Contracts in four dimensions
By Denis Potemkin.
Contracts are not just about process and data. A more dimensional view of contracts can deliver amazing results and uncover solutions in unexpected places.
GCs have a problem. A recent survey of 2000 in-house lawyers and their business clients by Big Four firm EY found rising workloads and increasing cost pressures. 88% of GCs said they would be reducing the overall cost of their team, yet expect workloads to increase by 25% over the next three years. An astounding 90% of business development leaders reported they face challenges working with their procurement, legal and commercial teams on contracts, with 57% saying that inefficiencies in the process result in lost business. Yet 97% of GCs said they find it hard to get the budget to invest in legal tech.
So how do you solve this conundrum? This article focuses on contracts - frequently identified as a top priority for GCs. We will start with understanding the problem better, then present a fresh way of looking at it.
Framing the problem
Trade is a foundation of our civilisation, and contracts are the lifeblood of trade. But merely transacting is not enough: building relationships makes the difference between winning and losing. Relationships are both harder than ever and more important than ever.
Building relationships means bringing people together, getting them on the same page, creating clarity and getting to “yes” fast. Yet contracts and contract processes are still highly dysfunctional. Contracts are poorly understood by the business, while the process creates bottlenecks and erodes trust.
Most of the time we’re looking at the problem in only one dimension: using tech to solve for process efficiency. This is a slow, resource intensive process with challenging ROI yet no guarantee of success. Once you get there, the solution might result in savings, but you’re still only fixing supply-end problems, not the core dysfunctions. Technology alone does not make the business good at relationships, which is a human challenge.
To really change the contracting journey in a more fundamental way, we need to look both nearer and further.
Not a one-dimensional problem
A contract (in Word or an editor inside an automation platform) is a two dimensional construct. It’s a flat piece of A4. In practical terms it’s only one-dimensional because you can only expand it downwards on the page. The typical contract process is also rather flat and linear: template -> draft -> internal ping-pong -> external ping-pong -> signature -> archive. After signature, contracts are usually “put in a drawer”: businesses will use completely separate processes and systems to manage the underlying business tasks and will allow value to leak by not using the contract’s governance, fiscal and remediation mechanisms.
Much of contract automation technology replicates the same tools and processes. It might produce data but it’s arguable how much of it is actioanble and whether it’s really put to good use by businesses. Many of the advantages of technology are not actually used: for example online negotiation tools are rarely used; users still largely resort to exporting Word documents and exchanging redlines by email in the old way. Technology reduces the incentive for creating shorter and simpler documents and really thinking about the user journey.
A multi-dimensional approach
To make contracts really work as useful business tools - especially for building relationships - a more dimensional approach is needed. There are amazing things that businesses and legal teams can do by treating the contracting problem as a multi-faceted one that needs multi-faceted solutions. Whether technology is part of that or not.
Let’s start with some foundations. At its most basic, a contract is information (the legal and commercial information it carries) + process (its lifecycle). This is where contracting traditionally lives.
Figure 1: the first dimension
There is a third component to this which is often overlooked: Communication, which is the way the contract and the contract process are conveyed. How is the contract process explained internally? How is risk exposure reported? How are the proposed terms introduced to the other side? How do you agree whose template to start from? The Information and Process components can’t operate well without a working level of Communication - and that means internal communication also.
Information and Process is where most professional effort is directed: working on templates, the drafting process, approvals, controls, automating parts of it. Communication does not often feature expressly. That is why, for example, organisations spend huge resources on creating long complex playbooks which nobody reads. It is also why lawyers and businesses are poor at communicating with the counterparty: it usually doesn’t get more sophisticated than shooting one’s template at the other side and hoping it sticks. When it comes to internal processes, companies focus more on approval processes, and less on creating clear visibility of risk.
The other dimensions
To get better results and faster, legal teams need to look beyond the foundation. I propose three other dimensions, which is a model I use in my contract design, process and technology work. We’ve covered the first dimension. Let’s look at the others.
Figure 2: the second dimension
The second dimension: Data. This is about making contracts and processes easier to automate, teasing out patterns and learnings and creating visibility of risk. While there is a lot of technology for extraction and insights, creating structured content from the get go remains a challenge. As with all dimensions, this is not just about technology. Restructuring contracts to make data extraction easier is an opportunity irrespective of where you are with technology.
Figure 3: the third dimension
The third dimension: Design. Design means turning flat one-dimensional pages into something more thoughtful and empathetic, through information architecture, language and visualisation. I take a very broad view of design, and behavioural aspects come into this also. This is all about making contracts more human: getting people on the same page more quickly, building trust and creating enjoyable experiences.
Figure 4: the fourth dimension
The fourth dimension: Systems. This is about making the contract a more useful part of the ecosystem, rather than a mere snapshot that records the deal. One aspect of this is the ability of the contract to accommodate lifecycle actions and change events; for example ensuring that the contract makes it easy to handle microchanges, or to add SOWs under a master agreement. I call that plasticity. Another aspect is whether the contract helps with the underlying business tasks that it purports to manage; for example tracking and allocating ownership of new intellectual property under a development agreement. I call that expansion or expandability beyond a merely legal function.
Connectivity is about how well the contract connects with broader business processes. This is important not just for efficiency, but for understanding how well the contract is performing, and for reducing value leakage (for example ensuring that remediation processes like penalties are followed through, or price change mechanisms are correctly applied). This is not just a question of process or technology: the contract itself has to help. For example, does that contract make it easy to calculate and apply damages? If the information is hidden inside dense legalese, it does not. If there is a simple table of triggers and resulting remedies that a commodity manager can apply, then it does.
The four dimensions of contracts
This is how it all fits together:
Figure 5: the four dimensions of contracts
Technology is not a separate component in this model. It is an enabler, something that can implement and enhance any of the elements in the canvas. For example, some CLM solutions enable smart clauses to connect with ERP systems so that post-signature tasks - like issuing a notice or penalty - can execute automatically based on given business triggers.
As a matter of prevailing practice, certain parts of the model are more tech-driven than others. Data is primarily a tech play while legal design is very much a human artisanal activity. That will change. Structured data should be the way contracts are created and will be increasingly so, and automation of visual design is starting to happen.
The key is that a well designed contract and well functioning process must work across all these dimensions.
Going deeper: the four dimensions of design
So far, I’ve argued that to create a better contract experience (and become better at relationships), it’s necessary to look beyond process and information: at much more exciting dimensions like communication, data, design and systems.
There is another set of interwoven imperatives. In addressing any of these dimensions, it is important to look at all the outcomes including legal risk and business needs. Users must be able to experience the process in a positive way. It all needs to be scaleable and actually work inside an organisation. And the result should make people happier, not stressed and overwhelmed. How do you achieve all that?
We are now in the realm of design and design thinking.
There are many design frameworks. I use a 4-dimensional model to help me: the four dimensions of design. It can be applied to any challenge along the contract journey - whether that’s in the dimension of communication, data, content or systems. It’s all about having a clear purpose, delivering on all the important outcomes, with a great experience of all users, in a sustainable way.
Figure 6: the four dimensions of design
Here is how I break it down:
Purpose: Why are you doing it? What is the purpose you are trying to attain? What are the objectives that will get you there? Design needs a positive transformational objective and an idea of what success looks like, otherwise the risk is to remain tinkering at the edges. Good design involves being vulnerable and opening up to criticism to make the problems visible. So it also needs a diagnosis: a brutally honest view about what's broken and whether your attempt to fix it will make it better.
Experience: An improved contract or contract process should strive for clarity, simplicity and usability. Ideally it should be a joy to experience (if only relative to the prior pain!). Designers aim to achieve joy in how users interact with home appliances and accounting apps. Why not legal processes?
Outcome: The end results of your contract or contract process should go beyond legal and risk outcomes. The solution needs to achieve commercial, human and relationship outcomes and lead to net value versus the investment required.
Sustainability: The best design is scaleable (can eventually be deployed in organisations and in complex settings), resource-efficient (it uses human and technology resources wisely) and durable over time (future-proof yet malleable enough in case it isn’t). Hence sustainable.
Applying it in practice
Let’s see if we can apply the four dimensions of design to the original problem we discussed: communication. A recent survey by World Commerce and Contracting shows that 65% of companies want to improve how they communicate. There’s the EY survey result that 90% of business development leaders reported they face challenges working with other functions on contracts. From my own experience as a lawyer and consultant, communication is a critical success factor. Projects where communication occurs early, frequently and with clarity tend to create less friction and more trust, and usually result in faster deal cycles and lower cost. Poor communication, on the other hand, creates collateral damage across the entire journey.
In the typical contract process, communication strategy - internal and external - is not adequately thought through. This means that the way users experience the contract journey is left to chance, brute negotiation leverage, and individuals’ skills. So let’s have a go at applying the four dimensions of design to this facet of contracts.
Step 1: Outcomes
We know that contracts need to manage risk. However if that’s the primary focus, then all the documents along the process end up looking like defensive disclaimers or aggressive posturing. That’s one of the key dysfunctions of contracts which creates friction and erodes trust.
Even a term sheet or “key terms” summary - in itself a great way to align early with the other side - will typically contain language that is biased towards risk, starting from the opening paragraph that tells the other side that this is just a summary and should in no way detract from the full set of terms that will come their way.
What if you look at these documents with a different lens: solving for human and relationship outcomes? That drives a different approach to the language, structure and content of the term sheet, away from risk-biased language, towards a more relational model. So to be effective, communication needs to balance the risk, business and human outcomes and this dimension of design reminds us to do that.
Step 2: Experience
An excessive focus on risk means ignoring the experience of your users (both internal and external). The outcomes have to be balanced - and can be improved even - with attention to the user’s experience of your documents and communications.
A human touch is something that lawyers are often too busy or scared to apply on paper. One way to add a human touch to legal documents (especially complex agreements), is to have opening paragraphs that explain in a down-to-earth way what the document is and what you’re trying to achieve. This is a simple but surprisingly effective technique. Adding a visual aid like an agreement map that gives the user an overview of the document is another way of being helpful and creating trust. Having a document that is a pleasure to handle will improve the user experience and is proven to reduce the level of unnecessary scrutiny and push-back. Introducing a bit of humour can be a huge added differentiator.
Step 3: Sustainability
A perfect process could be built around user friendly documents supported by a nice phone call at each stage. But that’s not resource-efficient or scaleable. So the challenge is making communications both human and scaleable. Possible solutions lie in creating helpful documents (not just functional risk-focussed ones), adding a bit of humour and creating interactions that are engaging for the user (something more exciting than intranet link).
Another aspect of sustainability is simplicity. It’s well known that complex systems are more prone to stresses and breakdowns. Simpler systems may lack precision, but they more than make up for it in resilience. When designing documents and processes, consider whether the additional detail is adding certainty but creating more complexity, more maintenance effort and increases the risk that the document or process needs amending as soon as anything in the organisation changes. Less can be more and the same applies to communication: the more you say and the more words you use, the higher the risk that a miscommunication occurs compared to simpler, more frequent touch points.
Step 0 and 4: Purpose
Getting all that right is impossible if you don’t have a clear idea of what your purpose is. Purpose is the starting point and is also the way to pressure test what has been done. That’s why purpose is at the heart of this model.
Most businesses have some sense of their objectives when starting a contract improvement project. But objectives are not the same as purpose. Objectives answer the “what”, not the “why”. The “why” answers the most fundamental questions, forces more honest scrutiny and can only be answered correctly if all the stakeholders are involved.
The way we communicate along a contract journey is going to be different depending on whether our “why” is focussed on cost, deal velocity, risk visibility, relationships, trust, team dynamics or wellbeing. For example, if creating confidence for management is part of the purpose, the internal reporting system is going to look different than if the primary purpose is better risk visibility. If a key purpose is to improve negotiating positions and win more battles in the “whose template” war, then the confidence with which the business communicates with the other side becomes critical and needs to be designed, not left to chance or individual strengths. Any solution needs to show return on investment, so a clear purpose helps to prioritise all these objectives and make it all affordable in terms of money and time.
Final thoughts
Looking at one facet of the contract problem, I have attempted to illustrate how a more expansive view of contracts can bring solutions to light which can achieve faster and easier results than bulky transformation and digitisation projects (and make those bigger projects leaner, too).
Cutting your template wordcount by 50% can achieve huge productivity gains without any technology. Making contracts more structured and better at handling data by isolating key variables and negotiables, for example through a Key Terms section, can simplify negotiations, improve controls and speed up approvals without reworking your whole process. Improving the information architecture of your templates can do as much to achieve self-serve as automation tools. And then there are behaviours: tools and habits you and your team can introduce, that improve collaboration and trust - and trust means speed.
A multi-dimensional view of contracts and contract processes is an important component of the GC’s arsenal when solving those pressures of rising workloads, budget constraints and the need to deliver results quickly. These solutions can be found in surprising places, if you look.
About the Author
Denis Potemkin is a lawyer, legal designer/engineer and legal tech entrepreneur. Denis consults businesses on contract process improvement, is Head of Innovation at London-based ALSP LexSolutions and founder of legal tech start-up Majoto (majoto.io) where he is building a contract automation solution based on the models described in this article. Denis is passionate about design and behavioural change as a means to make legal processes and technology not only productive, but also better at creating positive relationships and wellbeing. He writes about better contracts on his blog at potemkin.legal.
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