Why Companies Need a “Playbook” to Outsource Commercial Contract Legal Review to an ALSP
Most corporations deal with hordes of contracts, from non-disclosure to procurement agreements, that govern their relationships, rights, and obligations with other parties. Historically, the responsibility to review contracts has fallen to in-house lawyers and, when necessary, their outside law firms. More recently, it has become clear that the traditional ways in which contract review was (and, in many cases, still is) conducted is not efficient or even all that effective. KPMG has estimated that 40% of value on a given deal, depending on circumstances, is lost to inefficient contract review practices and processes.
Today, corporations are finding better ways to process contracts. The advent of technological developments such as artificial intelligence, and more particularly the utilization of more streamlined and effective contract review services offered by alternative legal services providers (ALSPs), has allowed corporations to overcome many of the impediments to effective contracting practices.
In this third installment in our series on optimizing the review of commercial contracts (you can view the first two articles in the series on contract intake and allocation here and here), we address the issue of legal review of commercial contracts. At the core of legal review is ensuring that the right person with the right training is allocated contracts within the sweet spot of his or her expertise. From there, it’s all about having effective processes in place to move contracts through the system.
The Issues Driving New Approaches to Legal Review of Commercial Contracts
Vilfredo Pareto was an Italian engineer, sociologist, economist, political scientist, and philosopher who came up with a simple but powerful insight which suggests that 80% of results come from 20% of efforts; 80% of outputs result from 20% of inputs; and 80% of effects come from 20% of causes. The 80/20 ratio of cause-to-effect became known as the Pareto Principle or 80/20 Principle.
As corporations have worked with ALSPs over time to optimize their contract review processes, they have come to an important 80/20 realization: Most contracts of the same variety (e.g., NDA, licensing, etc.) in across industry verticals contain similar terms and provisions. Only a small percentage of contracts are truly distinct.
In the not-too-distant-past, each contract that worked its way through a corporation was typically treated as unique. This led to a custom contract review process, often involving expensive outside lawyers, even for the most boilerplate agreements. By identifying the commonalities across contracts, corporations and ALSPs have been able to fashion more streamlined systems and processes that allow for the faster, higher quality, and less expensive review of contracts.
Moving forward, the systemization of contract review will become even more important and valuable. Over the next several years, the acceleration of the integration of artificial intelligence software into the contract review process will enable corporations to extract data and clarify the content of contracts more effectively. This will allow corporations to review contracts more rapidly, organize large amounts of data more efficiently, and increase the volume of contracts that can be reviewed, negotiated, and executed.
However, those who realize the greatest benefits from AI in the future will be those who lay the groundwork for it today by establishing processes that will enable machines to optimally perform. Computers require data, and if there’s no relevant, organized data to put in then even the strongest supercomputer paired with the smartest software won’t be able to add much value.
The challenge that many in-house legal departments face is that they lack the organizational capacity and technological know-how necessary to transform a traditional departmental approach to contract legal review to a modern one that relies on systems, leverage, and effective resource allocation. That’s why many are turning to ALSPs for assistance.
The Components of a Modern, Effective Contract Legal Review Process
In the context of contract legal review, ALSPs complement in-house legal and outside law firm resources, they don’t displace them. ALSPs are most effective at handling the review of a corporation’s “80” contracts—the common, core set of standardized contracts that don’t require the specialized expertise of a specific lawyer.
To be effective, an outsourced contract review process involving an ALSP must begin with a clear understanding of a client’s preferences for how work is performed. These preferences must be clearly and comprehensively documented so that all of the individuals involved in the review process are performing work in a consistent way. At Lumen Legal, we call this documentation a “playbook.”
There are many components to a playbook, but one of the most important is the determination of a client’s preferred service delivery levels that allow ALSPs to establish benchmarks for how quickly contracts move through the system. Along the way, clients have access to reporting mechanisms that enable them to know the current status of a contract. Clients also have the opportunity to get answers to questions in real time. Direct lines of communication—from email systems to dedicated 1-800 numbers—are established to enable the open flow of information between client and ALSP.
An effective playbook also takes into account that not every contract fits neatly within the confines of the playbook. Depending on the risk factors and unique circumstances of a particular contract, there are often situations requiring the escalation of questions and issues from an ALSP back to the client. By clearly documenting the commonalities among contracts, the nuances that fall outside of those parameters can be properly directed to the appropriate in-house resources for further review.
This type of process not only results in the higher quality and more efficient review of contracts, but it also frees up in-house resources to operate at their highest and best use. By leveraging the resources of an ALSP by outsourcing elements of contract legal review, it eliminates the need to hire and train additional internal resources. Corporations can have peace of mind knowing that a vacation, illness, or departure of a single individual won’t grind contract review to a halt because their ALSP partner has multiple cross-trained individuals in place who can step in immediately to fill gaps in coverage. And instead of managing, motivating, and holding more internal people accountable, leaders within an in-house legal department can outsource these responsibilities to an ALSP partner structured specifically for the task.
There are many other benefits to a structured as opposed to an ad hoc approach to contract legal review. One of the most important (which will be the subject of the next article in our ongoing series on commercial contract review) is the fact that it allows corporations to more effectively gather and analyze contract data and information—and therefore extract more value from their contracting practices. But to realize any of these benefits, it’s critical, no matter how aggressively or tentatively you engage, to start systematizing contract legal review. It’s only by scaling a systematized process that you can begin to generate compound returns on your contracting efforts.
EVP Strategic Initiatives
Dave founded Lumen Legal 25 years ago. He enjoys providing his thoughtful, creative, and innovative counsel to law firms and corporate law departments looking to solve problems and reduce costs.
He also enjoys staying abreast of all developments in the legal industry and has contributed to the dialogue with two books: Legal Visionaries and Unbound: How Entrepreneurship is Dramatically Transforming Legal Services Today. He is a frequent speaker at conferences.