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Contract Harmonisation Made Simple

11 August 2021 | Luke Taylor, Subject Matter Expert at Luminance

As economic uncertainties begin to lift in the wake of the COVID-19 pandemic, a 2021 Mid-year Update by PwC shows a positive outlook globally, with indicators such as positive GDP rates foreshadowing an increased appetite for Mergers and Acquisitions (M&A). As each individual company involved in an M&A transaction is likely to have their own, distinct template of contracts, for example NDAs and employment contracts, the key to a smooth transition is the consolidation of contracts across all enterprises involved, therefore ensuring uniformity across the board. Outside of the context of an M&A transaction, contract harmonisation can streamline the arduous process of compliance reviews for any company by establishing unified templates. This means that any deviation can easily be spotted, and necessary amendments can be made fluidly.

The advantages of harmonising contracts

In order to have a greater understanding of their contractual landscape, management needs to make sure that all of their contracts follow set standards or models. By harmonising contracts, a company can establish a tangible culture within the enterprise, with employees and suppliers fully appraised of their requisite roles, rights, and obligations and how they fit within the company structure. Having this greater level of understanding allows Management, sales and HR to keep a greater degree of control so they can then interpret, monitor and keep the contracts up-to-date more easily, thus minimising the risk that arises from contractual drift or variation.

The arduous manual procedure

The sheer amount of employment contracts that accrue within a business, particularly with the subtle differences that develop over the years when there is not a set template, means that consolidating an entire body of contracts without the aid of technology is simply unfeasible for any mid-to-large sized enterprise. This challenge can be considerable when different firms with highly distinct contractual landscapes merge. Even within one business, contractual drift occurs when multiple people within a legal team perform reviews, to the extent that one customer used Luminance to look at the different contract templates used in their enterprise, and discovered that they had, in fact, been using a competitor’s template.

Previously, if a manager wanted to assess the similarities or differences within the pension provision clauses, for example, across all employee contracts to ensure there was no significant disparity, they would have to find the pertinent clause in each document, extract it and place it in a separate spreadsheet to compare it side-by-side. Trawling through each individual document to pick out the relevant clause, then copying and pasting this into an Excel document is both time and labour-intensive, and highly inefficient. Where there is a large volume of documents, the amount of time and attention that a contract consolidation task would require using this method can undermine the increased efficiency gains made through contract harmonisation.

How technology can revolutionise the contract harmonisation process

Award-winning Australian law firm, Lander & Rogers used Luminance’s advanced machine learning technology to consolidate almost 70 different types of contract template for a client operating across 15 different retail businesses in Australia and New Zealand down to just six models. Luminance’s spatial widget provides a visual representation of what contract templates exist, allowing the contract set to be immediately assessed and narrowed down to a more manageable set of models. The way in which Luminance reads and forms an understanding of document meant they could instantly identify all examples and variations of a given clause, with access to powerful analytical tools that indicate the level of similarity and pick out any anomalies with ease.

The firm were able to shave 30 hours off the review time in this project by using Luminance to mark model clauses, notice discrepancies and edit where applicable, all without leaving the context of the document set. The ‘model’ clauses that the lawyers created in Luminance can then facilitate the drafting of future contracts and allow their clients to ensure that their contractual landscape is not only consolidated, but can remain harmonised in the future. Luminance performs the arduous parts of contract harmonisation for the user, presenting its analysis in the form of redlining and greenlining to show how each clause relates to the ‘model’, ideal versions. The green sections that are identical to the template can then be passed over, saving valuable time, and allowing the lawyer, manager or HR professional to focus on the key areas, picked out in red, that could put their company at risk.

Joel Kennedy, Transformation & Process Improvement Consultant at Lander and Rogers, commented: “The number of contracts that a business today is executing is ever-increasing. AI is providing a real solution to the problem of contract consolidation, allowing lawyers to quickly understand the intricacies of their contracts but in a way that is easy to digest, efficient and extremely insightful.”