June 26, 2023
By FactorPage Reading Time: 7 minutes
Why centering your contracting transformation on technology can lead to its failure (and how to stop this)
Nearly 70% of Chief Legal Officers (CLOs) planning to invest in technology over the next 24 months will invest in new or updated contract management tech, according to the 2023 ACC Chief Legal Officers Survey.
Still, Gartner predicts that by 2025, corporate legal departments will capture only 30% of the potential benefit of their contract life cycle management (CLM) investments.
Better contract management is clearly a priority for in-house legal teams – and one that they’re willing to invest in, but those investments rarely live up to their full potential. Why?
For most organizations, the fundamental issue comes down to an overly simplistic view of the contracting ecosystem.
Common view of the contracting ecosystem
In many organizations, “contracting transformation” and “CLM tech” aren’t just mutually inclusive, they’re virtually synonymous.
It’s easy to see why: CLM software promises tremendous improvements – if successfully implemented. So, for many teams, the contract ecosystem equals CLM tech. With stories of failed CLM tech implementations so common, many have adjusted their view of contracting to include a thin layer of process (but only those decisions immediately surrounding tech, like workflows, templates and playbooks).
Legal departments endeavoring to transform contracting are generally guided by this viewpoint, tempted by the promises of AI silver bullets, and it severely limits the (necessary) scope of their project.
A broader view of the contracting ecosystem
Because the common understanding of contracting is too narrow, “contracting transformation” often falls short of anything remotely transformative.
A broader view of the contracting ecosystem must consider the approach to work, contract artifacts, contract data, people, and culture in addition to tech and a more comprehensive understanding of process.
These inputs help inform a target operating model – a vision of contracting built on a clear understanding of demand and supply capacity, guided by the objectives of stakeholders across the organization.
Why consider all contracting inputs during contracting transformation projects?
In instances where bad contracting processes lead to consequences, the tech is rarely the central issue. Failed CLM tech implementations are generally derailed by deep-rooted, systemic issues, such as departmental silos or bad contract data (no surprise given that the average organization holds commercial data in 24 different systems).
The cost of poor contract management
Poor contract management costs companies 9% of their bottom line, so it’s little wonder that so many teams are eager to improve. Tech solutions have sold many in-house legal teams on the promise of “plug and play” improvements, but reports on CLM suggest that transformation generally takes at least 12 months – and often much longer. alarmingly high rates of CLM tech implementation failure (and the fact that 30% of legal departments who currently have contract management software in place acknowledge that it is underutilized) tell us that CLM software isn’t a silver bullet.
Technology is a powerful enabler, but only if it’s implemented thoughtfully as part of a larger strategy – it can’t solve operational issues. When organizations approach contract transformation from too narrow a viewpoint, they don’t realize that they should be considering broader issues at all. The larger, critical context goes unseen.
Better contract management helps mitigate risk, save money, and generate revenue faster. But achieving a contracting target operating model takes planning and legwork, which can only begin once a broader perspective is established.
Designing a contracting target operating model
Designing a target operating model starts with an assessment of the current state of contracting to understand capabilities and uncover opportunities for improvement.
Before this assessment can begin in earnest, it’s important to do some early legwork. Take the time to complete initial tasks like developing a project plan, identifying key stakeholders, and collecting project data. This is particularly important in industries where a large percentage of the workforce is involved in contracting – such as telecoms, where the average organization involves 26% of its workforce in contracting. Not only is it more difficult to identify key stakeholders in these instances, but it’s also easier to forget someone.
Assess the contracting current state
With a plan in place, teams can analyze data and stakeholder needs (through interviews or questionnaires), define and prioritize pain points, and conduct root cause analyses. Because so many organizations know something is causing issues within their contracting ecosystem, but few have clarity on exactly what that is, a root cause analysis is a critical step in connecting the dots.
At the end of the assessment, organizations are left with greater visibility into the current state of their contracting, including a view of process, operations, pain points and underlying causes.
Understanding the current state is vital. As the saying goes, you don’t know what you don’t know. Less than 11% of organizations view their existing contracting process as very effective, so it’s clear why many teams want (or need) to improve contract management. But without an understanding of the starting point, they can’t see where breakdowns are occurring or how much improvement is truly possible.
With the current state established, design of the target operating model through future state visioning can begin. This involves efforts such as conducting a future state workshop and identifying barriers to achieving the desired future state, then assessing and simplifying the path to the desired future state (including with respect to CLM tool functionality).
Establish a contracting capacity model
A key part of target operating model design is understanding and quantifying both demand and supply – the “why, how and what if?” behind both sides of the equation. This process entails some further examination of the current state. Ask questions like these around both the supply and demand sides to create a capacity model:
Demand side questions to identify contracting capacity:
- Is all current contracting necessary?
- What are the demand flows?
- What segments and types of contracts?
- What quantitative measure of complexity drives resource matching? How is this being done today?
Supply side questions to identify contracting capacity:
- Where, how and by whom is contracting done?
- What are the productivity metrics? Is this optimized?
- How will technology affect productivity?
- How do low-touch and no-touch contracting assumptions affect the capacity model?
A clear capacity model better illustrates future state potential, and the gap between that vision and the current state.
Envision the target state and map a path
A target operating model is driven by a number of inputs across the contracting ecosystem, each of which bring benefits that grow more pronounced when they build off each other.
This marks an opportunity to prioritize changes and identify quick wins. For example, if an organization realizes that all current contracting is not necessary, or that expensive resources are currently handling low-complexity contracts, they may find opportunities to affect change and realize savings quickly.
From here, organizations have enough information about their starting point, target operating model and potential roadblocks create a map that links the current state of contracting to the future state vision.
Depending on the current state and target operating model, this roadmap may include improvements, negotiation artifacts, process flows, technology enablement and change management.
Achieving the target operating model
Once developed, implementing the contracting target operating model requires three key workstreams: artifact development, contract management system (CMS) enablement and data migration.
Updating contract artifacts
During artifact development, teams can leverage the information gained throughout the assessment and planning process to update their master service agreement (MSA) or other primary agreement templates. With these foundational artifacts in place, teams can update ancillary documents and finally, develop a playbook.
As part of this workstream, teams can harmonize or consolidate remaining documents to work alongside the new MSA. They will also develop an index of provisions for their clause library, which supports the creation of playbooks inclusive of rationale for standard risk positions, acceptable fallbacks and use-cases, escalation protocol and more.
Selecting the right CLM technology
Part of CMS enablement may involve selecting CLM technology. It’s important to leverage a complete understanding of user and system requirements to select a solution with features that align to stakeholder goals.
But of course, even an ideally suited CLM tech solution is only one piece of the puzzle. A data hygiene plan, which focuses on ensuring the data going into the new system is correct (and correctly formatted), and a system to ensure more seamless, widespread adoption help ensure that the tech does its job as an enabler of process.
Migrating (clean) data
Given that bad contract data is one of the main roadblocks that ruins CLM tech implementations, a carefully considered contract and data migration plan is critical once technology has been selected. As part of the contract and data migration process, teams must create a data hierarchy and metadata validation report to better understand the value of their contract data (and to ensure that it is complete), followed by a migration plan (outlining details like who will do it and when it will be done).
By completing efforts like metadata cleanup and contract clause analysis to ensure that contract data is being leveraged properly and consistently, organizations achieve a clean, complete, easily searchable, de-duplicated and properly tagged document corpus in their selected CLM technology platform.
These steps support the journey from current state to target operating model. But once achieved, the TOM still has to be maintained – much like any optimized state of being, it requires upkeep.
The value of holistic contracting transformation
If the risks of too narrow an approach to contract transformation are wasted investments, organizational incongruity and ongoing revenue leakage, then the benefits of a broader view are just the opposite.
What’s more, when a contracting target state is achieved, work is aligned with the resource(s) best suited to handle it.
Contracting transformation case studies
The assertion that a holistic approach to contract transformation drives results isn’t conjecture – it’s based on years of experience.
For example, a multinational healthcare company engaged Factor to support procurement contracting transformation. At the time, the team handled 4,500 contract requests per year, but the process lacked oversight and standardization.
By designing – and continuously optimizing – a streamlined contracting process, Factor now supports 6,000 contract requests per year for this company while achieving a 25% reduction in cycle time.
In another instance, a Top 3 Management Consulting firm engaged Factor to assess current contracting processes, desired future state and complete a root cause analysis for the implementation of contract lifecycle management technology. As part of this process, Factor completed a large-scale document review across a variety of document types, including MSAs, SOWs, NDAs and more. We uncovered and provided qualitative data on issues that must be resolved before CLM tech can be implemented, avoiding a failed implementation.
In still another example, an educational publishing company was looking for cost savings, associated process improvements and operationalization. Factor introduced self-service contracting for lower complexity contracts – with the right tooling and training, they are now executed by business managers, contract owners or purchasers. This speeds up time to contract for business stakeholders and increases capacity for higher complexity, strategic contracts.
Additionally, we have helped the legal team refine templates, create playbooks and train their team members to enhance their contracting capabilities. As a result, the organization has seen 35% shorter cycle times across all procurement categories.
There’s no denying that technology is a critical part of modern contracting, but organizations that zero in on CLM and gloss over the bigger picture sow early seeds of failure. If a contract transformation project is a key objective for you, start by shifting your perspective – take a broader approach and realize faster results.
For more on how to drive the greatest impact from your contract transformation project, get in touch.