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At eCommerce companies everywhere, legal departments are being asked to reduce their budgets while still providing value to the company. How to accomplish this? One key is increasing efficiency in the contracting process, so that customer transactions and third-party agreements occur more quickly. Another key is avoiding legal disputes over the terms of their clickwrap agreements.
eBook Download: The Economics of Contract Design
But how would you speed up contracting while avoiding litigation? Aren’t these contradictory goals? With their risk-averse mindset, many attorneys would think that if the contracting process is rushed, then the customer contracts will be inadequate and litigation costs will increase.
Not necessarily. As we can see, there are numerous ways to increase contracting speed and efficiency, while still minimizing legal exposure and reducing legal costs. And contract automation is one of the main pathways to success.
While contracts are a necessary part of doing business in eCommerce, they are also a large drain on company revenues. But why are online contracts so expensive? There are several factors at play.
One potential solution for online agreements would seem to be contract lifecycle management (CLM) tools. CLM tools follow a linear process for contracting: (1) contract creation, (2) contract delivery, (3) negotiation, (4) review and approval, and (5) storage. But while CLM tools were once considered innovative in the online contract technology space, they are now generally inadequate for the purposes of modern eCommerce companies.
Consider a recent IAACM study of more than 700 major organizations and their contracting costs. The study found that, even with the advanced contracting technology available today, the business spend for the review and negotiation of a basic contract (standard, low-risk procurement or sales contract) has increased 38% in the last 6 years. In terms of squeezing out greater efficiency, eCommerce companies have gone about as far as they can go with CLM tools.
Another reason for high contract costs is the complexity of contracts.
Contract complexity is driven by the length of the contract and the complexity of the language, i.e., the reading grade level. And when the contract is more complex, this also increases the total number of contract reviews necessary, as well as the number of individual reviewers with their different specialties. In addition, the pay scale of the reviewers goes up.
The bottom line? When contract complexity increases arithmetically, the contract costs increase exponentially. Simplification of contracts is clearly a worthy goal for any business looking to keep down contracting costs.
Another major cost of contracting inefficiency is deals that are either delayed or lost completely. A slow contracting process naturally slows down the company’s sales velocity. Even worse, a lengthy contracting process can lead to deal fatigue, causing a prospect to drop out of the deal altogether.
One way to keep these contracting costs down is by prioritizing the time spent on high-value contracts, while decreasing the time spent on low-value contracts. The key distinction here is between standardized contracts and personalized contracts.
Standardized contracts are generally preferable for high-volume, low-value contracts, such as terms of service or NDAs. These contracts are made for short sales cycles, where the contracting process must be fast. The process is also generally no-touch or low-touch, since it involves limited (if any) negotiation.
Personalized contracts, on the other hand, are best for less frequent high-value contracts, such as M&As or long-term partnerships. The contracting process is high-touch with extensive negotiations, often involving several rounds.
Image: A contract ecosystem
While the legal team focuses its time on personalized contracts, standardized contracts are the best candidates for contract automation. When clickwrap agreements are utilized in combination with automation, the contracting process for standardized contracts can be reduced to a no-touch process, or as close as possible.
With contract automation, contracting software allows both legal and non-legal parties to “self-serve” on routine legal documents, so that no lawyers are necessary to execute the contract. And the legal team can create the pre-approved standard terms for these automated contracts. Compared to manual contracts, the benefits of contract automation are enormous for eCommerce.
Automated contracts also increase contracting speed by enhancing the “acceptance mindset.” When a Word or PDF document is sent to a customer or third party, this sends a subtle signal that the agreement is open to negotiation. Automated contracts, on the other hand, can be presented as digitally native contracts, such as clickwrap agreements. This reduces friction in the contracting process and puts the recipient in an acceptance mindset.
Our research at PactSafe bears this theory out. We found that the average transaction time for a B2B, digital, click-to-accept contract was 14 hours and 26 minutes. The transaction time when the same contract was sent as a PDF or Word document? 14 days. Contract automation is a clear moneymaker for any business, especially in conjunction with clickwrap.
No discussion of keeping legal costs down is complete without addressing the obvious - minimizing litigation costs. Litigation tasks, such as discovery and preparation of affidavits or declarations, can be a huge draw on legal team resources. So avoiding clickwrap litigation is a prime consideration.
This is why a third-party vendor could be a key resource for management of your online contracting. Third-party solutions can maintain back-end records of contract acceptance. They can also keep up with changing evidentiary standards in courts, as well as an ever-changing regulatory landscape.
To learn more about the different ways of keeping contracting costs down in the eCommerce industry, download our eBook: Making Contracts Key to Revenue Recovery