• Strategy
  • CFO.com | US

Contract Automation: Digitizing the Party of the First Part

Companies turn to Web-based applications to better manage corporate contracts.

Over the past decade, software designers have spent a good deal of time developing Web-based applications that automate just about every aspect of the buyer-seller relationship. But the creation of the agreements that bind those relationships — contracts — has largely been ignored by application vendors.

The result? Producing and storing legal documents remains as big a pain in the neck as it was 30 years ago. Indeed, you’d be hard-pressed to find a senior executive who isn’t familiar with the contract drill. Draft a proposal. Negotiate. Redraft. Negotiate some more. Dig through endless filing cabinets to unearth earlier versions of the contract. Insert riders. Express mail. Fax infinitum.

This paper trail of tears may soon be coming to an end, however. Over the past year or so, startups such as DiCarta, I-Many, MyContracts, Webango, and TradeAccess have launched browser-based applications that automate the creation and management of legal documents. What’s more, financial software heavyweights such as Oracle, SAP, and i2 Technologies have also come out with contract automation systems.

While a number of these applications automate specific parts of legal document creation, others manage the entire contract lifecycle — from proposal and negotiation, through analysis, approval, and execution, to management and renewal. Some contract management programs go even further, tracking terms and conditions, as well as the relative profitability of different agreements. A few apps even prompt users through contract-negotiation steps and automatically issue checks to customers and suppliers when contracts go into effect.

This digitizing of corporate contracts makes a lot of sense in a digital economy. Mary Barth, Atholl McBean Professor at the Stanford University Graduate School of Business, notes that the increasing corporate reliance on outsourcers, application service providers, and electronic marketplaces has put a premium on the handling of contracts. ”Automation has become important because more and more relationships are being documented in contracts,” she says.

In addition, commercial documents have become more complex, as companies attempt to cram rebates, chargebacks, and refunds into service agreements. ”Managing contracts and breaking them down into pieces becomes more complicated,” asserts Barth. “It is inconceivable to me that managers at any reasonable-sized company try to do this by hand.”

Now Entering the Forgotten Land

They do. Surveys show that 99 percent of companies still don’t have electronic or automated contract management systems in place. While many companies use spreadsheets to track agreements, few have the technology to extract and compare the content of thousands of contracts. ”Most companies don’t have an early warning system, or the ability to compare contracts,” notes Michael Evans, a partner in Ernst & Young’s strategic investment division. ”It’s really the forgotten land.”

A trip to that land usually involves a tour of the Hanging Folders of Babble-On. Indeed, sifting through endless files to ensure contractual compliance remains a monumental task for many medium-to-large sized companies. This probably explains why most businesses simply let their contracts collect dust.

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