I recently spoke with the head of commercial legal at a Fortune 200 corporation about how her company had grown through acquisitions and doubled in size over the past three years. Once they consolidated the contract templates, she was left with almost 700 different templates used to varying frequencies by various business and legal professionals throughout the company over the past three years.
More than the substantial inefficiency this created, her biggest concern was the risk from using different templates for the same purpose. Slight variations in language and provisions can end up meaning dramatically different things. It seemed that standardizing or harmonizing these differing provisions could eliminate the differences in risk thresholds due to these variations. Indeed, the board of directors’ risk management committee had identified the issue based on a recent internal audit. My colleague knew she needed to do something, and though she had been thinking about it for about a year, she had yet to take action due to the seemingly overwhelming scope of the endeavor.
After exchanging platitudes like “the best way to eat an elephant is one bite at a time,” and “don’t try to boil the ocean,” we began to discuss practical ways to get her to a (smaller) harmonized group of templates that could reduce organizational risk as well as increase efficiency, reduce cost, and enable lawyers to spend time on other (typically more complex and more important) legal matters.
Our conversation revolved around a straightforward six-step approach to getting to her destination. We agreed that two points are critical when invoking the six steps: get started – but don’t rush once you do. That meant creating a reasonable timeline that doesn’t try to accomplish a gargantuan initiative in just a few months. There were numerous stakeholders – in the acquired companies, subsidiaries, parent entities, and different business lines – including lawyers, procurement professionals, IT professionals, finance professionals, and others, each with their own point of view. Absorption time would be necessary.
SO, WHAT ARE THESE SIX STEPS?
Step One: Organize the contract templates by each business line, and then contract type within each one. This doesn’t mean that every line of business should have its own templates. Rather, this exercise helps ensure that the idiosyncrasies and nuances of a particular business line are not inadvertently ignored.
Step Two: Make sure to clearly delineate any parent-child relationships between contract documents. For example, statement of work templates that go with specific master services agreements. Often language in the statement of work is closely linked to the master services agreement and sometimes may supersede provisions in the MSA.
Step Three: Identify any specific contracts or contract types within the business lines that were purpose-built for a single instance, and then remove them from the population. These outliers will hinder the effort to identify commonalities among templates.
Step Four: Identify common provisions across different contract types within each line of business and have a mechanism to compare these provisions to similar contract types in other lines of business. Technology can be very powerful to enable this categorization but remember: technology is a tool, not an elixir. A team of experienced contract analysis and review lawyers should quality check the output of any technology used to support this effort and then manually review and compare provisions that the technology cannot identify (note that technology exists to assist this sort of manual work, so using “stone tablets and chisels” is not necessary).
Step Five: identify both unique provisions within the templates that are necessary (e.g., geography-specific language) and provisions (e.g., regarding intellectual property protection or data privacy) that must remain but are not meant for “everyday” use.
Step Six: The hardest step: removing templates if most of their provisions are in another template. Creating a clause library to accompany these templates is another approach; if key clauses and alternate provisions are available to people drafting and negotiating contracts, then the primary template can be kept bare-bones.
One Key Note: I also mentioned that if she had a single source of truth repository of all material, executed contracts, organized by counter-party, with parent-child hierarchies articulated and meta-data extracted, it would be a lot easier to embark on this initiative. The creation of a clause library could emerge from the repository. Identifying which provisions most frequently require negotiation (and the degree of intensity typically involved), as measured by deviation from the starting point, would be handy to have when creating a clause library.
The steps above are straightforward. However, complexity accompanies volume. Talking about 30 templates versus 700 are very different complexity discussions.
This is where patience becomes crucial. Applying these six steps to 700 different contract templates from six different companies will likely take a year or two. Stay aware of the concept we have all encountered (which my friend likes to call “an organizational speed limit”), whereby we take into account that humans will use these templates, and while individuals can change and adapt from the current process, this often occurs slowly. The existing process, however inefficient, enables them to get their jobs done and (one hopes!) go home to their families each night. Any change, even if heralded as the path to a better future, requires some change management.
We ended the conversation with my friend feeling a little bit better about the endeavor that lay ahead. It felt a little cathartic for me as well...Perhaps, having read this post, you will, too.
Our conversation revolved around a practical, straightforward six-step approach to produce a harmonized group of contract templates that could reduce organizational risk, increase efficiency, reduce cost, and enable lawyers to spend time on other (typically more complex and more important) legal matters.