Have you been hearing chatter about the intersection of big data and legal? Do you suspect the people chattering have no idea what they’re talking about, and know for certain that you have no idea what they’re talking about?
You’re in good company.
I believe that there’s actually something compelling and quite important going on here, and it is in fact about legal and data. It just doesn’t happen to be big data.
Let’s see if we can make sense of it.
Contracts are a diamond mine
Legal contracts define pretty much every detail of pretty much every relationship held by every company in the world. Our contracts know everything and so we spend inconceivable hours and dollars negotiating them, just to tuck them away somewhere dark and rarely look at them again.
But consider the data locked away in those contracts. What could be more valuable? Want to know if your company has exposure to a product, country, company or event? Check. Want to know how many customer relationships expire next year and how that compares to prior years? Got it. Need to understand how service-level obligations or entitlements impact margin as circumstances change? Yep.
I shouldn’t have started a list, because I can’t possibly finish it; the scenarios are endless. Unlocking the value in that data is going to create a generation of heroes inside corporations.
On its face, this sounds like a typical big data undertaking, but it isn’t. Most big data exercises draw directional answers from masses of unstructured data. The challenge in legal is different. First, the data isn’t that big, and it’s not necessarily unstructured. It’s relatively narrow and knowable (though complex).
Second, the standard of accuracy is far higher. “Directional” answers don’t do the trick in legal – they get you fired. The legal data exercise must draw highly accurate answers from known populations of structured data: We call this type of data ‘Little Data’ and it’s a very different animal.
How do we get at it?
Different companies have different starting points depending on the degree of neglect and confusion in their contract function, which ranges from “unfortunate” to “catastrophic.”
Stage One: Capturing Contracts
In some companies, contracts roam free, like little woodland creatures, hibernating in dispersed file cabinets and individual desktop folders. They must be captured. Your company may be past this stage. Most are not.
Not long ago, we encountered a Clinical Research Organization (CRO) entangled in vicious commercial litigation. Anxiety was high, partly because a lot of money was at stake, but mostly because the core contract at issue was….missing. The CRO couldn’t find a copy of it.
The CRO’s opponent was behaving unpredictably and no one knew exactly how to proceed. Asking them for a copy of the contract didn’t seem like a great idea. Then someone proposed an explanation for their strange behavior: Perhaps, they, too, couldn’t find the contract?
The CRO demanded that the counterparty produce the contract. They couldn’t. The suit collapsed.
Stage One is partly a technology challenge, (there are dozens of contract management solutions in orbit), but not a difficult one. Rather, it’s the behavior modification challenge that’s been overlooked. The goal is to ensure every signed contract is tagged with a standardized nomenclature and entered into a company-wide repository.
Stage One has severe limitations, the most important being that the corporation still doesn’t know what’s IN the contracts. To find out, you have to open the pdfs and read the damn things (time consuming and expensive).
Stage Two: Structuring Contract Data
Now it gets interesting.
When Greece’s economy was about to crater like a rotten cantaloupe, many banks removed their contract negotiators from the good, revenue-generating work they were doing and deployed them to summarize Greek exposure across massive populations of existing contracts. For some banks, this was a months-long diversion with lost revenue in the tens of millions.
Others had the same answer in 90 minutes – these are the Stage Two banks.
They’ve not only captured the contracts, they’ve attached structure to contract elements to yield answers to foreseeable questions. This is a much more complex technical and human undertaking, but it has exponentially more value.
Stage Two lets companies analyze the portfolio of contracts, not just individual agreements. Stage Two lets the sales force know how much business rolls off next year and how much revenue is leaking because they haven’t issued change orders, reset volume discounts, or applied COLA.
Stage Two data is valuable, but harder to structure than anyone would like. It requires more sophisticated technology, a greater investment of time (to develop data models) and resources (to structure existing contracts and properly process new ones).
But even with all that, the payback period on the investment is rarely more than 18 months, and the medium-to-long-term return can be immense in avoided cost and captured revenue. And, importantly, Stage Two enables Stage Three.
Stage Three: Mining the Data to Mitigate the Future
The example above of a “Stage Two” bank responding to the Greek crisis sounds pretty nifty. Ninety minutes, we know our exposure. That’s value!
But Stage Three is about so much more. It’s about harvesting that value before Greece starts to wobble.
Stage Three means mining the data that’s sleeping peacefully in our contracts to mitigate our biggest risks sooner and more intelligently.
It means negotiating smarter contracts going forward, because we know what our aggregate risks and surpluses are across the existing contractual population. It means knowing how contract provisions we’ve negotiated in the past have correlated to actual outcomes, like long-term margin defaults or renewals. It means stripping months out of the contracting cycle, resulting in greater revenue realization and faster revenue recognition.
It means smarter mergers, where we’ve identified upsell and cross-sell opportunities before the deal is consummated, or the price set. It means applying accurate risk scores to high volume contracts (the commercial equivalent of the consumer FICO score) to adjust acceptable risk levels according to the margin potential of each deal.
That’s the promise of Stage Three. It’s a Legal game changer.
The article is written by Mark Harris, CEO, Axiom.
<link http: www.axiomlaw.com _blank external-link-new-window external link in new>Axiom is a official partner of the 6th Autum Conference of the Bucerius Center on the Legal Profession, which takes place on 18th November 2016 at Bucerius Law School in Hamburg, Germany.