Organisations can expose themselves to massive risks, costing millions of pounds, if they don’t fully grasp the contracts they’ve inherited in an acquisition or properly manage the auto-renewals of their business contracts
For most people, contracts are little more than a nuisance, hurriedly signed or clicked through before completing the desired transaction.
At their best, contracts are dynamic and represent everything from intellectual property to commitments to clients and employees. At their worst, contracts are unmanaged, outdated and even squander resources. Large organisations, on average, manage tens of thousands of contracts that range from the dynamic to the outmoded, but new contract intelligence capabilities are disrupting the status quo.
This disruption comes at a particularly critical time. Rapidly changing legal, political and regulatory frameworks, including Brexit, place greater burdens on organisations to find, understand and act upon contracts quickly so they remain relevant.
Managing contracts across the various activities within the corporation is daunting and fraught with risk in the worst cases. The business that does not know the details of its contracts opens itself up to exposure both in revenue lost but also costs that could be incurred to execute upon contractual requirements.
“We see these issues most commonly across the highly regulated industries such as financial services and pharmaceuticals as well as in multinational corporations,” says Kathryn Hardie, senior managing director and global contract intelligence (CI) leader of business advisory firm FTI Consulting. “As an example, in merger transactions there is a particular urgency for corporations to understand the nature of the targeted company’s contracts to assess their obligations. Entering into an integrated company requires that acquired contractual terms not only be understood but adhered to in ongoing business practice.”
There are numerous pending situations that currently exist from the analysis of leases for compliance requirements, change in tax regulations and looming new compliance requiring stricter adherence to changing reporting requirements.
“A simple example of hidden risk could be auto-renewal clauses,” says Craig Earnshaw, senior managing director at FTI Consulting. “A contract could be written in such a way as to be automatically renewed and, as a result, a company could be facing a huge bill that it wasn’t expecting. A lot of companies don’t think about this until they actually have a problem with it. Then they have to try and find the relevant details in a particular contract.”
These issues have prompted a growing number of companies to turn to FTI Consulting to manage their contracts more effectively. FTI Consulting’s CI experts use their experience, combined with advanced analytics, to create a more effective way of managing contracts.
“Our service is based on our many years of knowledge gained in dispute resolution and in identifying information within the corporate landscape,” says Mr Earnshaw. “CI gathers intelligence on contracts and helps organisations to take action to avoid problems or to solve them quickly, easily and cost effectively when they occur.”
FTI Consulting has already been helping clients to handle difficult issues and, with Brexit impending, Mr Earnshaw believes this is exactly the sort of situation in which FTI’s experts can assist. He says: “Organisations need to be aware of their contract terms about geographical and territorial issues. For example, they could be the sole distributor of goods or services in the EU, with a potential requirement to renegotiate the contract to determine whether this includes or excludes the UK post-Brexit.
“Once the UK is no longer part of the EU, there may be new trade barriers or new taxes and levies. Companies therefore need to understand whether their current contracts provide for these situations as they might become uncommercial and require renegotiation.”
Ms Hardie is keen to stress that CI is an iterative product and part of the firm’s managed services. “We work in partnership with our clients to make sure that their contract management processes aren’t just following the status quo, but are meeting the increasing demands and staying ahead of the game,” she says.
For more information please visit www.ftitechnology.co.uk