Contract Management Demands a Modern Approach in the Age of COVID-19
As the coronavirus pandemic continues to force businesses to make dramatic changes to the way they operate, utilizing a modern digital contract management tool is key to keeping up.
COVID-19 is leading many companies to make dramatic changes to the way they do business. While the work-from-home model has grabbed most of the headlines, companies are currently evaluating other (though equally important) measures that may stay with us for years to come. One big change: the way we set up supply chains. For years, globalization allowed businesses to develop razor-thin supply chains that drove higher margins. But many of those worldwide, lowest-cost, just-in-time supply chains have been stretched dangerously thin or even broken by the COVID-19 pandemic.
Businesses are reacting quickly. For example, a recent white paper published by global investment firm KKR estimates that many parts of the technology sector in China will consider diversifying 20%–40% of their production away from the country within five years, partly in response to the pandemic. Such a retreat from globalization—at least in the near future—seems inevitable. Some others have described this retreat as moving from “just in time” to “just in case.”
As businesses survey the damage from the pandemic and rethink their supply chains, many are finding that their decades-old contract management techniques are not meeting the needs of the business. In those cases, a modern digital contract management tool may be the solution.
The Basics of Digital Contract Management
Digital contract management tools are software products that store contracts in a way that allows users to locate, track, analyze and change contracts in an accurate, reliable, documented and cost-effective way. At the most basic level, digital contract management tools are document databases—the primary benefit of which is that they organize contracts in one place. But like many aspects of our daily lives, technology is making these tools better and more indispensable every day.
Today, contract management tools incorporate artificial intelligence that allows the software to perform advanced searches and analytics on a repository of contracts. The tools can be used to identify and compile otherwise disparate families of contracts, identify particular covenants across a large data set, identify and locate contracts with nonstandard provisions, and assist in reforming contracts that need to be changed.
You may be familiar with similar technology through litigation. Historically, an army of junior attorneys would review boxes of documents to produce to an adversary in the discovery phase of a case. When the world digitized, junior attorneys were set loose in document databases on their computers. Now, modern discovery tools use artificial intelligence techniques like predictive coding and continuous active learning to find responsive documents with minimal human intervention. This evolution is similar to the evolution of contract management.
How Can They Help?
Broadly speaking, modern digital contract management tools offer benefits in three areas:
- Organization. In many businesses, contracts are not centralized in one location. Some may be in hard copy, while others may be in folders on a SharePoint or other file management system. Evaluating a business’s portfolio of contracts poses obvious challenges if they are not ready to hand. Digital contract management tools solve this problem by making the contracts accessible through a single interface. And for businesses that cannot readily identify all of their contracts, some tools have features that scan file systems and locate contracts automatically.
- Analytics. The most basic contract management tools have a basic search feature that locates documents containing key terms. Modern contract management tools use artificial intelligence to “learn” concepts in documents, even if they do not contain a uniform set of terms. For example, modern tools can identify all the contracts containing a force majeure clause or a termination provision, including those that do not follow the business’s standard template. Through AI, the tools can quickly compile data about a set of contracts, such as when contracts are expiring, and generate custom summary reports.
- Renegotiation. Confronting an external shock, such as COVID-19, may require a business to identify and even renegotiate provisions in many or all of its contracts. While a small set of contracts can be identified, analyzed and renegotiated manually, it may be difficult and impractical to do so for a large portfolio of contracts. Digital contract management tools provide the necessary technical aspects of workflows designed to automate the renegotiation and repapering process.
Application to COVID-19 and Beyond
Just as companies are rethinking their supply chains at this inopportune time, this may well be the right time to implement a digital contract management tool as well. In the short term, these tools may yield the most benefits by organizing contracts impacted by COVID-19 and analyzing business risk in light of particular contractual provisions. Force majeure clauses are obvious examples: the software can quickly identify contracts with (and without) these clauses and ascertain which ones have standard or nonstandard provisions.
In the medium term, these tools may help businesses navigate other business challenges that arise in the changed economic landscape. Deadlines may need to be extended. Payments may need to be delayed. And other terms may need to be modified or provisions invoked. Making these changes on a mass scale may prove less challenging with a digital contract management tool.
After we move past COVID-19, a fully implemented digital contract management tool is likely to continue to pay dividends. When integrated with document generation and e-signature software, these tools will prove far superior to sending redlines back and forth by email. They will lead to quicker and more efficient negotiation with less human intervention.
Such tools may also prove useful in confronting other external shocks. For instance, as we approach the end of LIBOR in 2021, businesses and financial institutions are finding that they need to repaper their LIBOR-related contracts. Some businesses are already using digital contract management tools to identify affected contracts, analyze them and repaper them with appropriate LIBOR fallback language.
Especially in a time of economic upheaval, the goals in implementing a new technology should be to increase efficiency and reduce cost. Digital contract management tools may do both.
Paul Forrester and Ethan Hastert are partners and Anthony Pastore is an associate in Mayer Brown’s Chicago office.
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Reprinted with permission from the May 14, 2020 edition of Corporate Counsel © 2020 ALM Properties, Inc. All rights reserved. Further duplication without permission is prohibited.
