Contracts: The danger hidden in your desk drawer

26 October 2017

On average Legal functions spend 65% of their time on contracts, and 68% forecast contract volumes will continue to increase. Yet after execution, they become a ticking time bomb hidden in a desk drawer.

 

It may give lawyers some pride to know that for all the poetry, philosophy and literature humanity has created, the first known form of writing was a contract.  In around 3300 BC The Sumerians started marking clay tablets to track ownership rights, business transactions, and government records.

In an era where business is confined by regulations and defined by intellectual property, contracts form the connective tissue that creates, captures and scales economic value.  Yet in almost 5000 years’ contracts have changed surprisingly little.

They are slow, complex, static, expensive and after they are executed they rarely see the light of day again.

As the image above shows, the majority of a Legal Resources is spent on briefing, drafting and negotiating the agreement.  Yet an agreement has next to no risk or value prior to the date of execution.

What happens next is anyone’s guess, and without any clear accountability a tremendous amount of value is lost, and risk accumulates.

The root cause of this confusion is obvious:

a) Legal functions naturally mimic the locus of their training grounds – law firms.  Law firms don’t manage contract lifecycles – so why should in-house teams?

b) Contracts fall between clear lines of functional accountability.  Lawyers understandably contend that it is the businesses contract, and they are not resourced to be able to manage execution.  The business, on the other hand, feels because Legal was involved they can abdicate responsibility.

It could be argued that contracts are the most valuable information asset in the enterprise.  Yet they get scattered in desk drawers, filing cabinets, disparate systems, emails archives and hard drives.

In an ideal world, there would be no debate.  Business contract, business responsibility.  However, in the cut and thrust of reality, risks can only be managed when there is both clear accountability and clear competency.  In many businesses, there are neither.

We would argue the only function equipped to be accountable is Legal.

Why?

Let’s look at first principles.  Contracts are an asset of the company.  Every function manages assets (e.g. computers, buildings, capital) for the company, and other functions use them to create value.  The accountable function is responsible for the management of that asset and has a ‘System of Record’ (e.g. ERP, CRM, HROS) to manage that asset at scale.

Could you imagine if Finance couldn’t track Assets?  If HR couldn’t track employees, or Sales had no customer data?

As one progressive GC said to us ‘you are responsible to extract value out of a company’s laptop, but the IT function manages the risks and performance of that device across its lifecycle – contracts are no different’.

Sounds hard? 

It doesn’t have to be.  Risk management is about transferring information from the ‘risk-informed’ (Legal) to the ‘risk empowered’ (the business).  It’s a simple information transfer game that platforms like Legal Gateway can automate through alerts, storage, search, dashboards, and reporting.

Still in doubt? 

Answer this question honestly.  Within an hour can you access any contract in your business?

If your answer is not an emphatic ‘YES’, you have a big problem.  You are putting 65% of your function’s value (along with unlimited shareholder value) at risk.  It’s probably time to get a Legal Operating System.

 

Andrew Mellett is the CEO of Plexus.

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