Business Contracts 101

The global marketplace is more competitive than ever before. As a result, many organizations have become increasingly dependent on specialized external groups to help them succeed. That means there’s more pressure on experts to deliver above and beyond. Inc. contributor, John Hall, emphasized as much almost three years ago. “From startups to Fortune 500 companies,” he declared, “businesses are making the effort to become better partners and leaving the vendor mentality in the past.” His article begins by describing how and why customer expectations are evolving before proceeding to highlight several companies doing things right.

Forging healthy business partnerships is no trivial undertaking. Though time-consuming, there are multiple factors that warrant careful consideration. Those who neglect proper due diligence are effectively dabbling with disaster. Fortunately, there’s no shortage of informative guidance for the less experienced to explore. Writers at Entrepreneur released a rather comprehensive article that outlined how to find and work with suppliers. The resource they put together contains key definitions and then introduces its readers to industry standard selection criteria. While cost is the most commonly cited variable, it’s rarely the crux of what makes a bona fide partner. The focus should instead be on characteristics like reliability, stability, innovativeness, etc.

There are some leaders who avoid partnerships due to the complexity involved, but that’s hardly a compelling justification. Yes, it’s true that business contracts are often unnecessarily dense and laden with convoluted language. However, that doesn’t diminish the value of the endeavor nor does it make an accurate interpretation impossible to achieve. Jean Murray at The Balance did everyone the favor of promoting five tips for reading a business contract. She covered everything from universal definitions and dispelling assumptions to changing the boilerplate and getting a second opinion.

Unfortunately, far too many stakeholders remain susceptible to flawed judgment stemming from explicit or implicit biases. There are few organizations that can afford to have those issues with business contracts, which is precisely why many of them are turning to contract discovery software to fully understand the scope of their various contractual agreements. That means data analytics to reveal key risks and inform future decisions. It’s difficult for anyone to dispute those advantages given the trend disclosed at the very beginning.

Applying the power of digital software to contract lifecycle management (CLM) is a relatively new best practice. Analysts at Deloitte published an executive report on the topic last year. “No matter whether your contracts are complex, contain significant value, have a long life cycle, or if they are spread across the organization,” they cautioned. “Contract management is often time-consuming and costly.” Then, of course, mistakes can have serious consequences and they aren’t always simple to rectify retroactively. Suffice it to say that utilizing innovative digital tools lets businesses scale CLM without compromising the results.

It’s equally important to recognize that technology doesn’t eliminate all risk. The role of technology is to mitigate risk more efficiently than otherwise possible while acknowledging its core limitations. Hie Jung Yoon at Business2Community outlined the four frequent sources of contract risk and visualized them for everyone. The risks roughly approximate the different stages within the lifecycle (contract creation, contract terms, contract execution, etc.). Financial risk is the fourth and final category and is in many ways reflective of any preceding ones. It’s clear through her breakdown that technology can have a disproportionate influence but cannot supplant human intervention.

Business agreements might be unappealing to those without adequate education, but it’s never too late to start the enlightenment process. Attorneys are definitely recommended before officiating a contract, but they aren’t absolutely necessary when it comes to drafting or decoding one. Literacy can be cultivated and technology can be leveraged. All it takes is a willingness to try.

Adam Hansen

Adam is a part time journalist, entrepreneur, investor and father.