ready for these exciting, though challenging, changes. At IACCM, that is certainly the support we are providing to our members.

 

 

 

The cost of a contract


I was recently asked by LawGeex, an AI technology and analytics provider, to update an article I wrote in 2011, estimating the typical cost of producing a contract. Here is the result.

Here we are in 2017, with businesses focusing on automation and agility. So surely operational costs in areas such as contracting must have reduced.

In fact, the average cost to businesses of processing and reviewing a basic everyday contract where some level of negotiation is required is only rising. Drawing from IACCM studies, based on analysis of more than 700 organizations, it appears that business spend on a low risk contract from draft, negotiation, to signature, has increased 38% in the past six years, to an average of $6,900. Costs for a mid-complexity contract stands at $21,300 and high complexity contracts run into hundreds of thousands of dollars.

This calculation takes into account data from large companies and enterprises in North America and Europe with annual revenues of $1billion or more, comparing current costs with a similar analysis undertaken in 2011.

The true cost of contract review and approval 

The true cost of a contract reflects the extensive (and growing) time of departments in getting a deal through their organization.

The contract stages include contract creation, processing, review and negotiation of the contract. Costs are incurred due to the involvement of the multiple individuals in an organization required to iron out the contract details. This may include negotiations setting out statements of work, price or charge schedules and ever-growing issues around security and regulatory complaince.

The breakdown of costs in a typical contract involves 2.5 hours of legal time (costing the average business an estimated $500, assuming the use of iin-house resources); around 18 hours of contract manager/procurement time (at a cost of $2700); around 12 hours of operations, engineering, or project management time ($1800); two hours in Finance (c$300); up to six hours with compliance / risk / or regulatory functions (c$1000) and $600 (‘other’ types of review or resource).

Cost data influencing these findings are extracted from the 2017 IACCM salary survey, based on our 40,000 members.

What is driving rising contract costs?

One of the main factors causing an increase in contract costs is the steady increase in domestic and international regulation, such as anti-bribery legislation, data protection and cybersecurity rules. The imminent GDPR legislation is poised to make things even more expensive.

Perhaps as important is the fact that services now represent 58% of business-to business-spend. Contracts for tangible goods (the main source of contracts in the past) are much easier to test, define and specify, while intangible services contracts require increased diligence, such as validating supplier capabilities through service delivery undertakings, drafting service levels and outlining key performance indicators. The growing importance of complex services is mirrored in growing focus (and length) of contracts.

The gap between the most efficient and contract “laggards” is rising 

The gap between average and best has grown due primarily to variability in the levels and sophistication of automation in handling basic contracts. While the average cost of a simple contract has risen by $1900 (38%) in six years, for the most efficient organizations this price has risen by only $300 (9%). Smart companies are moving away from templates and into standard term databases, generating less contention, and saving time and money. This is also where Artificial Intelligence is starting to kick in and where digitization offers potential for major savings.

How to follow the contract cost-cutters? 

The world’s most efficient businesses have cut around one-third of the cost on contracts when compared to the average corporation. The most efficient companies adopt contract “playbooks”, codifying contract policies and empowering the organization. In addition, solutions such as AI and NLP are raising business intelligence and the quality of analytics, which can steadily eliminate the need for case by case discussion of clauses. The lowest costs for an individual contract in “top quartile” companies is $3,800 for simple contracts, $14,000 for mid complexity contracts, and $49,000 for high risk or unique contracts.

What this means for your business 

Management in many companies is awakening to the inherent inefficiencies of today’s contracting processes. The extent of manual intervention, outdated methods of production, individualistic approaches to legal drafting and error-prone production of key documents such as statements of work impose unacceptable delays and costs – not only during production, but even more significantly in performance.

Emerging technologies should eliminate many of these problems. Intelligent systems, together with the steady development of global standard terms, will revolutionize the way that contracts are produced and managed – only then confirming the overall scale of cost that is associated with today’s methods.

 

GDPR: Is Europe crazy?


At last week’s IACCM Americas conference, many delegates were stunned by what they learnt about GDPR, the data privacy regulations that the European Union plans to impose from May next year. One observed that this is ‘another example of the law operating contrary to reality’.

It isn’t just the scale of fines that matter (up to 4% of annual revenue), but the extent of what will be deemed ‘private data’. As Apple’s head of litigation observed at a conference this week: “The challenge is that it applies to all personal data, meaning any data that can be used, ultimately, to identify who you are. So it’s far beyond your name, your Social Security, your bank account. It’s your IP address, or your device ID, or a reference number to a customer, or a complaint or question that you brought in. For any organization, beyond tech, it just covers just about anything.”

This legislation is costly; it is questionable how companies will comply; and there is no real evidence that anyone (beyond the ivory tower of the European Commission) actually wants it. When they discover the impact of this legislation, there is every chance that consumers will complain because it means more checks, more clicks, more validations and more focus on giving specific authorizations regarding use of data.

For corporations (and government) GDPR places a heavy burden on processing costs, which will inevitably fall back onto consumers in the form of higher prices or taxes. The level of technology investment required to protect data continues to spiral; the sophistication of nations interested in hacking continues to grow. Adding these further layers of required protection challenges European competitiveness in international markets.

Ultimately, as with too many regulatory initiatives, the rationale and benefits are unclear. Cynics might suggest that the real purpose behind this is that it is another way to fill the EU’s coffers with money from fines. When the consequences – as in the case of GDPR – are so profound, there surely should be a much greater engagement with the wider population to obtain their support.

 

Change, Risk & Integration


At the end of each IACCM conference, we like to summarize key themes. Today, I am featuring the observations of Sally Hughes, IACCM’s Chief Operating Officer.

CHANGE

Change is a constant enigma to us all.  While one executive presenter told us to embrace change, to “make change your best friend”, another observed that in reality change is reacted to by one of two things – complacency or terror!

We are all facing change – in our organisations, in technology, in the projects that we are managing – so don’t we all have a duty to react to change in a very different way – to focus on it as an opportunity?  And in the context of contracting, we need to design our contracts as an instrument for managing change.  Our organisations are demanding us all to be more agile, more adaptive; to remain relevant – we have to contribute to this agenda.

RISK

We heard a lot about risk throughout the conference. Again, I would like to quote the speaker who commented that risk is always owned by a customer in every case; customers can lend that risk or share it – but customers always own it.   So, we need to have the courage to talk about risk and focus on appropriate risk allocation, on risk management and risk mitigation – to focus on minimising risk.  It was noticeable how everyone ran out of the conference room following a presentation on GDPR, terrified of the potential impact of a regulatory fine – 4% of annual revenue.   But we seem to concern ourselves so much with what needs to go into the contract to protect us and not the practical solutions to avoid the risk becoming a reality in the first place!  It took on of our Leaders of the Future to observe – “…why are we so worried about 4% of annual revenue when it might not happen?  Why don’t we worry about the 9.2% value erosion that is already happening as a result of weaknesses in contracting…!”

INTEGRATION

My final theme came as a result of the output from the Great Debate.  The audience, by a very small margin, voted that procurement should become a sub-element of Contract Management.  However, I think the real output was in fact the need to focus on integration. And that brings me back full circle to our opening remarks on Wednesday where we talked about the inclusiveness and diversity of the IACCM Membership, one of the great strengths of IACCM.  The Chief Compliance Officer from 3M talked in her presentation about the “15% Culture”, the need to spend 15% of your working day focused on activities beyond your role because this is the source of innovation, of value. This is the thinking and the opportunity that IACCM provides  – extensive networks, the ability to outreach, a commitment to research – beyond your organisation, beyond your industry and beyond your geography – to gain those outsights.  So, don’t let this be the end – one of our Leaders of the Future talked about how she was excited to have found “applicable solutions” to challenges that she can take away from these three days.  That is the purpose of this conference, to give you tangible takeaways so that rather than just saying – “…it was an OK conference…” – you can say it was an “outstanding” conference and start putting into action the things that you have learnt when you get back to your desks on Monday morning. And key to that learning is to think and operate as integrators of ideas, approaches and people.

Collaborating across boundaries


Trading relationships often involve multiple parties whose support and alignment is critical to success. Achieving that support and alignment depends on empathy – an understanding and appreciation of their point of view (whether or not we agree with it).

Last week, IACCM held its 16th annual Americas conference, bringing together groups that represent four of the key stakeholders in every significant trading relationship – lawyers, project managers, contracts and commercial and procurement professionals. The spirit of collaboration was palpable. Newcomers especially were amazed at the openness and inclusive behaviors, commenting on the positive, ‘can-do’ atmosphere.

So what makes it different?

For an event to succeed, it requires a shared sense of purpose that goes beyond simple networking. The IACCM conference enables conversations between people who would not normally meet each other outside a negotiation. With its focus on ‘trading relationships’, they rapidly find a uniting topic, something that all of them care about and consider important.

I am going to highlight three of my observations from the event – three factors that helped build this spirit of togetherness.

  1. Each of the functional groups is facing similar pressure to increase delivery of measurable value. This means a need to expand their role and thinking – and to achieve this, building bridges between each other is an obvious way to generate more creative, more successful solutions and outcomes.
  2. At this event, even more strongly than in the past, there was a clear consensus that the approach to formation and management of trading relationships is changing. The integration of ‘the contract’ and ‘the relationship’ lay at the heart of many presentations and case studies, with focus shifting to the terms that support improved governance, greater adaptability and proactive performance management.
  3. There is a new enthusiasm and belief in the opportunities that lie ahead of us – in particular from new and emerging technologies. With ContractTech a major feature of the event, delegates were given multiple insights to an exciting future, where the quality of data will enable a shift of role and business influence.

For several years, IACCM research has pointed to the scale of value erosion that comes from weaknesses in the way we form and manage contracts. While a few organizations have picked up on this and driven significant improvements, most have not. Suddenly, the reticence is disappearing; there is a real belief that a focus on ‘relationship resource planning’ can yield the next big wave of savings – and that the IACCM community, with its ‘collaboration across boundaries’, will be at the heart of the movement that drives these benefits.