Applying Technology to Reduce Contracting Costs & Risks
A problem for businesses that handle a large number of contracts is that the approved standard contractual language is often modified. Particularly in large enterprises, there is a lag between the implementation of the modified language and the supervisor finding about it, if at all. Deviations from pre-approved conditions such as terms of warranties and indemnities can create costly problems when contracts are approved without prior knowledge of these modifications.
To learn more, read our Introduction to Contract Management eBook.
Deviations from Standard Contractual Language
While the contract formation process varies widely, from contracts formed quickly in face-to-face meetings to contracts formed with teams of attorneys, any business needs to be clear on what standards to use.
It is understandable that in order to generate business, one must be flexible to accommodate the specifics needs of clients.
However, when lacking a centralized system of contract management or using a paper-based contract management system, it is difficult, if not impossible, to keep track of all the instances where unauthorized language or deviations from approved conditions have occurred. With the amount of documents, communication, and logistics involved in this process, traditional tools, such as email and spreadsheets, simply don’t cut it.
Here is a good example of why using a subpar solution is not worth it: Internet contracts involving the sale of goods or software. If no specific warranties and indemnities are described in the contract, it is implied that the warranties and indemnities under state law will take place. If a sales representative were to decide to include a warranty clause that her client is requesting and the sales representative were not to inform headquarters, there is no way that headquarters could correctly account for an accurate opportunity cost of the warranty clause. By that same token, if a group of salespeople were to close similar deals in different states, a standard contract may require specific amendments, which the salesperson may not fully be aware of.
Importance of Contract Management Software
Contract management software empowers any organization to clearly keep track of instances when someone has deviated from contract language standards and of instances when someone has approved conditions, including sale discounts, spending limits, budgets and other situations, that go outside of accepted pre-approved thresholds.
This type of software becomes a central repository, where authorized personnel can access contract and agreement data from any location in a fast and reliable way. It is important to select contract management software that has advanced search capabilities that allow managers to retrieve and compare contracts through a range of queries. Having such a tool empowers authorized staff to expedite contract creation and negotiation by having access both to approved alternative language and to explanations of why that alternative language was used. Members of the contract management team who need to be up-to-date on the progress of a particular contract lifecycle receive notifications when something changes via automated email notifications and can act on tasks in a timely manner.
By operating in a centralized system, all members of an organization can collaborate in real time and keep tabs on the history of a contract: check-ins, check-outs, amendments, authorization requests, approvals and requests, and much more. Instead of bombarding team members with a lot of questions or bothering them while they are in the middle of a contract review, a contract manager has visibility into everything everybody is working on at all times, in real time. A contract management system takes the guesswork out of contract writing by keeping language consistent, allowing complete disclosure of work performed, enforcing due diligence, and highlighting all deviations from standard language.
Takeaway
Using CLM software allows a company to track deviations from standard contract language in order to minimize the risk of entering contractual obligations without a full understanding of the financial costs and potential liabilities. By centrally controlling the integrity of its approved contractual language, a company will reduce the risk of unauthorized deviations within its contracts.
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