All Contracts Are Not Created Equal

Contract Considerations in a Contract Management System

Unlike the famous adage in the Declaration of Independence – "…all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness" – all contracts are not created equal. Given that they are not equal, they do not have the same "rights," nor can they or should they be treated the same way – especially when considering a contract management software initiative.

On the surface, this seems fairly obvious. Some contracts are boilerplate, involve little negotiation, and may or may not have a direct impact on company financials. Others are entirely the opposite – they are customized, involve protracted contract negotiations, and require heightened levels of approval. Not only do they impact company financials, but their management, or equally important, mismanagement – can have a significant impact on company profitability. This impact can occur not only on the revenue front, but also from an expense perspective as one considers the risks, penalties and missed savings which invariably happen when they are not properly managed.

As companies enter the realm of implementing contract management software, the fact that all contracts – and all contract management solutions – are not equal is extremely important. There will likely be a large disparity in the reproducibility, magnitude, management and financial impact of the contracts written by any given company. Unless the contract management software system is being implemented to handle only one contract type, considering the differences in your contracts and ensuring that your contract management software system can address these differences is vital to the success of the initiative.

When assessing the different contract types and their impact within contract management software, the following five areas should be considered.

1. Creation

Is the contract boilerplate or will it be highly negotiated? Boilerplate or form contracts which require customization in only specific areas such as company name, address, contract details, and governing law are ideal candidates for contract creation automation, a key component for many contract management software systems. NDAs – which within many companies comprise a high percentage of the contracts signed on a daily basis – are ideal candidates for contract creation automation.

2. Negotiation

Contracts that require high levels of customization and negotiation may not be ideal candidates for contract creation automation. This does not mean, however, that they shouldn't be managed or that their needs shouldn't be considered when analyzing requirements for a contract management software system. Contract negotiation includes the exchange of numerous versions of the contract. Throughout the repeated exchange of changes and suggestions, redlining may or may not be turned on, the final version of the contract may or may not be stored in the repository, and approved language may or may not have been included. A robust contract management software system should be able to address the need to manage these customized, heavily negotiated contracts, before and after their execution, even if the system is not used to create the contract in the first place.

3. Approval

Different types of contracts will require different types and levels of approval. Such levels of approval may be related to properties such as the contract's value, whether the contract is buy side or sell side, jurisdiction and geography, product/service type, or the language changes which are made to the contract. Regardless of the contract type – form or highly customized – contract management software should be able to accommodate the different approval levels and cycles, which must be considered throughout the contract negotiation and approval process.

4. Search and Reporting Requirements

Search and reporting requirements for contracts may be as simple as creating searches, alerts, and reports on contract expiration dates to highly sophisticated tracking mechanisms which ensure that contract obligations, whether financial or simply contractual, are met.

5. Integration Points with Other Enterprise Applications

Closely related to reporting requirements is the ability of the contract management software system to integrate into a variety of different back-end systems, including ERP. Managing certain contracts to the best advantage depends on real-time information (such as contract spend) from such back-end systems.

All contracts are not created equal – nor is all contract management software. When selecting the contract management system which best fits the needs of your company, be sure to consider the variety of different contract types which exist within your company and the management needs of these contracts. The "….Life, Liberty, and Pursuit of Happiness…" of your contracting folks – which your contract management solution will likely impact – should not be overlooked!