Organisations have a lot of contracts for a lot of reasons. Changes to any contract could be desired or required, for countless reasons, at any time from when its actual or virtual ink is barely dry until just before its death knell.
It’s crucial then that these changes deliver the desired intent because so much of what an organisation does depends on its contracts working as expected."
It’s a fact though, that whenever a contract gets changed, risk is often its uninvited and unwelcome companion.
That risk can manifest in the form of the Law of Unintended Consequences. If triggered by a contract change, there’s no telling what, if any, unexpected outcomes this law might produce after the changed contract becomes operational.
Minimising the likelihood of any such post-change risk occurring is absolutely necessary. It’s best handled by rigorous validation of the method established for achieving that change. That’s best described as contract change management.
This article discusses what needs to be done to achieve effective contract change management, for contracts between two parties for the sake of illustration, covering:
- The rationale for contract change
- Guiding principles for contract change management
- Outline of a contract change management process
- Managing contract change management
- Automation of contract change management
- Useful contract change management reporting
- Barriers to effective contract change management
The rationale for contract change
A contract change might be:
- Needed in response to any newly discovered actual or potential contract issues or operational circumstances, like fixing a shortcoming in a contract or adding a new set of countries where the contract can be used
- Pre-planned by agreement, like setting new annual service delivery performance targets based on achievement of continuous improvement activities
- Mandated by a regulator or other authority
- Restricted in terms of form, such as in writing and signed by all parties, or timing, such as only on an anniversary of the commencement date
- Proposed by any party to the contract, regardless of which one owns it.
Guiding principles for contract change management
It’s well known that contracts can range from straightforward, short and sweet to ambiguous, complex, lengthy, unclear and overly subtle. It can range from a cinch to a nightmare to find what needs to be changed, determine how to change it, then design a change that works as expected when implemented.
A contract change itself should always be as clearly, coherently and completely expressed as possible, however complex or lengthy. This should be especially the case when it’s contrary to the general state of the contract.'
Managing contract change is based on the principles that:
- Only those who need to be involved get involved
- Only what is legally allowed to be done gets done
- Only what needs to be changed gets changed
- Only the desired effect gets effected.
Such outcomes typically can only really be demonstrably delivered through the development of a standardised contract change management process. Ideally, the use of such a process will be mandated organisation-wide.
Minimising the likelihood of introducing error and unexpected risk into a contract via a change is the general aim of the process. The odds of getting something wrong might be unrelated to the extent of the changes needed, because even the smallest mistake can have very costly consequences. On the other hand, a change can be so ineffectual that its driving issues remain unaddressed.
People are indispensable in managing contract change, as there are many roles and responsibilities involved. Appropriately qualified, experienced, authorised and available people will be needed to:
- Guide and ensure usage of and compliance with the change process
- Determine from time to time who should be involved, internally or externally, in working on a specific contract change, with respect to its admin or the more legalistic aspects
- Participate in and contribute to the development and assessment of proposed changes and their boundaries, and the development of associated contract amendment documentation
- Maintain oversight of contract amendment execution and its implementation in terms of operational application and achievement of the resolution of the driving issue
- Track and report on aspects of usage of the process and its effectiveness.
Outline of a typical contract change management process
The generic activities usually found in a contract change management process should include:
Identify the contract issue
Errors, omissions or problems or whatever - the things that could warrant changing in a contract might self-identify operationally in some fashion.
Other issues might hide unactivated in plain sight until discovered, often accidentally, by a thorough reading and consideration of contract documents.
The key features of an issue, its causes and actual or potential effects, need to be stated clearly and concisely to allow development of viable options for dealing with it."
Where the effects of an issue are currently or likely to be material, addressing the issue via a priority contract change request is warranted. For all other cases, as and when practical will usually be the case.
What’s needed then is understanding of the applicability span of the issue.
Does it only occur in a single contract? Is it in a clause that’s in general use in many contracts or just a particular subset of them?
A discovery process of some kind will likely be needed to allow identification of all the contracts that need to be changed to deal with that issue.
If a clause library is used, does the issue originate there in one or more versions of the clause? If a contract template library is used, is the issue embedded in one or more of those templates? These areas must be investigated in case they are the original source of the issue.
Determine the issue’s fix priority
The level of priority or attention an issue warrants should be determined. For instance, it might be graded on a scale of 1 (highest) to 5 (lowest) based on aspects like contract importance, issue status and the level of risk impact it represents, as follows:
Various people might need to be involved in identifying these aspects. That could include the contract’s operational owner or delegate, the people who are or might be affected by the issue, or the organisation’s Contract Management or Legal teams.
Design a solution to resolve the contract issue
Some issues might be trivial to fix, with an obvious solution readily available and agreeable.
Other issues could require deep consideration. Relevant people from the organisation and the associated third-party will likely then need to jointly consider the contract issue, its root cause and consequences for each party, to identify options for resolving the matter.
Elements of complexity, cost, timing and other factors might be used to allow a decision to be made about the nature of the contract change to be implemented.'
Any implications associated with implementation of that change for either party need to be stated and addressed as necessary.
Discussions concerning the solution should continue until both sides reach agreement. Escalation paths in each party should be established to help resolve any deadlocks.
Prepare and submit a Contract Change Request (CCR)
The main operating document used in contract change management is the change request. This is a numbered entry in a digital or physical register used to record pertinent details about the rationale for, and nature of, a proposed change to a contract.
In the case where multiple contracts have the same issue because they are based on the same template, say a lease, a local decision will be required about whether one CCR can cover all applicable contracts, or if each contract needs its own CCR.
Regardless of which party owns the contract, the organisation should complete a CCR when an agreed solution has been devised. This comprises the first step in an audit trail covering contract changes.
The precise wording of the change can be developed and specifications for any operational implementation activities, timing and costs can be prepared and recorded in the CCR.
Great care is needed to ensure that the proposed contract change will not upset any unrelated aspects of the contract, whether related to the original contract purpose, or its obligations, rights, risk allocations or anything else.'
Note that there can be limitations on the scope of a contract change in various legal jurisdictions, particularly but not only with respect to changes in contract purpose or value. Legal advice may be needed to determine if any such regulations apply, and if so, what steps should be taken to comply and whether or not to continue with the change process for the issue in question. Sometimes a replacement contract might be the only option for addressing the issue.
The completed CCR should be submitted to the appropriate people in the party that owns the contract for evaluation with the intent of approval or rejection.
Evaluate the CCR
Evaluation of a CCR needs to consider the level of actual or potential risk both the underlying issue and the proposed solution represent for the party(s), both operationally and in cost-benefit terms.
A CCR rejected by the evaluation team needs to show the reasons for the decision. If redeemable, the CCR should provide guidance for what needs to be done to make it suitable for resubmission.'
Similarly, an accepted CCR might provide some guidance for improving certain elements of the proposed change or minimising implementation effort and costs.
Accepted or rejected, every CCR should be studied by the submitters to allow any necessary revision and resubmission. It should also allow the updating of any lessons-learned documentation maintained for the purpose of creating contracts and CCRs, and to obtain insight into where similar issues might be found in other existing contracts that haven’t yet exhibited any symptoms.
Prepare the contract amendment document
With an approved CCR in hand, the party owning the contract can prepare the actual contract amendment document in accordance with the standards it normally uses in terms of updating method and document format. Any guidance provided by the evaluation team in the reviewed CCR should be taken into account.
Both parties should review the final contract amendment document to check that it conceptually represents their agreement, and is correctly worded to do just that and nothing more. Escalation should be triggered if necessary to ensure agreement is reached.
Execute and implement the contract amendment
The party owning the contract should follow its standard processes for executing a contract amendment in terms of approvals and signatures.
Once executed, the organisation should then follow its own standard processes for implementing the contract amendment, guided by the details approved in the CCR.
Some contract amendments might require a change of behaviour for users of that contract. In such cases, those users and all key stakeholders should be advised about the nature of the issue that has been addressed, the change implemented to deal with it, and any operational or other implications for their subsequent use of the changed contract.
This information allows those people to keep an eye on how the contract performs post-change, and raise the alarm quickly if the original issue persists or a new issue appears.
On finalisation of the implementation work, the CCR can be marked as completed.
It's important to note that there’s no way to guarantee that a contract amendment will actually deliver the expected outcomes, despite the best efforts of the people who developed it.'
Because there’s no real way to physically test proposed changes when contracts only operate in a live operational environment, people can only bench-test them as a mental exercise. Experienced people can have an outstanding track record of success from bench-testing, but real life has a way of throwing unanticipated curve balls.
Immediate absence of a contract issue’s usual effects and no disruption to other aspects of the contract are welcome signs but no guarantee of 100% success. Sustained absence is the best indicator but be prepared to be surprised. It happens.
Address any other changes related to the issue driving a contract amendment
Ideally, every contract amendment made will provide only the expected outcomes. When it’s reasonably certain that this is the case, any related changes required to contract and clause templates or other relevant areas can be implemented to prevent future recurrence of the problems from those areas. Such changes should be made in accordance with any standard change control processes in place.
Note that the timing of this activity might be contestable and can pose a bit of a dilemma.
If performed at the end of the process, use of any contract and clause templates containing the issues during the interval between their discovery and fixing could result in additional contracts that need to be fixed.
Conversely, if performed as soon as the change has been validated, in the event that the change actually fails in some respect, use of any contract and clause templates containing the fixes during the interval between their discovery and when the fix has proven to fail could also result in additional contracts that need to be fixed.
It can be hard to determine which timing might prove most beneficial.
Managing contract change management
Every operational process should be managed to a degree matching its importance. This is necessary to help ensure that a process is:
- Owned, documented, regularly reviewed and improved when relevant
- Aligned with current operational and compliance requirements
- Supported by appropriate technologies when possible and practical
- Reliably achieving its purpose and delivering a positive ROI
- Streamlined and optimised for effectiveness and efficiency
- Measuring and reporting the right things
- Easy to use, widely adopted and closely complied with.
An essential part of the contract change management process is tracking all these elements and outcomes and attending to any shortcomings found. This is an important risk mitigation activity that sits above the day-to-day activities associated with the process. It should be conducted at least annually, but more often as needs dictate. It’s a risk-reward calculation.
It can take some doing but that’s no excuse for not doing it. Failure to do so, or paying lip service to it, might result in a preventable disaster. That could be considered a hanging offence in some quarters.
Automation of the contract management process
Automation can be used to great effect for contract change management. It can be used to simplify activities like:
- Collecting the necessary information
- Advising the necessary people when their involvement is required
- Providing visibility of the current process stage
- Raising alerts for activities taking longer than anticipated
- Gathering and reporting usage and performance statistics
- Triggering other downstream processes such as those that handle execution of contract documents.
Useful contract change management reporting
Accepted wisdom has it that management of any activity requires measurement of whatever might be relevant concerning its usage and performance. Determining what should be and can be measured might be challenging, depending on the technologies available.
Measurements have no value until they are reported, as both absolute values and in comparison to a relevant benchmark to provide meaning.'
Measurements for contract change management should be reported monthly and annually, compared on both a month-to-date and a year-to-date basis to show any trends, and grouped into several categories and sub-categories.
It’s often valuable to know how much of something has been and is being done. A little or a lot can be good news or bad, depending on the context. Of course it can be neither, merely a statement of fact, but it could provide some form of input to other considerations somewhere down the line.
All volumes can be reported at a total level, and some additionally sub-totalled at a component level to provide deeper meaning. Some volumes of interest for contract change management might include:
|Total number of||Show and sub-total by option|
|Contracts reviewed for issues||Contract importance level
| Contract change requests:
Contract importance level
Contract importance level
|Clause library amendments made||Clause name|
|Contract template library amendments made||Template name|
This sort of information is useful for understanding how much of a problem the organisation has in terms of the need for contract changes, its trajectory if one is discernible, the resources available to deal with the issues reactively and maybe proactively, and so on.
Key Performance Indicators
While volumes can be interesting in terms of contract change process throughput, Key Performance Indicators and how they’re trending show the outcomes of the process compared to desired results.
Some volumes of interest for contract change management might include:
|Change authorisation ratio||% contract changes made that were handled by a CCR|
|CCR preparation time||min / max / avg CCR duration by fix priority|
|Contract document change handling duration||min / max / avg change duration by fix priority|
|Contract change success ratio||% contract changes made that worked as expected post-implementation|
|Contract Change Management satisfaction level||Survey to indicate user satisfaction with the contract change management process across its various elements, scaled from low to high|
This sort of information can be compared to modifiable benchmark settings to indicate the relative success of the various elements of the contract change management process.
Barriers to effective contract change management
When a contract is changeable, because sometimes they’re not, a few situations can occur that can cause difficulties for making contract change management as effective as it can be, including:
- Non-existent, insufficient or ineffective human, financial and technology resources can lead to contract change management being not done well or at all.
The growth in the number of operational contracts an organisation has inevitably increases the chances of changes being required to some proportion of those contracts. All too commonly, the resourcing needed to deal with such growth will not keep pace with it. This can easily lead to the risky situation of which of the growing pile of must-do jobs get priority.
Declaring a contract change as a priority task means nothing if that task is at the bottom of the list of equal or higher priority tasks for whoever has to perform the work. Reliance on personal heroics to do what’s necessary is never a viable strategy, for either the organisation or the people who put themselves on the line.
- Fractious or non-existent relationships between the parties can make it hard going to get traction on any issue, let alone those involving contracts. The party being asked to agree to a contract change might be disinclined to do so unless and until the root causes of the issues upsetting it are resolved to its satisfaction, but maybe not even then.
Quid pro quo can deliver fairly thin returns if positional haggling takes priority over looking at the bigger picture.
Such situations might not be so easy to address but it’s worth making the problems known.
Any type of contract or group of contracts might need to be changed randomly or regularly. Any change might range from simple to complex, irrespective of the level of complexity of the contracts involved. It all depends on the purpose of the change.
Correction of a typographic error might simply involve the addition, subtraction or replacement of a single, maybe very meaningful, character.
At the other extreme, incorporating the obligations that accompany a recently modified or newly applicable piece of regulation might require the addition, subtraction or replacement of pages of text in different places all through the contract.
The key activities in the contract change management process by necessity rely on human brainpower, with technological horsepower playing a supporting role when available and possible.'
This makes the process largely cerebral / manual, with a focus more on what needs to be done in what sequence than how it could or should be done. The how is something for the organisation to decide for itself.
The technology aspects essentially provide a support scaffold for those manual activities, possibly in terms of control of activity transition, visibility of activity ownership and duration, capturing change details and process usage information for later analysis, and so on.
The combination of people, process and technology - and their interaction - provides the pathway to overall effectiveness of contract change management. Regardless of how things get done, the key outcome desired is that each change made produces only the desired effect, without introducing any side effects.
As Metallica once sang: nothing else matters.
If you would like more information about establishing a contract change management process or how Gatekeeper can assist with that activity, then contact us today.