Controlling the contract lifecycle

Currently, Xerox is rolling out a contract lifecycle management system from Apttus Corporation across its U.S.-based operations. (Canada is next on the list to receive the system.) Given his work with the U.S. divisions, Bourque is currently using the software, which is integrated with Salesforce (the customer relationship management software used by sales teams) to create and manage contracts.

In addition to having a centralized and easily searchable repository for all of its documents (including amendments, transaction documents and statements), which Bourque said improves his access to documentation “tenfold,” he says the company now has a tool to ensure contracts better and more consistently reflect the company’s business needs.

Bourque says standardizations have been built directly into the system in order to ensure that certain positions such as financial clauses regarding payment terms or indemnification issues such as early termination charges are “consistent from lawyer to lawyer to agreement to agreement.”

For lawyers used to exercising their creativity in writing up documents, he says working within a system that establishes tight confines can present a bit of a challenge, but it doesn’t eliminate all possibilities for finding unique solutions, especially “when you’re dealing with a new situation where you’ve got a bit of a wrinkle in a deal, and balancing that need for efficiency and standardization with your own creativity.”

Overall, he believes any trade-offs caused by the automation and standardization that come with contract lifecycle management systems are positive ones for businesses.

“It’s going to make you much more efficient as counsel and it’s going to make the business that much more nimble. It’s going to allow the company to accelerate its time to revenue, because it’s going to increase the speed at which data circulates within the organization. And it’s going to increase the speed at which contracts are signed,” he says.

While Xerox is taking a standardized approach to its contract lifecycle management implementation, Celestica Inc. finds having a system in place makes it easier to produce customized contracts for each of its suppliers and customers.

Robert Ellis is senior vice president, legal, of the Toronto-based company, which was originally an IBM manufacturing facility before being spun off into its own entity. Today, the company has plants around the world and produces not just electronic parts for computer and communications companies, it also designs and manufactures health technology products, solar panel components, smart metering devices and electronic hardware for appliance manufacturers. Additionally, it offers warranty and end-of-product-life support services for its clients.

According to Ellis, Celestica has what he describes as “a couple hundred customers, the top 20 or 30 of which are driving a lot of [our] revenue” and 5,000 to 6,000 parts and components suppliers. All of this means plenty of individualized contracts and agreements.

“We don’t have a cookie-cutter approach to our contracting. Customers typically are the ones who have drafted the contract, and they ask us to negotiate with their form. It’s not as if Celestica produces its own standard-form documents, rolls it out and then requires customers to sign up to some negotiated form of Celestica’s agreement — it’s the opposite. We work off of their contracts. And, essentially, it’s an uphill negotiation to bring things into line with our expectations as a supplier,” he says.

Ellis says that while Celestica does rely on contract lifecycle management software to act as a tickler system and provide early notification when contracts are coming up for renewal (a requirement that he called “table stakes” for any company dealing with a large number of contracts), his department has “developed a set of contract policies that guide us about who the correct approver is to make business decisions in approving a given contract. It’s very focused not just on legal matters but on business matters as well. And we developed policies that help us guide negotiation strategy, as well as approvals for when that negotiation has been completed and we now need to make sure the company as a whole is going to sign off on things.”

Celestica’s legal team has also worked closely with its finance team to “come up with a high-, medium-, low-risk assessment of individual terms that come up with a customer for assessment.”

For example, Ellis said the company has solid data on circuit board failures over time, so “when it comes to a customer asking for a three-year warranty versus a one-year warranty on a product, we can use predictive models from our manufacturing experience, and say very realistically, based on what we know about the design of this particular electronic device, the failure rates are going to be such-and-such within the first week of delivery, the first year of delivery or the first three years after delivery. We can figure that out and price for it.”

In addition to ensuring that signing a deal won’t lose the company money, Ellis said that managing contracts means taking a hands-on approach to reviewing how well suppliers are living up to their ends of contractual agreements.

Ellis says that whenever Celestica signs a contract with a company to supply components to one of its global manufacturing facilities, the first thing his team does is draft a very short summary of the contract, which is then sent to the plant. The summary is written in such a way that it is easily understood by people who may have English as a second language and is a “very simple description of what the key terms are so they are able to a) comply with the contract but b) make sure the customer complies with the contract as well.”

Then, twice a year, Ellis’ team surveys all plants. The team asks the plants if they are adhering to the agreement, but more importantly, it also asks if the components suppliers are living up to their end of the deal. Are they paying on time? Are they delivering parts on time? Are they treating Celestica fairly and following the contract terms? Ellis calls it a “trust but verify” approach.

The in-house team also makes it a point of visiting all of the company’s worldwide sites on a regular basis and performs a “customer performance review, where we do a deep dive on our key accounts,” says Ellis.

“We sit down with the account team who is responsible for, let’s say, a Cisco or an IBM and ask them in-depth questions — tell us exactly what’s happening in practice: How are you functioning with the customer? Are they taking care of you from an inventory perspective? How accurate is their forecasted demand? [It’s] really working through everything with them at a painstaking level of detail just to make sure that the contract is well understood and the parameters of the recovery that we expect to make financially are being met. We work with the teams to understand what some of the challenges they’re having with that account are.”

Ellis says this level of detail is necessary because Celestica is in business to make a profit and there is no point in renewing contracts or keeping customers or suppliers that cost the company money, especially when margins are so thin to begin with in the manufacturing industry.

“You have to know your contract well enough that you’re not just giving away things for free,” he says.

Knowing and understanding contracts throughout their entire lifecycle is absolutely vital, says Lynne Charbonneau, a Vancouver-based consultant and legal innovator who has experience working as both in-house counsel at HSBC, where she was deputy general counsel, and as an external lawyer.

“Once you are in-house, it’s much more important to think about the contract in its entirety. And it’s not just a matter of diarizing dates that might come up, it’s a matter of thinking of the life of the contract from the back end, from the perspective of operationalizing it, from the perspective of reviewing it at regular intervals. So, in an in-house role, particularly one where there is a broad suite of standard contracts, it’s important to continue to think about the contract as a continuous obligation and whether or not changes that your business might make come back to impact the contents of the contract,” she says.

Companies that, for example, offer software updates, should understand not just what the contract says about updates but what the updates can do, says Charbonneau.

“Updates are very basic and very common, but if you are undertaking to provide a service over a period of time . . . there are often back-end or infrastructure changes that occur. Many of them have no impact whatsoever. But if an in-house lawyer doesn’t have the kind of relationship with its client where [he or she] understands that those types of things are going on and has the curiosity to be able to investigate whether or not there might be an impact, that can lead into a bit of a danger zone,” she says.

Charbonneau believes mitigating possible dangers is one of the key roles of an in-house legal department, and she says that “every in-house lawyer should absolutely be invested in enterprise risk management as a control function and as an advisor to the business.”

This means knowing every risk that flows from the execution of the contract and understanding how to put measures in place to limit those risks, and Charbonneau says the best way to do that is to obtain and study the metrics and to ask questions about the volume of contracts and whether they’re standardized or bespoke.

She says businesses that use high volumes of standardized, repeatable contracts put themselves at higher risk of class actions  than those that use lower volumes of bespoke contracts and, as such, should review the contracts regularly.

As part of that review process, Charbonneau suggests performing a “hygiene exercise” and taking the opportunity to rewrite the contracts in plain language. The benefits of doing so include the possibility of finding “that the business actually didn’t intend what was written.”

No matter what, she says, in-house counsel needs to involve itself over the lifetime of the contracts if they want to demonstrate their value to the company.

“When lawyers disappear after the negotiation or the initial development of a template, for example, I think the rest of the business doesn’t feel their investment in the future. So, doing this [managing the contract throughout its lifecycle] is important. It’s important for the legal function to always show that it’s invested in the long-term successes of the business and not just getting its work done in a factory mode. It is forward thinking that gives in-house lawyers their place as valued advisors to the business.”