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I D C T E C H N O L O G Y S P O T L I G H T Contract Discovery and Analytics: Driving Value from Within Your Contracts October 2014 Adapted from Wo...
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Contract Discovery and Analytics: Driving Value from Within Your Contracts October 2014 Adapted from Worldwide Procurement Applications 2014–2018 Forecast and 2013 Vendor Shares by Christine Dover, IDC #249832; Sponsored by Seal Software

This paper examines the complex issue of managing the hidden data within business contracts in a time of ever-changing government regulations and compliance, disparate systems, and an exploding number of contracts across all aspects of businesses. IDC includes contract management in its definition of the procurement applications market. Overall, the procurement applications market grew 7.7% in 2013 to reach a total of $3.8 billion (over 2012's reported $3.5 billion). The procurement applications market is expected to grow at a 6.6% compound annual growth rate (CAGR) through 2018 when the market total is expected to reach $5.2 billion. A primary reason for the growth in this market is that enterprises are rapidly updating legacy applications and adding new applications to fill gaps in their work processes, including, in large part, the ongoing management of contracts. Enterprises of all sizes realize that the hidden data in their contracts can have a major impact — both positive and negative — on their organization's future.

Introduction: The Limits of Conventional Contract Life-Cycle Management Contract life-cycle management (CLM) is a process that has been around for a long time, and since the 1990s, it has been increasingly automated. It's the process of managing contracts, often procurement or sales contracts, within a single system from the time the contracts are created until they are approved and signed. While CLM systems focus on efficiency, expanded control, and standardization of the contracting process, they have some limitations: 

CLM systems address only contracts executed after the CLM implementation and not the portfolio of active contracts that existed prior to the CLM implementation.



CLM systems are typically implemented in one or two departments within a company, limiting the managed contracts in the CLM repository to only those for the specific departments.



The contract records stored within CLM apps track a minimal amount of contract information that remains fixed and static. There is no way to go back and extract new information from the unstructured language of the contract once the contract has been finalized.



CLM apps are hit and miss when it comes to managing contracts originating from another party (third-party paper) versus contracts created on an organization's own paper because third-party paper contracts are not tied to a specific predefined template within the CLM apps; are too cumbersome to manually map to clause templates, metadata, and workflow within the CLM apps; and are often negotiated outside of CLM apps for the first two reasons and never make into the CLM apps upon completion.

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As such, CLM implementations lack a fully searchable and indexed contract repository that contains all of the contractual documents across the enterprise, leaving a great deal of risk and opportunity still buried within the extensive portfolio of legacy contracts. The magnitude of these shortfalls is significant when you understand the plethora of events that can happen over the lifetime of a contract. What exactly happens over the lifetime of a contract? The answer is "many things." Contracts are impacted by changes in government regulations and compliance, mergers and acquisitions, and emergency scenarios such as bankruptcy. Also, contracts might include clauses that take effect at a future date, which could impact corporate revenue or profitability as well as the degree of risk exposure to the enterprise. Such clauses could be overlooked because the people who negotiated the original contract may have moved on to other responsibilities. Contract discovery and analytics is an important part of a company's overall contract management strategy, but it has historically been a manual process. For example, when a company is acquired, the acquiring company needs to review all existing contracts signed by the target company. It's not uncommon for there to be thousands of contracts that need to be reviewed, requiring a large team of lawyers and legal assistants. The process could take months — time that's generally not available during the 90-day period to close an acquisition. If this due diligence is overlooked, the risk to the acquiring company is substantial. Imagine, if you will, that an acquiring company learned several months after the close of an acquisition that many of the sales contracts had no end dates or termination clauses or that there were adverse assignability clauses. The financial risk to the acquiring company could be significant and could create a major public and investor relations crisis as well as lead to increased financial risk. Contract discovery and analytics solutions can be used to reduce these risks because the process of reviewing and extracting contract details is automated, greatly reducing the time it takes to complete the contract review. It's also consistent and efficient because the software searches for a specific set of data rather than relying on members of a work team who may be scattered across time zones and locations and some of whom may be making their own decisions about what data is important and what it means. If the team members do make different decisions about the data collection, then rework is often required, adding additional delays to the project. In summary, any CLM initiative will fall short of achieving its fullest potential without the inclusion of contract discovery and analytics as a part of the overall strategy.

Benefits There are a number of benefits for enterprises using contract discovery and analytics solution. For example, consider the following use cases: 

Mergers and acquisitions. The due diligence period for mergers or acquisitions is often short (e.g., 90 days). During that time, the acquiring company should review every contract that the target company has signed — sales and services to customers, partnership agreements, leases and rental agreements, employment contracts, and software and services agreements for products used by the target company. The reality is that there may be thousands of contracts to review and little time to get the job done.



Ad hoc emergencies. It's impossible to predict when emergencies will arise, but they always do, and with increasing regularity. For example, what if a financial services organization that the enterprise does business with suddenly declares bankruptcy or receives a credit rating downgrade? These types of activities cause a ripple effect; as such, it's difficult to know how many contracts may be impacted by the changed credit situation.

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Changes to government regulations (e.g., Affordable Care Act, Dodd-Frank, and Basel III). Governments worldwide are updating regulations on a seemingly continual basis. Generally, this means the enterprise needs to track a new piece of data, which could result in a CLM system change. But IT organizations often cannot react quickly enough to write the requirements and make the coding changes to the CLM system because they have just finished a project to update the system for the previous year's changes and have moved onto other urgent projects.



Missed revenue opportunities. Sales contracts often include an allowance for a price increase in a subsequent year of the contract, often for support or other services. But what if the person who originally signed the contract has left the company or moved to another assignment? Over time, support contracts represent a large revenue item for a company, and missing out on a contracted price increase can have a substantial impact.



Reduced expenses. Many contracts include clauses for early-payment discounts, responsibility for payment of freight charges, or auto-renewals. Over time, the accounts payable organization may not be aware of the discount allowances, the shipping department may use the corporate shipping account rather than assigning that expense to the receiver of goods, or software may be auto-renewed and paid for but the enterprise may no longer have any use for it. Following mergers or acquisitions, organizations should — but often don't — make the time to review contracts with suppliers to determine whether there is opportunity to consolidate contracts with suppliers, determine which contract offers the best terms, optimize pricing, and potentially improve existing terms as a result of an increased volume of business from the newly combined operations. In all these cases, the enterprise is missing out on opportunities to reduce expenses.

The benefits of using contract discovery and analytics solutions for each of these use cases are significant. If contracts can be quickly added to the contract repository and searched for a specific set of data — a set of data that can be continually updated as business needs change — the time frame to complete any of these projects is greatly reduced. Plus, if the process is automated and a piece of data is missed, it just needs to be added to the data set and the automated job run again. While there will always be a need for some level of human review, today's demand for teams of lawyers doing repetitive, completely manual reviews is no longer necessary with contract discovery and analytics solutions. IT doesn't need to make a system change every time a new piece of data must be tracked. Personnel changes won't result in lost revenue opportunities or increased expenses because someone didn't know what was in the contract. Another benefit of contract discovery and analytics solutions is the opportunity to learn from the enterprise's existing contracts. By examining past contracts, an enterprise can learn how to better negotiate in the future. This learning can also expedite and streamline the contracting process itself as the enterprise learns which items are most commonly negotiated or regularly agreed to, thereby spending time on the items that need discussion.

The Growing Need Today's business world is complex and filled with contracts — newly drawn contracts plus existing contracts that have been amended, updated, and changed. It's difficult for enterprises to know where all of their contracts are: Some may be in CLM applications, but others may be attached as Word documents or PDFs to sales records, on personal hard drives, in file-sharing systems, in content management applications, or elsewhere. Add to this the increasing number of contracts that an enterprise is signing with customers, employees, partners, suppliers, and others. It's likely that few, if any, people know where all the contracts are and what information is in them.

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Enterprises are also finding that the number of activities that prompt the need to review existing contracts is increasing dramatically. Mergers, acquisitions, and divestitures happen frequently among enterprises of all sizes. Manufacturers divest plants or divisions regularly; companies are often acquired by private equity or by another company. In the wake of the financial crisis, governments worldwide are continuing to legislate regulatory reform and update compliance requirements. For example, in the United States, the Dodd-Frank Act includes 398 regulations, of which about half now have defined rules associated with them. One of those rules, the Volcker Rule, is 800 pages long. And that's just the U.S. federal government. Every state in the United States and every country worldwide in which an enterprise may do business is increasingly reviewing and updating its business legislation, all of which impacts existing and future contracts.

Considering Seal Software Founded in 2010 and headquartered in San Francisco, California, Seal Software is a provider of contract discovery and analytics solutions. Using patented predefined rules that are based on natural language processing and machine learning techniques, Seal offers a disruptive technology that enables enterprises to leverage the information written inside the thousands of contracts that are enacted annually. Whereas CLM systems are limited to managing a handful of static fields across a subset of contracts, Seal delivers the ability to dynamically teach, find, and extract critical terms from unstructured contract language across all contracts to meet the demands of any future event (litigation, regulatory request, compliance requirement). This flexibility and agility in finding any contract term can help companies address not only external, ad hoc pressures but also ongoing changes to their own internal business requirements. One of the key differentiators of Seal's technology is in the way it allows companies to "teach" the system. Some methods involve building a complete learning model up front using the data available at a given point in time and relying on that prebuilt model going forward. The limitation with this approach is that the original data set used becomes obsolete quickly as new data becomes available. Seal's teaching methodology, on the other hand, dynamically builds the model at the time it is needed (versus up front), starting with preconfigured policies and then enabling each client to extend it with a more tailored or localized model. This new model combines all the data that the system has seen up to that point and then classifies items based on the most recent information available. The net result is the best-fitting model built on demand around the most current data, thereby ensuring the greatest accuracy and completeness. Advantages of the Seal solution include: 

Locates contracts wherever they are across corporate systems — in CRM, procurement, marketing, support, human resources, content management libraries, and more (Seal makes copies of the contract to store within the Seal system and leaves the original contract in place.)



Identifies contracts with close to 100% accuracy, scoring them in order of review priority to "teach" the system and further enhance accuracy



Extracts more than 50 contractual legal and commercial terms from each contract (e.g., limitation of liability, termination, most favored nation, start/end dates, clauses, and payment terms) and stores them in a centralized database with advanced search engine functionality for review and further processing



Speeds the loading of legacy contracts into most other systems, including CLM applications, which is typically a manual process

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Consistently reviews contracts on an ongoing basis rather than people making their own, often different, choices about what is important and entering the data into spreadsheets



Provides analytics that empower users to continually teach and refine the Seal platform based on examples and contextual rules from their own contract terms and clause combinations

Seal's customers include midsize to very large enterprises across a variety of industries, such as financial services, high technology, legal, pharmaceutical, and energy. Seal is experiencing rapid growth in demand for its products, and in June 2014, the company raised an additional $4 million to continue to expand its growth.

Challenges Seal must contend with a lack of awareness in the business community of the breadth and depth of the risk that failure to continually review contracts creates for an enterprise. Enterprises often simply don't know how many contracts they have because those contracts may be segregated by department (sales, support, procurement, human resources, marketing, etc.). Also, enterprises may falsely believe that contracts need to be reviewed only under special circumstances and can then be treated as a special one-off project. Another challenge is that Seal Software is, at this time, a small technology company that is relatively unknown. Name recognition and brand awareness are important to customers. Many CLM vendors have recognized the gap that Seal Software fills within the CLM process and may choose to add contract discovery and analytics to their own software, reducing the need to license an additional product. However, a number of CLM vendors have already begun reselling Seal and, in some cases, white labeling Seal's technology as part of their own solution. This recognition from other vendors is important because it emphasizes the value of contract discovery and the quality of the Seal solution.

Conclusion Managing contracts is a complex process for enterprises. It cannot be addressed by implementing a contract life-cycle management system that fails to include contract discovery and analytics. IDC believes that the continued growth in the procurement and contract management markets is due, in large part, to enterprises recognizing that managing contracts is an essential part of their everyday operations as the business is impacted by more frequent regulatory changes, mergers and acquisitions, forgotten contract clauses that affect revenues and expenses, and ad hoc emergencies. To the extent that Seal Software can address the challenges described in this paper, the company has a significant opportunity for success.

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This publication was produced by IDC Custom Solutions. The opinion, analysis, and research results presented herein are drawn from more detailed research and analysis independently conducted and published by IDC, unless specific vendor sponsorship is noted. IDC Custom Solutions makes IDC content available in a wide range of formats for distribution by various companies. A license to distribute IDC content does not imply endorsement of or opinion about the licensee. C O P Y R I G H T

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