Contracts are the backbone of business operations, providing the framework for agreements and commitments between parties. But let's face it: managing and analyzing a large number of executed contracts can feel overwhelming for any organization.
Without close contract governance, studies show that organizations can lose up to 40 percent of a contract’s value—and if you’re juggling between 20,000 and 40,000 active contracts at any given time (which is the average for Fortune 1000 companies), that can become a serious business issue.
The sheer volume of contracts, coupled with the potential risks and missed opportunities that could arise from overlooked terms or clauses, makes this a daunting task to handle manually—especially without the right expertise. But don’t get overwhelmed just yet! There is a more efficient way to conduct contract review, and we’re going to explore it together.
Did you know that you can conduct contract review with RelativityOne? Learn more about this brand-new, fully integrated feature.
Before we dive into the nitty gritty, let’s take a look at the main drivers of a contract analysis project and why it’s such a hot topic for businesses today.
What Drives Contract Analysis?
Picture this: you're in a high-stakes situation, like a merger or acquisition, bankruptcy and restructuring, or a regulatory compliance review. These events can be game-changers, and they often require a large-scale contract review and analysis project.
Let's take the example of an M&A deal. The acquiring company now has countless agreements from the target company to sift through, not only during the due diligence phase but also during the integration phase. They need to determine their responsibilities, potential risks, change of control notices, terms to renegotiate, and so much more. Failing to understand the details in every single agreement could spell disaster for the purchasing company.
But it's not just major events that trigger the need for contract analysis. Standard business practices also periodically demand full-scale analysis of agreements. Think about portfolio risk assessments, commercial lease reviews, vendor/contractor management, CLM migrations, or general post-signature contract data management. These exercises ensure good contract data hygiene, keeping agreements across business units up to date and defensible.
Having a clear picture of the terms and conditions you're responsible for, as well as those involving your vendors and employees, can help you mitigate risk down the road and make sure you're not missing out on any opportunities.
How Can Contract Analysis Help Mitigate Risks?
Many legal departments manage risk at the individual contract level, but weaknesses or exposures across business units, regions, and whole populations of agreements can go unnoticed without a frequent portfolio-level view.
That’s where contract analysis comes in. Whether it’s merger and acquisition due diligence, corporate restructuring, client indentures, or compliance reviews, meticulously analyzing these agreements and understanding contractual obligations is crucial. You never know when you might have to answer questions like, “Which contracts need to be updated to comply with new privacy regulations?” or “Where do we have uncapped liabilities?” or even “If we experience supply chain disruption, where will we face penalties or terminations?”
It seems like a lot to handle, but staying ahead of things like regulatory changes can help you mitigate risks and safeguard your business from legal and financial repercussions.
In today’s volatile macroeconomic climate,` it’s more important than ever to understand how events in one country could have a ripple effect across your entire organization. According to PwC’s 2023 CEO survey, 31 percent of respondents believe that macroeconomic volatility is the number one threat to their business in the next 12 months. By turning your agreements into structured data through the contract analysis process, you can quickly gain insight into the ties you have with certain countries or vendors. This holistic picture of your organization’s ecosystem empowers you to make informed decisions faster.
Strategies to Maximize Revenue with Contract Analysis
Contracts play a crucial role in maximizing revenue, but did you know that companies can lose millions each year due to revenue leaks? These leaks can occur due to scope creep, outdated pricing, overdue payments, or excessive rebates. And guess what? It all boils down to contract data. When important information about the scope of activities, pricing, and payment terms or penalties lives within scanned PDFs or blocks of text, identifying these revenue leaks becomes next to impossible.
But it’s not hopeless! By converting your agreements into structured data points, you can easily identify revenue leaks by analyzing contract terms, monitoring vendor actions, and ensuring adherence to pricing entitlements. As CEOs are diversifying their product and service offerings and raising prices, it's critical to have clear insight into which agreements need updates, new pricing, or revised payment terms. By addressing these common contract challenges, you can take full advantage of your pricing entitlements, optimize supplier governance, minimize cost, and maximize revenue.
Building Future-Proof Policies
Mitigating risk and maximizing revenue are valuable benefits to help business today—but what about the future? Playbooks or policy guides are designed to help inform those negotiating contracts on acceptable positions. They reduce the number of different templates floating around and ensure favorable terms are negotiated across the business.
But here’s the kicker: a whopping 69 percent of organizations don’t require staff to use a template or pre-approved model when drafting a contract. And only 31 percent of contracts typically follow a playbook or guidance document. This lack of oversight exposes organizations to unnecessary risks and non-compliance with contractual obligations.
The first step to combat this is to create a playbook that governs different agreements and acceptable terms. But there’s one big stipulation: a playbook is only valuable if it’s enforced across the organization and its effectiveness is measured and tracked. And right now, it seems as though only 22 percent of organizations systematically track their contractual obligations.
By leveraging the contract review process and converting contract data into structured data, you gain visibility into the positions agreed upon across your organization. You can identify business units or regions that tend to deviate from standard provisions, take action, and track your success in negotiating preferred policies over time. This proactive approach helps future-proof your policies and reduces the likelihood of legal disputes. It's a win-win!
Enhance Efficiency with a Robust Contract Analysis Solution
We've established that contract analysis offers numerous benefits, but here's the reality check: manual contract review is time-consuming and error-prone. Who has time to search through every lengthy contract for such specific information? On average, this takes about 84 minutes for each document! And let's not forget, there's no margin for error when critical business decisions rely on the outcome of the review; one minor typo could alter the analysis and change the recommended course of action.
But it’s not all doom and gloom. At the beginning of this article, we promised an easier and more efficient way. That’s where purpose-built contract analysis solutions come in to save the day.
By leveraging a tool specifically designed to structure and analyze agreements, you can free up your internal resources to focus on more value-added activities, like prospecting new business and building stronger relationships with clients. The right tool automates the extraction of key data points from contracts, giving you quick and accurate access to critical business information.
Contract Analysis in RelativityOne
At Relativity, we understand the challenges businesses face in effectively managing and analyzing large volumes of data and documents. That's why we developed Relativity Contracts, a robust solution designed to accelerate the contract analysis process. With powerful workflows, a purpose-built viewer, and machine learning capabilities, Relativity Contracts helps you transform complex agreements into structured data, enabling you to make informed decisions faster.
In today's rapidly evolving business landscape, contract review is no longer a "when we have bandwidth" type of project—it's a necessity. Mitigate risk, maximize revenue, and future-proof your policies with the help of Relativity Contracts. We're here to help you get to the root of your agreements faster and navigate the complex world of contracts with ease.