A Quick Guide to Contract Governance
Any lawyer who has worked in-house or engaged in significant commercial disputes knows that the quality of contracting is driven by ‘governance’ – the structure, authority and processes in place to ensure that contracts are entered into and performed effectively. From reviewing complex contracts relating to the sale of businesses to drafting outsourcing agreements and acting for clients in relation to supply chain disputes, the issue of governance (particularly at an enterprise level) is always at the forefront. Contracts are governed by the terms of the contract between the parties as well as any applicable legislation. Contract governance takes that a step further by considering how effective practices can be used to develop compliant and legally robust contractual relationships. Contract governance encompasses the policies, procedures, processes and organisational structures which operate at a strategic level. It refers not to the individual terms of contracts but rather the overarching framework within which organisations operate when entering and performing contracts. Contract governance ensures that: The aim is to develop a strong culture of compliance across an organisation which permeates throughout an organisation and shines through in the way in which it contracts with other organisations . Policies and procedures that form part of an organisation’s contractual governance can vary from simple check-lists to comprehensive systems designed to track the contract a company is entering into right from the initial stages of bid/tendering through to ensuring that governance is being undertaken throughout the life-time of the contract. The term ‘contract governance’ is often used by organisations and lawyers to encompass specific processes or policies when exchanging contracts or to describe the approach taken to contracting at a high level. However, the application of the term can differ from one organisation to another. Contract governance therefore may not always mean the same thing to everyone and a common understanding of what contract governance means in a particular context is key. End to end scales and contract governance is based on the notion of ‘accountability’ and that those who have responsibility for performance are the same people who understand the key commercial and legal issues at play and those who are responsible for managing risk. That is enhanced by ensuring that the accountability is captured through clear governance structures.
Critical Aspects of Contract Governance
A successful contract governance strategy revolves around several key elements. The primary objectives of a contract governance strategy should ensure regulatory compliance, manage risk, and address stakeholder requirements. In order to achieve these goals, organizations need to adhere to guidelines that ensure quality and positive performance outcomes. The contract governance guidelines include, but are not limited to, the following:
Well-written and unambiguous terms that are clearly defined in the contract
Comprehensive contract scheduling
Outline and approval of contract terms
Effective contract delivery
Practice and verification of options clauses
Deliverables audit
Reporting requirements
Document management and organization
A complete set of accurate records
Valuable and quality performance development
Supplier and contractor performance evaluations
Contracting and status reviews
Monitoring, reporting, and full compliance with all regulations and requirements
Well-organized and efficient contract administration
Compliant and accurate contract documentation
ILSS performance management
Timely closeout of all contracts and agreements.
The Importance of Technology in Managing Contract Governance
In a world where business moves at lightning speed, organizations are increasingly turning to technology to help with contract governance. In particular, automation, data analytics, and contract lifecycle management software are transforming the way companies manage their legal agreements. Automation tools are becoming more prevalent and sophisticated. With the capability to streamline workflows for drafting, reviewing, and executing contracts, these tools can save time and significantly reduce the risk of human error. For example, legal teams can now use software that highlights standard contractual terms and flags any provisions that fall outside the organization’s risk appetite. This reduces the human effort needed to identify and correct issues, thereby increasing speed and efficiency. Data analytics tools are also helping organizations improve contract governance by providing critical insights into how contracts are performing over time. By analyzing contract terms and clauses, companies can pinpoint how each agreement is behaving and assess the impact on overall performance. Analytics dashboards connected to contract terms and milestones give visibility into spend, renewal dates, and obligations, to name a few. This enables organizations to be more proactive in addressing issues and to have data-backed conversations with business units to flag, for example, potential contract terminations and/or renewal opportunities. Tools for contract lifecycle management (CLM) are also riding the digital wave. Comprehensive CLM software can be used to create, negotiate, execute, oversee, renew, and terminate all legal agreements within an organization. It can also track which business unit is responsible for a contract and when it is up for renewal – eliminating one of the largest pain points of contract governance. In addition, the organized storage at the heart of such systems makes it easier to find contracts when disputes arise. As contract clauses move from paper to pixel, organizations now have their contracts at their fingertips and can pull them up for review at a moment’s notice. As these tools continue to evolve and become more widespread, organizations will be better equipped to manage vast amounts of contracts in a more efficient manner while also achieving greater levels of productivity.
Reducing Risk with Effective Governance
Contracts inherently involve a multitude of risks, the key of which are: (i) performance risk; (ii) compliance risk; and (iii) payment/revenue risk. In the case of performance risk, this usually refers to failure to deliver or failing to accept or make payment, resulting in potential liability. Compliance risk involves breaches of risk, which may result in invalid contracts, undue expense, even criminal liability. In the case of revenue risk, this relates primarily to the fact that many contracts cannot be modified after management and board approval, so that revenue not booked is lost forever.
Robust governance strategies can reduce risk. Initially, companies need to establish an effective contract framework that can manage performance, compliance, and revenue risks. A properly functioning contract framework ensures that contracts conform to best practices, all legislation (for example, the Sale of Goods Act), company policy and precedent while recording the necessary obligations. The contract framework also enables authorized personnel review contracts for compliance, potential liability, and ensure that contracts properly reflect the approval of the organization.
Secondly, companies should establish a contract repository, which is a centralized location for contract storage. All contracts should be stored in a central electronic repository with the relevant metadata collected. An effective contract repository will require technical and business skills and requires a sophisticated IT strategy. The repository is a combination of a document management system and a contract management system. The repository facilitates both the management of contracts, and the ability to conduct analysis and reporting.
Finally, companies should ensure that they have a dispute resolution mechanism in place. An effective dispute resolution scheme means that disputes do not go to court, which saves cost and time.
Successful Implementation of Contract Governance
Mastering Contract Governance: Essential Insights and Best Practices
Best Practices for Implementing Contract Governance
Establishing a robust contract governance framework often turns out to be simpler than achieving its objectives. Drawing from our experience, we consider the following to be best practices in establishing a formal contract governance framework: Though these measures will not guarantee a successful contract governance framework, they are a good place to start. To further minimize risks , it is essential not to rush the development of a contract governance framework. The benefits of taking a principled approach to contract governance by carefully developing its framework far outweighs the benefits of hastily done and crafted contract governance framework. Stakeholders must also take care to manage the evolving landscape resulting from external forces that can impact contract governance. The legal, regulatory and policy environment are always changing. Social viewpoints, attitudes and preferences are also constantly evolving. The result of these is that contract and its relationship to accepted norms is also shaping and evolving to reflect those changes.
Common Issues in Managing Contract Governance
Organizations face numerous challenges in effectively implementing and enforcing contract governance. A few of the most common challenges are:
- Lack of training for legal and business teams on the importance and value of contract governance.
- Lack of standards, procedures, and templates for proper data collection about contracts.
- Unorganized, siloed contract repositories that do not provide a single source of truth for contract data.
Fortunately, all of these can be addressed with appropriate training, established protocols and processes, and a centralized repository for contract metadata and data.
The Next Steps in Contract Governance
As contract governance continues to evolve with new technologies and emerging global trends, organizations will need to remain agile and informed in order to stay compliant and competitive. One prominent trend is the increasing integration of artificial intelligence (AI) and machine learning into contract lifecycle management systems. This development promises to streamline the review and negotiation of contracts, reducing the time it takes to close deals and improving accuracy. Additionally, AI can help identify potential compliance risks by analyzing data across various contracts and identifying patterns that may require further attention. Another area to watch is the implementation of blockchain technology for contract governance. With its capacity to maintain secure, distributed ledgers, blockchain holds the potential to revolutionize the way contracts are executed , stored, and monitored. This technology will enhance transparency and reduce the likelihood of disputes, making it an attractive option for organizations operating in high-stakes industries. Finally, regulatory requirements surrounding contract governance are constantly evolving. With an ever-changing global landscape, organizations must stay abreast of the latest developments in data privacy, cross-border transactions, and industry-specific regulations to avoid potential pitfalls and legal issues. Navigating these complexities will become increasingly important as businesses continue to expand their operations and customer base. Staying informed about these trends and the broader landscape of emerging risks and rewards in the contract governance market is critical for organizations looking to maintain a competitive edge.