The Future of Contract Management & Why It Matters
What is the future of contract management? I ask for two reasons. First, we have seen an explosion in software start-ups focused on various elements of drafting or managing contracts. And second, in the last month I saw demos of synergist.io and LawGeex. Synergist’s tag line is “empower your team to negotiate great contracts” and LawGeex’s is “the quickest, easiest, and most cost-effective way for businesses to review and approve incoming contracts.”
Seeing this type of software caused me to think about the market. I answer here one question and then pose three for which I can only speculate. As always comments welcome.
One Question I Can Answer: Why Contract Management Matters
I start with a story to answer why contract management matters. In 2001, I talked with the CIO of a large real estate management company. He shared that his company had just lost over $10M. The company sent a tenant a rent escalation notice. The tenant wrote back. It cited a lease provision that required any escalation notice to issue by a date certain and pointed out the notice was dated after the cited date. The tenant therefore concluded it did not need to pay the increase. End of story – short but telling.
This might not have surprised had a commercial tenant lost track of a sub-lease. But a real estate management company losing track of key dates seems like a bank losing track of money.
Separately, consider recent accounting rule changes. The Financial Accounting Standards Board (FASB) has two relatively new rules with significant impacts on many companies: revenue recognition and bringing leases onto balance sheets. Companies cannot comply with these new rules unless they can manage their contracts (including leases).
And finally, I regularly hear about organizations that spend huge amounts of time negotiating contracts but then don’t have the tools to take advantage of key provisions such as volume discounts.
Q1: What’s Up with Contract Lifecycle Management Software (CLM)
One of my first consulting projects almost 15 years ago was helping a general counsel of a mid-size company evaluate contract lifecycle management software (CLM). In theory, it provides end to end contract management, from drafting and negotiating, to signing and execution, to managing rights and obligations. When I did that project, I thought the software category was crowded and would shake out.
I still think that. The 2016 Q3 Forrester Wave(tm) Contract Life-Cycle Management report lists 14 providers. A large number of software providers is sometimes a sign of a market that has not yet matured. (And this report does not even include some specialized players, for example, LeaseAccelerator.)
Forrester lists five sources of value for CLM. Among 41 CLM customers, here are those sources and the percent adoption:
Store - 93%
Report + analyse - 56%
Author + negotiate - 18%
Integrate to other systems - 11%
Optimize - 17%
Even among CLM customers, adoption remains arguably low. And I suspect that the percent of companies that have licensed CLM remains low.
So, the big question is why is penetration and usage still so low? My leading hypothesis is that too many stakeholders – business units, office of general counsel, procurement, and others – have a say and they cannot align.
Q2: Why Have We Seen So Many New Software Entrants in the Last Five Years?
Synergist and LawGeex are not the only relatively new entrants. In a recent consulting project, I identified over two dozen fairly new companies that offer software for one or more aspects of contracts.
I don’t have a handle on how these entrants play in corporations. But I know that many large law firms have considered, evaluated, piloted, or licensed software such as eBrevia, Kira, Km Standards, Leverton, or Ravn to accelerate due diligence, assist in managing leases, or create standardized contracts. There are also tools such DealStage and Doxly to help law firms manage editing and signing of the multiple contracts required in many individual deals.
So, why the multiple new entrants? My leading hypothesis is that entrepreneurs have spotted market inefficiencies and believe that they can meet unmet needs.
In my conversation with Edward Taylor, Co-Founder and CEO of synergist.io, I raised this idea. He replied “Entrepreneurs simply don’t see any reason why contract management should continue to be a tedious or highly repetitive task. Lightweight platforms exist and their underlying technologies have matured to the point users can reliably focus on outcomes rather than administering process. While Stanford Law School experiments with self-executing contracts and we at synergist.io develop bots to automate contract negotiation, the question is not if basic contract-related tasks will be replaced by technology, but when, and this is the shift that everyone is waiting for.”
Other unanswered questions include (1) how many lawyers will adopt some of these tools; (2) should we expect adoption of these tools to be higher than, say, document assembly; and (3) how many providers will survive for at least three years?
Q3: Choose Best of Breed or an All in One Solution?
For purposes of this discussion, let’s assume that some CLM are adequate all in one solutions. And we know that many of new companies offer narrower, point solutions such as negotiating or analyzing a contract.
So, are companies better off with all-in-one or best in breed? I view this question like I do 'build versus buy': reasonable people can and do disagree.
I don’t have a firm answer but I do have a point of view. CLM has existed at least since 1995. (Cobblestone was founded then; it is the only name in the Forrester report that I remember from my 2002 work.) Let’s stipulate that I am right that CLM remains under-penetrated and, where licensed, under-used. In those conditions, I suspect it is more sensible to license best of breed solutions.
CLM is hard because managing a contract over the lifecycle touches so many hands and departments in a company. The best CLM for procurement may not be great for business units and vice versa. In such circumstance, point solutions likely will achieve better adoption. Typical point solutions are designed for one function. If that function aligns that it wants a tool, it is more likely to use it than a CLM imposed by another group.
I started by titling this section conclusion, then realized, I really don’t have a conclusion. My goal here is to prompt thinking about these questions. I hope others will chime in via Twitter @ronfriedmann.
[ From my original article posted on Prism Legal, 26 February 2017 ]