Note: This is the fourth in a series of posts on contract management software. Click here to go to the first post.
Updated December 5, 2011
I don’t think there’s any question that automation has the potential to significantly improve the contracts function at many companies. Whether we’re talking about automation of document creation (aka document assembly), automation of information extraction, automation of workflow, automation of alerts, or automation of anything else in the contract process, there are systems that will do some or all of those things. But automation tends to work best when everything is standard and everyone follows the “rules.” And, as I’ve discussed in prior posts, there are limits to what machines can do and therefore limits on what automation can do.
There are also tradeoffs to consider. Setting up automated systems can be complex, time consuming, and expensive. So companies need to be smart about where they spend their efforts in automating contract processes. This is another area where a simpler, more flexible system can have advantages over an overly complex, overly rigid approach.
The Challenge of Data in Non-Standard Contracts
Last week I wrote about the importance of using human beings to “curate” information to ensure a high degree of accuracy of complex contractual data. But what if your system allows users to create the contract within the system and track all the relevant information automatically and in a structured way so no separate data entry is required? That sounds good in practice, but in theory it often breaks down. One of the common criticisms of contract management systems is that they are great for standard contracts but don’t handle non-standard situations or complexity well. For companies that are lucky enough to be able to do most of their contracting using their own standard forms without substantial negotiation it might be practical to manage all the data in a completely automated system. In the real world, however, many contracts are either on the other party’s form or are heavily negotiated. In either case it becomes difficult for automated systems to capture data because the data is no longer structured in a way that allows it to be easily captured. Also, in these kinds of situations, or when people are under time pressure, they tend to go outside the established processes and systems anyway. Once that happens you’ve lost control of the information.
Added December 5, 2011: Contract management vendor Mumboe (formerly Finetooth) closed its doors in the last month or so. Law Technology News Article. Mumboe’s most advertised feature was its automated data extraction technology. Mumboe’s web site is no longer available, but you can still find information about it here (warning: there is an autoplay video if you click on the link). The description of the system includes:
“To compete with the handful of other vendors in this narrow space, Mumboe has now added a new feature called On-Demand Contract Intelligence, which takes advantage of the service’s semantic processing engine to deliver something the others don’t: automatic extraction of data.”
Three years ago Mumboe claimed to have nearly 5,000 customers using their free trial (I was one of the people who signed up for a free account but I never really used it. I assume I was counted among the 5,000.) but apparently didn’t have enough paying customers to keep the lights on. Aside from the claimed automatic data extraction the system seemed to have some nice features, so it’s too bad the company wasn’t able to make it.
One reason for their failure might be that even though the system featured automatic extraction of some data the user was still required to verify all the data and enter additional data manually for each contract. I doubt the system was able to extract more than very basic information automatically. So even though the system seemed to have some nice features it still suffered from the common challenge of needing to have users manually input data. That was probably a surprise to those who assumed Mumboe would relieve them of that task and probably created some disconnect between customers’ expectations and reality. How you’re going to get good quality data into your system should be one of the main considerations as you think about implementing a contracts management system.
Maybe the main lesson to be learned from the Mumboe situation is that you need to do your due diligence in selecting a contract management system vendor. A company without enough paying customers may not be around long. Although many of the other vendors attempted to pick up the Mumboe customers I’m sure the transition to another system will still be painful for many of those customers.
Contract Creation/Document Automation
How often do you get to use your form contracts? Automating the creation of form contracts has tremendous potential to improve efficiency – until you have to use the other party’s form. Investing energy and resources in creating the greatest contract creation tool won’t pay off if you rarely get to use your contract forms. For high volume contracts (confidentiality agreements are a typical example) document automation can make a lot of sense. For lower volume contracts it may not be worth the investment. Having standard templates and a library of standard and fall-back clauses organized in a contracts “playbook” may provide a better return in some situations. That’s the first step on the road to document automation anyway, so the time spent creating standard clauses and templates and a playbook to guide negotiations is likely to pay off whether or not you are ever able to automate the document creation process.
A typical contract workflow involves RFPs, responses to RFPs, initiation of contract requests, contract creation, internal approvals, negotiation, more approvals, more negotiations, signatures, distribution, and post-contracting administration, all made more complex by potential interactions between systems such as CRM and ERP systems. That’s a lot of pieces to try to figure out, let alone try to automate and accommodate all the variations, different kinds of contracts, non-standard requests, personnel changes, and product changes that always pop up in the process. That complexity is one of the main reasons that efforts to automate the entire contract process are fraught with pitfalls and delays. That’s not to say it can’t be done or that it isn’t a good investment in some situations, but it’s another place where you need to carefully consider your needs and balance that against what can realistically be done in a given situation.
Related Contracts and Amendments
Another challenge for automation is in handling related documents, such as contract amendments, master agreements, orders, statements of work, and change orders. At the most basic level a contracts system will simply store related documents in some kind of a flat filing system, requiring the user to figure out how all the pieces fit together, while other systems provide a graphical representation that allows a user to easily grasp how different documents relate to each other. Another question is how the changes made by amendments are reflected in the system. Does the system still require users to look at amendments to determine the current state of the contract or does it roll all the amendment information up to the parent document? There are clear efficiency gains if the contractual information can be gleaned by looking in one place rather than having to look at multiple documents. This is one area where it is almost impossible to rely on automation. Figuring out how different documents relate to each other can be very much like trying to put a puzzle together – often with some of the pieces missing. While there are certain common themes, there are so many variations in the way contracts and related documents can be structured and even named* that it is essential to have human beings analyze the documents to uncover their real meaning and piece the puzzle together properly.
All of this is not to say there isn’t a place for automation. But the reality is that it’s unrealistic to think you can address all of a company’s contracts challenges through automation alone.
Next week: Can you build it yourself? (Is SharePoint the answer?)
* A seemingly simple question on the IACCM’s Contract & Commercial Management Linkedin group asking “what is the basic difference between a contract amendment and addendum” generated 47 responses, and no definitive answer. People’s interpretation of those terms depended on what industry they were in, what culture they were coming from, and what their experiences had been. In other words, you can’t rely on the title of a document to understand what its function is. The only way to know what a document means is to understand the contents of the document and the context surrounding the document, which again is very difficult for a machine to do.
Dave Munn is General Counsel and Contracts Intelligence Architect at Pramata. He is an experienced contracts attorney and veteran implementer of contract management software. You can reach Dave at (david dot munn at pramata dot com) or connect with him on LinkedIn.
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