Contract Redlining Best Practices

Contract redlining best practices: How to Prepare Your Company in 2020

Contract redlining is a vital part of your contract management process and you shouldn’t leave it to chance. Yet, many companies are using tools from last century to manage document redlining and negotiation, which are wasting time and resources, causing mistakes, and damaging relationships at their most fragile stage. Your grandpa called and he wants his redlining process back.

Know the Basics of Contract Redlining

Generally, the contract redlining process happens at the same time as negotiation. A contract is reviewed, usually by multiple parties like representatives from legal, financial, and fulfillment. Each makes suggested revisions on the contract to show the clauses they would like to remove, change, or add. Once redlined, the party that issued the contract must then negotiate with its internal teams to accommodate or push back on those changes. Often, there are multiple rounds of negotiating and redlining before the parties either reach an agreement or abandon the process.

Contract Redlining: The Dark Ages to Today

The name of this process carries a hint of its origins: Contract redlining once referred to paper contracts and a receiving party literally drawing a red line to strike out clauses they didn’t like. While contracts are now almost all electronic, businesses are often stuck in the dark ages when it comes to their document redlining process.

Here’s an all-too-common scenario:

A kettle corn manufacturer has drawn up a contract with the vendor that will supply its popcorn kernels. It stipulates how many pounds will be delivered, price, delivery schedule, and more. The contract is in a Microsoft Word document and was attached to an email from the kettle corn company’s representative to one at the kernel vendor.

The kernels vendor, in turn, sent an email to multiple people at their company and asked them to send feedback directly to the kettle corn rep.

The kernels marketing department returned the email to the kettle corn rep that afternoon with an adjustment in the body of the email to the clause that governed how the company’s logo would be used on the partners’ page of the kettle corn company’s website. The kettle corn rep saved a PDF of their email to the intranet and archived it in their inbox.

The finance department took six more days, and two reminder emails, before someone sent it back to the rep with a counter-offer. It wanted to change the clause that stipulated that if more than 5% of its kernels failed to pop, the buyer would pay only 60% of the price for that batch. They highlighted the clause in the document and offered that if 8% failed, the buyer would pay 75%, and sent the redlined contract back via email.

Under time pressure, the kettle corn representative sat down in Microsoft Word to make the changes, starting with the document they just received from the kernel vendor’s finance department. Rewriting the redlined clauses, they saved the contract and sent it once more to the kernel vendor rep. They were happy with this version and signed it.

It was not until months later that the kernel vendor’s marketing department discovered its logo was not on the kettle corn website, and its clause adjustment had never made it to the final contract. The Director of Marketing estimated it had lost tens of thousands of dollars in marketing.

Now the kettle corn’s primary vendor had bad blood and the president of the company was involved. The paper trail – split between the intranet and individual people’s email – was a nightmare to unravel, causing more delays and convincing the kernel vendor that their partner was disorganized as well as untrustworthy. The entire relationship was in jeopardy because of one forgotten email.

The problems in this scenario – poor version control, long delays, and opaque storage – are common to organizations struggling to manage contracts using a workflow cobbled together from legacy systems. 

But it’s 2020 and there is a better way.

 

Contract Lifecycle Management Tools and Document Redlining

The capacity to integrate document redlining into contract management is one of the primary benefits of contract management software. Forrester identified contract redlining tracking capacity as one of the six key sources of business value for a CLM.

Here is how a modern tool can speed and ease the contract redlining process:

  1. In a modern CLM, there is only one contract and a single source of truth – there is no chance of human error creating version control issues.
  2. Multiple members of the same organization are able to review the contract at the same time and see each other’s comments, which means they’re less likely to step on each other’s toes or contradict one another.
  3. With role management, only the right people are able to make changes to the sections relevant to them.
  4. When it’s ready to be sent to the other party, there’s a button for each relevant person to say they are done reviewing.
  5. Integration with eSignature tools means the signing process is simple and there is no loss of momentum at the end.
  6. And integration with other tools means fulfillment can start immediately and audits are a breeze.

To sum it up, the kettle corn company would have had all the kernel supplier’s feedback in one place and been able to edit the single contract inside the tool, which would have made it much more difficult to make that mistake. Its commitments would have been easy to recognize and the paper trail visible. Its streamlined and automated processes would also have reduced the “soft costs” of wrangling multiple versions, tracking down documents, and following up with people.

Are your outdated contract redlining tools letting you down? Find out more about how contract management software can help you mitigate risk and speed time to sign! Get a demo today.