How Proverbial Wisdom Can Help Improve Contract Risk Mitigation

A proverb is a succinct, condensed nugget of folk wisdom which may be hundreds or even thousands of years old. Learned from often bitter experience, proverbs have been passed down through the generations as guidelines for coping with the trials and tribulations of life.

Many proverbs are still as relevant today as when they were first expressed, like ‘nothing ventured, nothing gained’ and ‘better late than never’.

In this article we’ll describe two proverbs pertinent for contract risk mitigation, highlight important types of data that can appear in a contract document, discuss two types of contract visibility, and outline an approach based on the proverbs for improving contract risk mitigation.

Before we get into that though, here are three important definitions to be understood:

• Risk is the potential for a negative outcome. A risk is crossing the street while wearing headphones and selecting the next track to play on your smartphone. A negative outcome is getting hit by an oncoming person who, unremarkably, was doing something similar at the same time.
  
  
• Risk mitigation is about taking the steps necessary to minimise both the likelihood of a risk occurring - look around both before and while crossing the street - and its impact if it does occur - fall if you must, but save the smartphone!
  
  
• Contract risk is about any number of situations that can cause a contract to fail, from trivially - the supplier delivers needed goods late - to catastrophically - the supplier goes out of business without having delivered your long-delayed orders.

Mitigating contract risk requires a good understanding of what contracts are in place, how important they are to the success of the organisation and what data they contain. Collectively, this is known as contract visibility and it can resolve many contract management pains. 

Now that’s clear, let’s have a look at the proverbs.

Two proverbs

The following proverbs express sentiments that play a great role in the mindset needed to mitigate contract risks successfully.

"Forewarned means forearmed."
Even before the Romans summarised this as ‘Praemonitus, praemunitus’, every small village in ancient times knew to keep lookouts for marauding raiders, and to be prepared for their arrival.

This type of advance warning forms the basis of an approach for being better prepared for and achieving better outcomes from contract risk mitigation activities.

"Hope for the best, but prepare for the worst."
This simply means that everything should be done to ensure that, to the extent practical and possible, nothing that happens will be a complete surprise where no allowance has been made.

This can be considered an alternative definition of risk mitigation.

How to be “Forewarned” and “Prepare for the Worst”

Step 1 - Increase the visibility of your contract data

Contract data is anything and everything that needs to be known, done, not done, possibly done, used or complied with in relation to the operation of a contract in the period between its execution and its termination or renewal, but also possibly following termination.

Contract data can include:

• Key dates when certain activities need to be commenced or concluded by
• Obligations that a party needs to meet
• Regulations that a party needs to obey
• Confidential information that must be protected
• Rights that a party may exercise
• Operational processes that must be followed
• Pricing and opportunities for obtaining discounts
• Operational restrictions that must be adhered to
• Minimum or maximum amounts that apply
• Service delivery performance measures.

Much of this data is embodied in the form of contract clauses, expressing both business and legal aspects of the contract. In-depth knowledge of such data provides the foundation for contract risk mitigation.

Contract visibility type 1 - Reactive Visibility

A key aim of Contract Lifecycle Management (CLM) is to support risk mitigation by increasing the visibility of an organisation’s contracts.

This is usually achieved by a combination of physical activity to locate the contracts, and the use of automation in the form of a Contract Management System (CMS) to record the relevant details, as follows:

• Identifying all contracts in operation throughout the organisation
• Collecting the relevant contract documents in whatever medium they’re recorded
• Creating searchable electronic versions of those documents
• Storing the searchable electronic versions of the contract documents in the CMS’s centralised repository
• Providing access to contract data in the repository via the CMS’s search / reporting engine.

This form of contract visibility provides tremendous value because the repository increases both availability and accessibility of the contract data.

This data can be sliced and diced in innumerable ways, to reveal patterns, underlying relationships, undesirable situations, opportunities and so on.

This is deemed reactive visibility, since the repository can only provide contract data in response to a query. In essence, the required contract data has to be pulled out of the repository to make it visible.

Reactive visibility is necessary but not sufficient for effective contract risk mitigation.

Contract visibility type 2 - Proactive Visibility

Consider that two keys to successful CLM, and therefore risk mitigation, are:

1. Ownership of various CLM activities utilising the type of contract data mentioned above
2. Accountability for the outcomes of those activities.
   
   

Telling the people who need to know something about a contract exactly what it is they need to know, on a just-in-time basis, is proactive visibility, the obvious opposite of reactive visibility.

Pushing the contract data to the appropriate people is an example of the ownership and accountability principles in action, and compliance with the essence of the two proverbs.

It’s the responsibility of:

1. The discoverers of the contract data to disseminate it to the appropriate people as soon as possible after execution of the contract
2. The recipients of that data to ensure they study and utilise it to ensure appropriate risk mitigation measures are put in place.
   
   

In both cases, everybody concerned needs to behave properly in respect of those principles. To do otherwise could be considered as abrogation of responsibility, dereliction of duty or negligence. Extenuating circumstances notwithstanding, the consequences of such behaviour could be severe.

Of course, the intended recipients of contract data could simply be told that a new contract exists and that they need to go and pull its details out of the repository.

If that sounds like a risky proposition in its own right, that’s because it is.

Why? Because there’s a really good chance that at least some of the intended recipients aren’t too familiar with the legalese used in contracts, that they may not understand the nuances and intent of what they’re reading, that they may not discover everything they might have responsibility for, or that they just might not get around to it.

There are many ways that the contract data can be proactively pushed out to the intended recipients, depending on the sophistication of the organisation and its CMS.

One of the most effective ways is via a contract summary.

Step 2 - Prepare the contract summary

The main purpose of the contract summary is to reduce the content of a contract to its bare useful minimum, and limit the need for the actual contract documents to be accessed by all and sundry.

It’s a key tool for “forewarning” people.

The secondary purpose is to minimise the amount of times the same questions may be asked about a contract when the people involved change. This can be irritating, time-wasting and frustrating for both questioners and responders.

By way of a template available here, only the important details should be extracted from the contract into a document separate from but related to the contract.

Removal of the ‘noise’ from the contract, compression of the interesting bits that remain and application of a logical structure to the extracted data increases both the readability of the summary document and the chances that it will actually be read.

The contract summarisation process has the following steps:

1. Data detection and categorisation
   Closely following its execution, a contract and its associated documents are thoroughly reviewed by somebody fluent in legalese, possibly supported by or supporting some AI functionality or component of the organisation’s CMS when available.
   
   The purpose of the review is to identify all the key contract data items specified above.
   
   Once detected, a data item is categorised in some fashion. An example might be a combination of the subject matter of the data item plus the type of the item as listed above, say ‘Payment terms: obligation’ or ‘Contract amendment: process’.
   
   Categorisation allows grouping of related data items and provides a guide for determining data ownership.
   
   
2. Translation and augmentation
   Where necessary, the text which specifies a data item is translated from legalese into simple and unambiguous plain language. Translation also includes explicit statement of any implied data or references to other contract data.
   
   Where dates are mentioned in respect of certain events, the experienced translator needs to deduce if any unstated date-driven events are required to support the detected event, either before or after the detected date. Such implied events are to be included in the translation as suggestions for consideration later in step 4.
   
   As an example, if a contract will automatically renew unless the customer advises the supplier before a specified cut-off date of an intention to cancel the contract, an unstated event that ought to be suggested is another event that precedes the cut-off date to allow the organisation time to decide if it wants to renew or terminate the contract.
   
   
3. Data ownership allocation
   Somebody needs to be responsible for each piece of detected data in terms of risk mitigation activity. It can be a member of the CLM team or a stakeholder in the contract, say its operational owner or a key user of the goods or services provided under the contract.
   
   Discussion with the intended contract owner and key stakeholders may be required to determine suitable ownership candidates for each piece of contract data detected. In smaller organisations, all the ownership responsibilities may lie with just one or two people.
   
   The data owner may have a contributing role in checking or reporting on compliance with the intent of that data, or perhaps taking some kind of action because the contract provides the right to do so.
   
   
4. Dissemination and revision
   On completion of steps 1 - 3 above, the draft contract summary can be released, by whatever means are preferable, to all the people identified as having responsibilities for some aspect of the contract, and feedback requested.
   
   Following receipt and incorporation of any feedback as necessary, a revised contract summary document can be issued.
   
   
5. Promotion to production status
   On receipt of the final version of the contract summary or notification of its availability in the centralised repository, if it hasn’t already commenced, the data owners can start planning the activities they are responsible for, with full awareness of those responsibilities.
   
   Thanks to the proactive visibility of the contract enabled by preparation of the contract summary, an early and comprehensive start towards identifying and mitigating risk in the contract can be achieved.
   
   Over time, the contract summary may need to be updated to reflect contract amendments, changes of data ownership and so on.
   
   

Summary

Ancient proverbs provide the underlying arguments for this article, being as relevant to today’s circumstances as in the days of yore.

This relevance is supported by the 600-year old concept of reductionism or Occam’s Razor, that is, keeping things simple, as manifested in the form of the contract summary.

The concept of push and pull in respect of contract data visibility emphasises the advantages of proactively telling people the things they need to know to do their jobs, rather than requiring them to find out for themselves regardless of the quality or effectiveness of that discovery.

There is really no place for ad hocery in contract risk mitigation today, given the speed of business and the urgency and complexity of its problems.

A structured and possibly more automated approach to preparing a contract summary provides more confidence that the information presented will provide a foundational basis for developing effective contract risk mitigation strategies.

In this article we’ve described such a structured approach, and provided a contract summary template that can be modified to suit your particular circumstances.

If you would like more information on how to prepare a contract summary to improve your contract risk mitigation outcomes then contact us today for a free consultation.