Corporate legal departments today face numerous compliance risks, most notably understaffed and overworked departments with enormous volume and deadline pressures from multiple sides, especially as it relates to contracts.
Today’s corporate legal departments are under greater pressure to contain costs than ever before. Tightening budgets and constrained staffing levels that come with them stand in stark contrast to increasing regulatory burdens and the unrelenting, seemingly ever-growing need for in-house lawyers to manage and review contracts. As a result, the corporate legal department is often deemed a proverbial black hole – the department always in a mad race to complete the tasks at hand.
Not only do most departments see an increase in the amount of work they must do, but also the requirement they expand their knowledge and expertise to address increasingly specific demands. Mistakes happen and in such environments lawyers can and often do fail to adequately review and manage contracts. At times this can mean missing or failing to address those contracts that post the greatest compliance risk.
It’s for this reason that labour-intensive contracts and the required time investment for lawyers poses one of the greatest compliance risks for corporate legal departments. Real-world examples reveal the indisputable: if your legal department is overworked, lacks a formal process for managing contract review and related workflow and is drowning in contracts, the risk is all too apparent. Risks can range from missed revenue opportunities to more menacing consequences including substantial fines, material breach and government investigations.
Examples of such risk exist within the experiences of nearly every corporate law department. The only difference may very well be the degree of risk and the financial ramifications suffered by the department and larger corporation as a result. Typical risk exposure occurs in hastily reviewed contracts, which may be differently interpreted depending on the skill of the reviewing lawyer and the complexity of the contract. Other risks include expired confidentiality agreements, missed financial opportunities in agreed pricing increases and foreign exchange escalation clauses that are often ignored or simply forgotten.
Risk exposure is not limited to large, complex contracts. Simple contracts, due to their high volume, can pose equally dangerous situations for corporations. For example, if a corporation has non-solicitation clauses for client contracts and these are not tracked, it could place a company in unnecessary litigation. Additionally, corporations typically include intellectual property protections in their non-disclosure or confidentiality contracts. Allowing these provisions to expire or failing to track a non-standard clause can not only subject the company to embarrassing contractual failures, but also risks litigation or disclosure of valuable intellectual property.
Unnecessary risk exposure, mistakes and oversight are the stuff of nightmares for any lawyer, especially those in corporate law departments who are charged with the legal well-being of the corporation. Regrettably, high-volume and ostensibly low-risk contracts like non-disclosure agreements, statements of work and purchase orders have the potential to exert a stranglehold on even the best lawyers. Add to this the increased regulatory compliance called for by legislation, such as Sarbanes-Oxley, HIPPA, Money Laundering Regulations and EU Data Protection legislation, and the stage is set: even a brief lapse in diligence – one overlooked contract or one missed contract deadline – can have dire results.
Consider an actual example. A large US corporation faced a backlog of contracts for the properties it managed. Contracts submitted by brokers often sat in legal for weeks as lawyers within the department worked in a “fire-fighting mode” that forced them to continually review “urgent” contracts and left little time to think strategically. Ultimately the department missed a contract – a rent escalation notice that resulted in a $10 million loss.
Fortunately, there are ways for corporate legal departments to cost-effectively address this risk while satisfying the mandate not to add staff. Outsourcing is a viable and proven solution, not just for contract management and review services, but also the technology and process expertise required to most effectively free corporate legal departments from what is often a vicious cycle: lawyers hard pressed to review all contracts and not given the necessary time to adequately manage those that pose the greatest risk.
Following is a suggested starting point for lawyers that address contract review and management requests on a frequent basis:
Managed contract review services
Allocating responsibilities to the appropriate labour resource, whether internally, or via an outsourced solution provider, helps ensure workflow optimisation and standardiszation. Contract review services, initially utilised by only the very largest corporate legal departments, now enable both large and small legal departments to effectively offload much of the administrative burden associated with managing high volumes of routine contracts, particularly those in which specific clauses can be standardised. The added value benefit is that this frees up the internal lawyers to focus on higher-level strategic work requiring deep legal judgment.
Contract management software
Maintaining continual visibility over contract deadlines is imperative not only to avoid costly mistakes and failures to comply with contractual obligations and regulatory standards, but also to manage the internal operation of even the smallest corporate legal department. Fortunately, many viable solutions are now available that enable departments to effectively govern workflow.
Written documentation and standard review parameters
Some corporate law departments, especially smaller ones, still rely on the subjective legal judgment of lawyers who may lack deep domain expertise in reviewing corporate contracts. Written contract “playbooks,” of which the results are subject to quality audits, give corporate law departments a solid foundation to negotiate more complex contracts and predictability into the future state of contracts several years down the line and during personnel changes.
In all cases, it is imperative to work with technology and service providers that can prove they satisfy compliance requirements and reduce risk. Providers should be able demonstrate a keen understanding of all relevant legislation, as well as appropriate standards certifications such as the ISO 27001 security certification. They should also have a proven track record of success with corporate legal departments of similar size and contract volume. Likewise, all contract management technologies should enable lawyers not only to easily and effectively review and submit contracts, but also to maintain a database of all submissions and changes, as well as a complete audit trail.
Most importantly, all lawyers are best served by posing the query many corporate legal departments are reluctant to answer in light of the demands so omnipresent today: “Did we fulfill our contract management obligations in their entirety today, and if not, what did we miss?” More importantly, “where can we get help?”