The digital systems used by businesses to track their contracts are outdated and have largely not embraced the digital revolution that has transformed many other back office functions. The result is that most companies are faced with more transactional execution risk than they are aware of. And this risk leads to inefficiencies, time wasted, and too much money spent mitigating the risk ex post.
Transactional execution risk is the liability that accrues between parties after they sign a contract. The risk is how and whether each party will execute all of the obligations detailed in their contract. Often times, contracts are meticulously negotiated amongst companies and are subsequently filed away once they have been signed. The result is that the obligations agreed between the parties are neither tracked nor monitored.
This is a hidden risk because while different functions in an organization may be tracking components of a collaboration – e.g., inventory management systems – the results are rarely compared to the obligations in the actual agreements consummated by the parties.
The legal function of most businesses has been slow to keep pace with the developing digital capabilities of other back office functions not necessarily because legal practitioners are less adept at adopting technology as a general matter. The challenge for even forward-looking legal departments has been one of technical capacity. Legal, as a business function, absolutely requires a level of collaboration over specific data and events across company firewalls, which have been a challenge to develop with previous generations of technology.
Today, emerging technologies are beginning to create the environment for solutions that can mitigate the transaction execution risks faced by corporations.
I believe that a system that focuses on two areas is needed to solve the issue. First, a data and events infrastructure layer would need to be created where all the counterparties have equal control and access to the information held within the infrastructure. The platform must be capable of being co-managed by both parties, at a minimum. Second, the system would also need to be collaborative with other business functions such as human resources, finance and supply chain. This is important because the legal system needs to integrate with the digital ecosystem of a company. Indeed, the legal function of a particular business is typically what is driving what happens in its other systems, such as its human resources, inventory or finance systems. As such, it is vital that any digital legal layer is capable of being strongly unified with other back office systems.
Two key emerging technologies are needed to bring the legal functions of businesses into the digital world:
- Blockchain: Ultimately, companies are hesitant to digitize their contractual agreements because of the need to share platforms with other corporations. The hesitation is derived from a desire to own the information. With the use of blockchain, both parties can feel assured that the information is stored in a safe digital infrastructure space that can be securely and readily accessed, and can be controlled by an ecosystem of actors rather than a single counterparty.
- Machine Learning (ML): ML will help to create more robust and efficient agreements between parties both before and during contractual negotiations. This technology can also be used to derive risk profiles of particular contractual clauses and assist legal practitioners in defining those obligations they indeed need to monitor.
Emerging technologies are being used across the world to solve problems across virtually every business service. As these technologies continue to mature, 2019 is likely to be a ‘tipping point’ for the legal industry as well to begin to fully embrace what technology can do to help the industry.
Written by Casey Kuhlman.
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