Contract Maturity Model (Part 3): Evolution of Content from One-Offs to Modular Components

Topics: Automated Contracts, Efficiency, Law Firm Profitability, Law Firms, Legal Innovation, Legal Managed Services, Midsize Law Firms Blog Posts

This is the third, and last, article in the series of posts on the future of contracting platforms. It focuses on content systems — namely, the contracts and clauses that comprise the building blocks of agreements. The second post in this series examined the future of contracting platforms and focused on the technology systems designed to streamline contract tasks. The first post looked at the major drivers of change and predicted future states through the lens of a contract maturity model.

While sometimes obscured by the glare of shiny new technology, content is just as important, if not more, than the technological means to manipulate it. Henry Ford, for example, would not have been successful if he had just built an assembly line. He also needed to develop standard components that connect together in a modular manner to quickly assemble a car. This innovation massively increased production, lowered the price of cars, and has — over time — improved quality. Today, most cars come off an assembly line, while a far smaller number are hand-crafted by a relatively small number of companies.

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The trend towards standards is a path followed by all businesses. Of course, law presents a more challenging technical exercise compared to automated manufacturing, where the subject matter is the full breadth of human and business interactions expressed in language. Nonetheless, as the illustration shows, the trendline evolves from one-off contracting — where every agreement is slightly different — to portfolios of contracts built from standard, modular and reusable components, configured by input variables.

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Stage 0—Legacy Contracts

Prior to the implementation of any contracting system, legacy agreements may be stored in physical and electronic form on a variety of platforms (including personal computers). People rely on memory and simple searches to retrieve precedents — a process that is frequently frustrating and fruitless.

When suitable models are found, new agreements are drafted by marking up the last, closest draft. The result is a wide variation in terms from one contract to another. Some may argue that this is, in fact, a benefit as each agreement is custom-tailored to each unique deal-situation. However, there are standards — norms of contracting — that have been developed through millions of past precedents that dictate best practices in structuring a transaction. These standards are the building blocks of agreements. They are not simple or formulaic. They document our business transactions using known, reliable parts that can be configured through deal variables to meet the needs of the parties as well as allocate risk.

Stage 1: Contract Templates (Deal Variables)

As a first step towards standards, many law firms and corporate legal departments develop templates for their most common agreements. The process is typically manual, time-consuming and based on a small handful of precedents. Nonetheless, the effort is rewarded by significant advances in efficiency and quality, especially when the forms are automated with document assembly software.

At this stage, the templates are entire agreements. Variables are introduced in the form of deal terms, such as names, places, dates, amounts, etc. Document assembly logic (i.e. “if- then” or “if-then-else” statements) may be embedded into the agreement. However, the interdependent document-level logic may prevent easy reuse of clause components.

Stage 2: Clause Libraries (Clause Variables)

Initially, each template is seen as a separate agreement with its own universe of terms. But as more templates are created, some organizations develop clause libraries, often focusing on terms that are common to many different agreement types, such as representations and warranties, covenants, rights and remedies, and general provisions.

The creation of clauses introduces the critical modular building blocks of contracts. A similar breakthrough occurred early in the development of computer coding, when software moved from linear, decision-tree technology to object-orientated programming. Such modularity can be further refined by developing a common contract framework (or organizing taxonomy) to organize the clause library. For example, ContractStandards.com is built on the Unified Contract Framework. Despite the significant quality and efficiency gains, few organizations create clause libraries, in part because of the prevailing belief that every term has to be custom-tailored to each deal.

Stage 3: Playbooks (Clause Variables)

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Based on clause building blocks, many corporate legal departments construct negotiation playbooks containing preferred, alternate or fallback terms, together with guidance on the use of the clause options.

Variability is built into the clause library. In general, clause variations are driven by three main factors: i) the nature of the transaction; ii) the degree to which the clause favors one party or the other; and iii) the requirements of the governing jurisdiction (in that order of importance).

The art of negotiation is to select the appropriate terms to protect each party’s interests, attuned to the risk profile of the transaction. The clause library can be designed to contain a wide range of terms that can be automatically selected based on a handful of questions to identify the nature of the transaction and the degree of risk.

Stage 4: Unified Forms (Systematized)

The next stage of refinement builds a systematic, unified structure for all templates and clauses. It is a resource of forms and clauses built on a single organizing framework. It combines a contract taxonomy with a clause taxonomy: a list of all agreement types and all clauses, showing what clauses (and their variations) appear in each contract type. In this manner:

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Organizations creating a unified contracting system should also consider developing a style guide to ensure consistent form and use of language. An example style guide is provided on the ContractStandards.com site.

Stage 5: Self-Organizing (Embedded Markup)

The final stage — as currently envisioned — is to make contract portfolios self-organizing and actionable by embedding tags in the agreements designed to capture key contract terms, and ultimately to make the document self-reporting. For example, a tag can be inserted in notice provision that automatically sends an email reminder alerting contract managers of renewal requirements.

Initially, such tags can be inserted into contract templates and clause libraries as part of the manual setup procedures. As contracts analytics become ever more capable, legacy agreements and third-party contracts can be automatically tagged and marked up. Such automated systems “read” agreements and identify the rights, restrictions and obligations that are contained therein. For example, this technology is able to capture which party bears the burden, the nature of the right or restriction, and whether it is conditional or qualified.

Conclusion

The combination of simple (but also powerful and secure) technologies to draft, review, manage and monitor contracts — combined with standard, modular terms in those contracts — will radically reduce the cost of contracting by 50% or more compared to current costs.

These standards represent quality, not rote or formula. Modular agreements can be configured through key input variables that are highly sensitive to transaction, jurisdiction and risk considerations.

The growing capabilities in turn will provide new capabilities that cannot be offered by even the most experienced practitioners currently. In the future, these new, fully integrated platforms will move to a “self” contracting model: Self-service, Self-organizing and Self-reporting.