Technology

alt.legal: The New Alt-Enabled View On Contracts And Diligence

Contract management is super hard.

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future techContract management is super hard. What does anyone do with a contract after it is executed? Store it someplace in your company, refer to it when you have questions about what you owe the other side or vice versa, then after a while forget about it. Then be exposed to liability when some of the terms of those contracts were non-standard, or miss out on beneficial renewal terms because you missed the contractually-defined window to act.

Or, that latent liability gets passed on to whoever acquires your company and happens to be one of the agreements that didn’t make it into that frightened first-year associate’s diligence memo.

If only there were contract management tools, workflows, and managed services available! The way we transact and do business would gain so much efficiency and visibility!

There are, and it will. This begins a multi-part series on contract management tools and services in the alt.legal world.

Kira Systems, a startup founded by an ex-Weil associate and a Computer Science PhD with a focus on bioinformatics, focuses on contract analytics. I had an eye-opening conversation with Steve Obenski, Chief Commercial Officer at Kira.

Ed Sohn:  How far has contract lifecycle management (CLM) technology come in the last few years? Can you pinpoint the various inflection points in terms of technology advancement?

Steve Obenski: We are still in the very early stages. Large corporations have lots of contracts in their repositories and historically it has been very hard to get a handle on what those contracts say. Over the past ten years, many have made progress extracting some data from those contracts and putting it into workflow-enabled databases so they can track renewals, compliance issues, and other liabilities. But creating these databases still requires a lot of manual labor, and it is a struggle to do it affordably.

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One area where you have seen some interesting technology adoption is in document generation. HotDocs, Contract Express, Apttus and others all help enforce negotiating playbooks, and they can help capture some of the key data in structured form as contracts are created. But this only solves one part of the problem. They are less impactful when the contract is on the other party’s form, has been really heavily negotiated, is a bad scan, pre-dates the tool, or was obtained through an acquisition.

Tools that can really help with this messy reality — the unstructured data problem — are quite new, in just the past couple of years. My company, Kira Systems, provides technology that can identify clauses even in scans and even when the wording varies significantly from a standard. We can be a kind of bridge from unstructured data to structured databases. We’re growing quickly, but I’d hesitate to say we have hit a technology inflection point just yet; a lot of companies still don’t know tools like ours exist or how they work. But times are changing and legal departments, through their operations staff, are determined to solve these problems with a combination of process and technology.

ES: Where is this market headed in 2017? Do you see the market continuing to grow and see new players? Fragmentation? Consolidation?

SO: CLM software is a very fragmented market. The latest Gartner report I saw had over 40 providers and I think that only scratches the surface. Each provider tends to have very specific strengths, e.g. perhaps they do sell-side contract generation or signing workflow, or they integrate with a particular CRM or ERP platform. Some providers choose to stay focused on their strengths, while others supplement their gaps through partnerships or by providing custom technology and consulting services. There doesn’t seem to be any immediate trend towards consolidation.

Kira is a good example of focusing on strengths– we are not even attempting to provide most of the things CLM features, like authoring, approval workflow, and e-signing. We probably will never do those things. Our specific focus is to help companies get insight out of their unstructured contracts and related documents, whether it’s from legacy contracts or for M&A due diligence. This is one step upstream from typical contract lifecycle management tools. In our specific market, we believe we are emerging as the leader, particularly among law firms, but we are seeing a lot of new entrants.

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ES: Let’s talk more about these contract analytics, specifically. Unlike in ediscovery or matter management, something like contract analysis is a net new service for a lot of corporate legal departments, procurement functions and law firms–it’s something they might not have been doing before, and certainly something that an organization is not necessarily used to spending money on in an annual budget. How does Kira (and other players in this space) move lawyers to adopting this?

SO: It always comes down to showing return on investment. The technology may be new—but the underlying processes and needs have been there for a long time: M&A due diligence, compliance and recordkeeping, implementing a new CLM. These all involve reviewing thousands of documents in a short time frame. A corporation will typically source out the contract review to their law firms or an alternative legal service provider. This is expensive work. Kira users typically report 20-40 percent time savings even the first time reviewing contracts with the software, and 60 percent or more when they become expert.

Those savings that go directly to the bottom line—or that time can be redeployed to do important work that would previously have been uneconomical, like a compliance review that was previously beyond budget. One area where the savings are really easy to see is M&A: it’s historically been not uncommon for buyer’s counsel to recommend review of only 100 to 300 contracts as part of due diligence even though a mid-size company likely has 5,000 to 10,000 contracts or more. The spread exists because clients are unwilling to pay hundreds of dollars an hour to review agreements they guess will be lower materiality. However, almost any contract could have an MFN or other problematic language. The corporation benefits by having more agreements reviewed before the transaction because this lowers the risk of surprises during post-merger integration.

When corporations engage an outside service provider for contract review, they should be asking if they are using this kind of technology to enhance their process. What kinds of efficiency gains, and/or scope and quality improvements they can expect?

ES: Where is the technology heading this year and beyond? What do you get most excited about? At what point does document automation, negotiation platforms, analytics and obligations management come together?

SO: For Kira, I’m currently most excited about how many use cases there are. We started off as a due diligence contract review just yesterday launched coverage for NDAs as well as corporate organization documents, and new compliance provisions like anti-money-laundering and anti-terrorism, and for financial institutions, loan commitment letters. Later this year we’ll have some really exciting announcements around helping uncover standards and outliers, among other things.

As I mentioned before, we’re still pretty far away from the day that these different stages and tools in the contract lifecycle come together into one tool. It may even be that they never consolidate. Contract analysis, contract negotiation, and obligation management needs are quite different.

ES:  Often, CLM is framed as what everyone has needed but no one has been able to provide. Organizations frequently don’t know their own contract obligations, can’t easily identify clauses, and due diligence is sometimes a guessing game given the volume and complexity of organizations’ contractual requirements. Can you paint a picture of how organizations will behave in the glorious future day when everyone is equipped with CLM tools to the hilt? How will it change the way business is done, the information relied upon in M&A activity, etc.? What will change the most?

SO: The prevailing view on this seems to be that someday companies will all migrate to some sort of “smart contracts,” i.e. self-negotiating agreements the data for which is securely stored in blockchain protected chunks that automatically feed into workflow systems. There are certainly some industries such as manufacturing and shipping where this makes sense.

However, I envision a day when companies can get most of the answers they need out of unstructured contract repositories, without forcing so much structure on the initial drafting, and without necessarily first extracting and structuring the data from the repository. Tools will be available that can automatically figure out the obligations across a set of contracts and set up tracking systems, with substantially less human QC required. They will also automatically suggest precedents for virtually any clause you may be negotiating. The technology already exists to do these things, but it’s in pieces and parts, and some are more mature than others. The real question is how long it will be before someone stitches them all together in a way that’s effective and easy to use.

ES: That’s a perspective I haven’t heard before, the idea that contract analytics can basically facilitate more flexible and less structured contract drafting, lessening the need for forced structure.  Most businesses and transactional lawyers would agree that such flexibility is critical.

Thanks for your time, Steve!

Ed Sohn is VP, Product Management and Partnerships, for Thomson Reuters Legal Managed Services. After more than five years as a Biglaw litigation associate, Ed spent two years in New Delhi, India, overseeing and innovating legal process outsourcing services in litigation. Ed now focuses on delivering new e-discovery solutions with technology managed services. You can contact Ed about ediscovery, legal managed services, expat living in India, theology, chess, ST:TNG, or the Chicago Bulls at edward.sohn@thomsonreuters.com or via Twitter (@edsohn80). (The views expressed in his columns are his own and do not reflect those of his employer, Thomson Reuters.)

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