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Contracts face changing perceptions, changing needs

April 8, 2015

“We must think about contracts as the foundation for business operations”, observed Steve Harmon, Deputy General Counsel at Cisco. “We’ve reached the end for strategic ambiguity in contracts – there is a need for far more clarity”.

Steve, along with Paul Lippe, CEO of LegalonRamp, was a presenter on a recent IACCM webinar exploring the implications of the new ASC606 revenue recognition standard, due to be implemented in the US (a recording is available in the IACCM member library).

The standard is significant in that it is just one more step forcing organizations to have clarity and precision in their contracts, enabling unambiguous data extraction and management. The regulation forces organizations to unbundle their contract obligations and take revenue only as each obligation is fulfilled. That means contracts staff must be far more aware of the various cost elements within a contract and to ensure there is not only clarity within the terms, but that relevant commitments and obligations are then flowed into the business and actively monitored.

This requirement simply reinforces the existing pressures for better designed contracts and for robust processes supporting data extraction, dissemination and monitoring. It plays to existing trends – such as offshore centers to undertake extraction, more sophisticated contract management systems, growing focus on the role of ‘contract owners’. As Steve Harmon also observed when talking about CLM applications: “We need to publish the implications of contract terms, not just simplify their creation”.

In summary, we are looking at contracts and their management becoming a core capability for businesses, rather than a peripheral area of administration. Contracts have been obscure, yet now they must be increasingly transparent and designed for active use. These are challenging changes for all the professionals traditionally involved in their creation and management. The pervasive nature of contract terms means that many people in the business are affected. Indeed, just yesterday I was writing an article for a Sales journal, explaining the impacts on the traditional sales and account management teams.

Over the next two years, we will see a fundamental reappraisal of contract design and wording, challenging the way that traditional legal drafting has occurred. We will see fundamental changes in the software to support contract management, as artificial intelligence and machine readable data facilitate extraction and dissemination of information. We will see fundamental changes in the way that contract portfolio performance is monitored and business intelligence is generated to drive marketing and policy decisions, as well as far greater sophistication in understanding and managing risk. And this means we will without doubt see fundamental changes in the way that contract management skills are developed and deployed.

 

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