Effective Contracting, a Quick Guide for Procurement and Legal

In the dynamic landscape of procurement and contract management, the directors of procurement and legal teams play a pivotal role. They are tasked with aligning strategic objectives, mitigating risks, and driving operational efficiencies. Effective contracting is integral to these tasks. Here are five refined strategies that can transform the contracting process in your organization.

1. Foster a Collaborative Ecosystem

Effective contracting requires a harmonious relationship between procurement and legal teams. These teams often have different priorities and perspectives, but their roles are interconnected. Procurement tends to focus on sourcing the best goods and services at the best prices, while legal ensures the contracts align with the organization's risk tolerance and legal requirements.

The first step to effective contracting is fostering a collaborative ecosystem between your procurement and legal teams. These teams operate at different levels, yet their interdependence can't be understated. To unlock this synergy, focus on creating common objectives and clear communication channels. Empower both teams with collaborative toolkits and platforms that promote seamless interaction. Remember, a shared understanding leads to efficient problem-solving and faster decision-making.

2. Exploit the Power of Contracting Playbooks

Contracting playbooks provide a standardized approach to common contractual scenarios. They include pre-approved fallback positions, negotiation tips, and key contract terms that procurement and legal teams need to know. By leveraging playbooks, teams can drive down cycle times, mitigate risk, and enhance consistency across all contracts.

Contracting playbooks are not merely guides; they are strategic assets that can significantly reduce cycle times and enhance the consistency of your contracts. Equip your procurement professionals with well-structured playbooks that encapsulate pre-approved fallback positions, negotiation tactics, and key contract terms. This not only mitigates risk but also accelerates the contracting process, freeing your legal team to focus on complex legalities.

3. Embrace AI and Data Analytics

In the era of digital transformation, AI and data analytics can be game-changers for your contracting process.  

AI can significantly streamline the contracting process by automating routine tasks, identifying risks and opportunities, and providing data-driven insights. It can handle up to 80% of complex contract review tasks, freeing up procurement and legal teams to focus on strategic issues.

However, it's crucial to focus on AI applications that generate tangible value and align with the organization's strategic objectives. Although AI can automate complex contract review tasks, remember, AI and analytics should be tools to augment human expertise, not replace it.

4. Implement Project Management Principles in Contracting

Effective contracting is not a one-off event; it's a continuous process that requires diligent management. Treating a contract as a project can help to ensure that all necessary steps are taken, risks are managed, and critical deadlines are met.

Implementing project management principles can provide a structured approach to contracting. For instance, during an RFP, ask vendors to complete an exception table that outlines objections to contractual terms. This proactive approach reduces time-consuming back-and-forth during negotiations and ensures clarity for all parties involved.

5. Digitize Your Contract Lifecycle with a Focus on the "Last Mile"

The integration of contracts into your organization's digital transformation strategy is crucial, but not just any digital transformation. A crucial paradigm shift is needed to address the "last mile" of contracting – the review and redlining process, which consumes 86% of the time and is associated with the majority of the risk in the contract lifecycle.

Traditional approaches often focus on large Contract Lifecycle Management (CLM) projects. While these are important, they can drain resources without necessarily solving the pressing issues associated with contract review, redlining, and negotiation. Instead, adopting specific tools designed to optimize these "last mile" tasks can bring about significant improvements in efficiency and risk management.

Without a detailed view of this final phase of the contract lifecycle, organizations may fall into the trap of simply organizing the queue of contracts awaiting review and negotiation, rather than tackling the queue itself. The challenge is not just to manage the queue better, but to reduce it. To do this, you need tools that streamline the review and redlining process, enable faster turnaround times, and facilitate more effective negotiations.

Digitizing your contract lifecycle, with a particular emphasis on addressing the "last mile", is thus key. It can help to eliminate longstanding inefficiencies, reduce contract risks, and ultimately, drive value for your organization. As procurement and legal directors, your strategic decisions in this area can significantly influence operational excellence and sustainable growth in your organization.