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Contract management fundamentals for law firms

Contract Management Fundamentals For Law Firms
Contract management is crucial. Is your process as bulletproof as it should be?

Why not start off a discussion on a rather dry subject – contract management fundamentals – with a couple of bold assertions? Here they are:

  1. Contract management is an underappreciated practice area that could produce great profits for your law firm; and, 
  2. Litigators should be an integral part of your contract management practice.

As for Assertion #1, you may be asking how contract management can be profitable when technically, businesses don’t even need a lawyer to negotiate, draft, or enter into a legally binding contract. We’ll handle that issue at the outset of this post.

And, with respect to Assertion #2, – it actually comes from my prior work as a business litigator and, later, as a contracts manager for an in-house legal team. I’ll support this assertion at the conclusion of the post.

But before we get there, we’ll explore what a contracts management practice entails and discuss some of the current technology trends that are revolutionizing this important specialization.

Contract management as a profit center for your law firm

Let’s face it, contracts are the backbone of business operations. After all, they set the terms and conditions under which companies operate, trade, and engage with partners, suppliers, employees, and customers.

In fact, it’s estimated that 75% of business activities are regulated by contracts

This figure underscores the ubiquity and importance of contract management across all sectors.

Indeed, the corporate world’s pervasive reliance on contracts means that any inefficiency or oversight in contract management can lead to significant operational, financial, and legal risks for your firm’s business clients. That’s why lawyers can be worth their weight in gold when it comes to contract oversight.

To add fuel to this fire, it appears that in-house legal teams are frustrated by their own contract management efforts.

In fact, one recent survey revealed that three-quarters of GCs are dissatisfied with their companies’ current handling of contracts. They also report that they’re spending way too much time on this function of their positions.

What all of this means for your firm is that contract management may be the low-hanging fruit of practice areas.

Law firms that recognize and act on this opportunity can not only fill a vital market need but also unlock significant profit potential.

By prioritizing contract management and investing in modern technological tools that make the practice highly efficient, law firms can differentiate themselves in a competitive market, build deeper client relationships, and secure a more profitable future.

So, with that in mind, let’s turn to the nuts and bolts of contract management.

Core principles of contract management

The foundation of effective contract management is a deep understanding of the client’s business, industry, and business development goals.

In short, legal professionals must go beyond their legal training to grasp the commercial realities that their clients face. This holistic approach enables law firms to tailor contract strategies that not only protect their clients legally but also advance their business objectives.

With that in mind, however, law firms must also be proficient in the art of contracting. Here’s how:

Contract lifecycle management

Contract management work involves a lot more than simply drafting agreements. Indeed, full-service management work involves an entire contract lifecycle

Viewing these stages from a client’s perspective means prioritizing clarity, fairness, and strategic alignment at every step. In fact, it’s as much about ensuring that contracts are legally sound as it is about making sure they’re operationally viable and aligned with the client’s long-term goals.

The key steps include:

  • Initiation: Every contract begins with a need that needs to be filled. Perhaps your client builds widgets and needs a materials supplier. A good contract manager will be involved in evaluating the client’s full needs (e.g., cost, availability, and quality of product) and identifying potential suppliers before suitable candidates are contacted.
    • Negotiation: In this phase, legal professionals act as the client’s advocate to negotiate terms that serve its best interests while maintaining a collaborative relationship with the other party. Effective negotiation requires a combination of legal insight, business acumen, and interpersonal skills.
    • Drafting: Obviously, legal professionals also need to draft contracts that are clear, concise, and tailored to the specific needs of the client. This includes using language that is accessible to non-legal stakeholders. It also involves avoiding potential risks and/or ambiguous terms that could cause problems down the line.
    • Execution, compliance, and tracking: Additionally, your team must facilitate the smooth execution of contracts. This involves ensuring that all parties understand their obligations and verifying that the mechanisms for monitoring contract compliance are in place. Moreover, quality contract management includes keeping abreast of relevant laws and regulations that may impact performance. 
  • Termination: Every contract comes to an end. It’s the contract manager’s job to remain aware of impending termination dates, to renegotiate new terms if desired, and to ensure there’s no gap in operations due to a contract’s end date.

Tech trends in contract management

You can’t adequately discuss contract management principles without covering the tech evolution that has redefined the practice over the past several years. Staying current with these trends is critical for law firms that aim to provide exceptional client services. 

Here are some of the key trends shaping contract management today:

Integration of advanced analytics and AI

The integration of technology and artificial intelligence (AI) into the management of client contracts represents a seismic shift in how law firms can deliver contract management services.

This technological evolution offers unprecedented opportunities to enhance efficiency, precision, and client satisfaction.

By harnessing these innovations, your team can transcend traditional barriers (like exorbitant hourly fees), while delivering strategic, client-focused solutions that align with the needs of businesses in the digital age.

AI-powered contract analysis

AI-powered contract analysis tools stand at the forefront of this transformation. These platforms leverage machine learning algorithms to review contracts at speeds and volumes unattainable by human counterparts. 

For clients, this means rapid turnaround times and enhanced accuracy in identifying potential risks and opportunities within contracts. AI can review a company’s entire agreement portfolio and flag clauses in proposed contracts that deviate from standard practices.

It can also suggest revisions based on historical data, and even predict potential outcomes of contractual disputes, enabling legal professionals to offer proactive advice and strategic insights.

Automation and workflow enhancements

Automation technologies can also streamline the contract lifecycle discussed above, from assisting with the drafting and approval processes to monitoring compliance and renewal alerts.

Consequently, these systems can reduce the manual labor involved in managing contracts, thereby decreasing the likelihood of human error and freeing up legal professionals to focus on more strategic tasks.

For clients, this translates into faster, more reliable service delivery and the assurance that their contracts are managed efficiently and effectively.

The rise of smart contracts

Smart contracts, powered by blockchain technology, automate contract lifecycle so long as certain predefined conditions are met. This automation can significantly reduce the time and costs associated with manual contract management processes – again, offering a more efficient alternative for clients. 

Data security and privacy

With the increasing digitization of contracts, data security and privacy have become paramount concerns for clients. Law firms are investing in secure contract management platforms that comply with the latest data protection regulations.

As noted, there’s a trend towards adopting blockchain technology for its ability to offer secure, transparent, and immutable contract management solutions.

For example, these systems ensure that contracts and related documents are stored safely and can be accessed only by authorized personnel.

They often also feature collaboration tools that facilitate seamless communication between law firms and their clients.

This not only enhances transparency and trust but also enables real-time updates and revisions, ensuring that contracts remain aligned with the client’s evolving needs and circumstances.

Why litigators must be on your contract management team (true story!)

Finally, I’m going to support the second assertion made in the Introduction by sharing a short but poignant anecdote from my days of practicing law. It all started when I joined a boutique business litigation firm that was embroiled in a multi-million dollar contract dispute on behalf of one of its clients.

The principal issue in the lawsuit was whether two terms that were used interchangeably within our client’s supply agreement with a co-packer had the same meaning. The terms at issue: (1) “dehydrated products” and (2) “dehydrated food products.” If those two terms had the same meaning – as our client contended – then the co-packer was only free to use our client’s patented technology to manufacture a specific type of product to meet our client’s needs. 

If, on the other hand, those terms referred to two different things — as our opponents claimed – then they were free to use the patented technology to manufacture and sell many types of products for many different businesses. In fact, relying on their understanding of the agreement, the co-packer did use that technology to make and sell a vast array of products that netted them millions. Obviously, our clients wanted to be compensated for what they viewed as an extra-contractual use of their technology.

You may be surprised to learn that the contract at issue had been drafted by a lawyer – but a purely transactional lawyer. He’d never litigated a day in his life and readily admitted that he just assumed the two terms meant the same thing. You may also be surprised to learn that this hard-fought battle languished in Federal Court for the better part of a decade (at a great expense to both parties, I might add). 

Years later, I leveraged this story to obtain a contract management position with an in-house legal team. They hadn’t planned on hiring a former litigator for the position but ultimately, they understood why it was a good idea.

And why is that? Because, as someone who had litigated endlessly over poorly worded contracts, I was trained to spot holes and ambiguities before contracts were ever signed – potentially saving the company from future litigation. 

Today, having a litigator on your contract management team may be a way to sell the necessity of your services in a world where many critical contracting functions are performed by AI. AI can do a lot of things, but it can’t bring trial experience to the table.

The moral of this story? If your firm is looking for a new profit center, perhaps compiling a tech-savvy contracts management team staffed with litigators is the best way to go.

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