7 Trends Transforming Contracting and Legal Professionals in the Engineering, Construction and Advanced Manufacturing Sectors

Summary

It is easy to find examples of innovation and transformation around the delivery of legal services in the digital sector, for example within SAAS businesses, fintechs and insuretechs.  Less obvious perhaps is the arguably ‘quieter’ but equally impressive transformation happening in companies in the engineering,  construction and advanced equipment manufacturing sectors.  

Companies in such ‘traditional’ sectors have to apply innovation and transformation to long established business models (and sometimes resistance to change).  Unlike many digital companies, they don’t have a clean slate from which to start.

At Lexical Labs, we engage with many companies in these sectors, particularly those reviewing third party contracts.

This white paper showcases some of the impressive transformation that is happening to contracting and legal professionals in these sectors.  We see 7 key trends which are shaping the future of contracting and the lives of legal professionals in these sectors:

• Digital platforms and automation providing a highway to run projects and a single source of truth
• Technology assisted triage in a ‘legal front’ door - for example contracts reviewed by AI at the triage stage
• Data capture and visualisation - technology and graphics combining to present contract data and risks in an accessible manner
• Dynamic ‘business led’ risk assessment and decision making - decisions on contract risks being made more flexibly and quickly (addressing both risks and rewards), identifying effective mitigants and risk management and then tracking outcomes in ‘risk loops’.  Applying learning from those outcomes
• Growing impact of Legal Design - putting humans generally and specifically business colleagues at the heart of the contracting process.  Some interesting case studies discussed in the paper.
• Smart use of insurance - both to cover contract risks but also demonstrating to insurers effective management of risk in the contracting process, leading to lower premiums and better insurance coverage
• Legal professionals becoming designers and creators (arguably the most exciting trend!).

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Key challenges

Lawyers working in these sectors deal with complex cutting edge challenges.  Their projects solve some of the planet’s critical challenges such as the transition to clean energy, access to water, affordable housing and the modern workplace.  Yet, the sectors face a paradox.  The same design expertise, process optimisation, problem solving, innovation that is the hallmark of many companies have not traditionally been applied to contracting.    

The complexity of contracting should be respected.  The contracts are often high value beasts that require careful allocation of responsibility and risk.  When things go wrong, it should be clear who is responsible.  This takes time and patience.

Furthermore, most companies in the sector have a mix of ‘own terms’ and ‘third party paper’ contracts.  This makes consistency and efficiency more difficult.  

That said, contracts in these sectors have often been quite messy. Difficult to understand contracts, painful to negotiate and often just as painful to manage.  Often filed away and ignored until there is a problem.  Frequent amendments documented in a way that is difficult to keep track of the thread.  

A common complaint is that contracts have traditionally served the lawyers rather than the businessess.  Construction managers are expected to manage projects in line with the contracts but struggle to make sense of them.  

A final challenge, often overlooked, is that the legal teams are often small and overloaded.

Lexical Labs works with a number of companies in the engineering, construction and advanced manufacturing sectors and we see companies meeting these challenges head on in the following ways.

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Trend #1 - Digital platforms and automation

On the face of it, this trend does not sound revolutionary, but it provides a platform for the other trends discussed below.

Increasing digitisation and automation is the above challenges in a number of ways:

• Increasing use of contract lifecycle management (CLM) systems mean contracts can be tracked from first draft to final termination in a single source of truth.  More basic document management systems provide many of the same features.
• Contract creation tools - Platforms which create contracts based on user friendly questionnaires (linked to templates) enable business users to create contracts within agreed risk tolerances.  For example, an engineer in the field can potentially generate a service contract on a tablet, review it with the customer and execute it using e-signature.  This potentially saves hours or days of back and forth between legal and business teams and between the contract parties.
• Matter management / Tender management - Large or complex projects are common in the sector. For example, complex tendering projects that take months to submit a bid or complex construction projects with many parties involved.  Cloud based solutions provide platforms to run these projects. 

These platforms provide a basic highway on which projects or contracts can be run.  They provide for a ‘single source of truth’ be it either the contract, the work plan or the tender and the tools to communicate and collaborate between all involved.  

They therefore are the spine which supports the other trends below.

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Trend #2 - Technology assisted triage in a ‘legal front’ door

Contract intake triage is the process of prioritising contracts as they come in and then allocating the right resource to finalise it.  It is a crucial part of the contracting process that has efficiency and risk management benefits.  Triage is often performed as part of the ‘Legal Front Door’ which is a technology assisted way in which business teams seek legal assistance.

Triage needs to account for both the value and risk of the business opportunity (often obtained by a business manager answering a questionnaire in a platform or data sheet) and an initial quick review of the contract to uncover risky clauses. 

Contracts are sent down the right ‘train tracks’ to different personnel and at different speeds.  For example, the highly valuable and urgent contracts are assigned to senior lawyers or contract specialists.  Others are assigned to more junior colleagues.  Some to procurement or sales teams specialists and finally some to business colleagues.  

Some companies now use software to review the contract at the triage stage.  The benefits are:

• It is faster and with equal or superior accuracy -  A human, assisted by simple word search techniques, might perform this screening of a 50 page contract in 20-30 minutes whereas an automated review system can perform it in seconds to equal or superior accuracy;  
• A near instant ‘business critical review’ is performed before any contract specialist reviews the contract.  The business team might be able to respond immediately on any red flags to the counterparty.

The triage stage can therefore effectively become the first review of the contract and accelerate the contract finalisation process.  Basic contract data can be extracted automatically from the contract and placed on a dashboard as below.

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Trend #3 - Data capture and visualisation

Warren Buffett famously once said that ‘risk comes from not knowing what you are doing’.

A big problem in the past was that risks were buried in a multitude of dense contracts, often only accessible by contract specialists.  Those contract specialists often spent valuable time manually creating contract summaries and risk databases so that their business colleagues could manage responsibilities and risks.  Often the sheer time pressure meant that this was poorly performed or overlooked altogether.    

By digitising the contract process on cloud based platforms, innovators are now able to extract valuable data insights to users on dashboards and visualisation charts.  

For example:

• Contracts and subcontracts:
  
  The pass through of responsibilities and risk can be analysed digitally and presented visually.  For example, a main contractor that is responsible for the design of a project is able to track its ability to pass this responsibility through to the engineering company undertaking the design.  This analysis can be automatically performed. 

• Standard contracts and schedules:
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  Industry standard contracts such as NEC for engineering and FIDIC for construction have helped standard contracting.  A set of standard contract terms is supplemented or amended in a schedule.  They certainly streamline negotiation of a contract (as one only has to focus on the deviations and supplements in the schedule) but they are still somewhat inaccessible to the team delivering the service.  
  
  Innovators are therefore using analytics tools to present all of the key contract terms in visual and interactive dashboards.

• Contract amendments presented together:
  
  A major headache is often the line of amendment letters and agreement that trail behind a main contract.  Analytics tools can likewise pin all the documents together and present key contract insights running through all the amendments.

• Asking questions to your contracts:
  
  Often one needs quick answers to real time questions.  
  
  How is my contract impacted by the delay affecting one of my sub-contractors?  How are all my contracts impacted by a global pandemic or supply chain shocks? Can I terminate my contracts voluntarily or for ‘force majeure’ events outside of my control?  What counts as force majeure?
  
  Traditionally, one often asked a legal or contract expert for the answer, costing both time and money.
  
  One of the great advantages of using AI guided analytics tools is the ability to ask these questions in plain language and leave the tool to uncover the clauses or and summarise the answer. 

• Negotiation bottlenecks:
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  Where do contracts get held up and is the enterprise sacrificing business opportunity and revenue in the pursuit of perfect contract outcomes?  Increasingly companies are able to answer this by reference to real time data.

One AI based automated contract review tool providing these insights is Tiro, from Lexical Labs.  Tiro reviews contracts - using both deep learning and logic based algorithms - not just extracting clauses but analysing them.

Tiro is designed to review inbound contracts known as ‘third party paper’ without having seen the underlying contract template.  Third party paper is common in the sector and traditionally a headache to manage as reviewing and managing unfamiliar contracts in a static document is time consuming and challenging.   

Tiro has a unique contract risk scoring, automated reporting and data visualisation features.  Tiro can automatically score each contract across more than 20 issues, assign an overall risk rating (see screenshot below), and creates a risk report.  

Each contract is linked to a more detailed risk report as follows:

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Trend #4 - Dynamic ‘Business lead’ risk assessment

Risk management in the E&C sector has been a key priority but has arguably lacked both flexibility, dynamism and data analysis.

This is changing rapidly.

We often hear our customers describe their approach to risk management as ‘informed and business lead’.  What does this mean in practice?

• A good starting point:
  
  Enterprises will often record a set of rules, preferences and principles into a contract playbook (see Trend#5 Legal Design for a fuller explanation).  Traditionally these playbooks were overly complicated and clunky and often misunderstood or not applied in practice.
  
  Modern contract playbooks are shorter, easier to understand and apply and rely more on principles and guidance rather than hard baked rules.

• A good end point:
  
  A key attribute that singles out pioneers in the sector is the ability to analyse risk outcomes through multiple projects over many years. This builds up a database that informs future decisions.
  
  For example, a company might have guidelines over the exposure to liquidated damages clauses in contracts.  By tracking how this exposure plays out in practice allows it to re-adjust those guidelines to its advantage in the future.  Is the exposure more or less than it perceived.  
  
  Similarly, what percentage of NDAs or simple engagement letters get into any dispute or litigation.  How does this stack against the time being spent reviewing and negotiating them?  
  
  Innovators are introducing ‘risk loops’ (constantly re-evaluating their contracting policies) which account for actual (not perceived) outcomes.  These risk loops will involve some form of risk register that is compiled before signature, identifying a range of risks and responsibilities taken on in the contract and suggestions on how they can be mitigated or managed. 

• Flexible decision making during contract negotiations:
  
  In a similar vein, decision making during contract negotiations is becoming more dynamic and streamlined.   

• Technology is joining up the dots:
  
  At Lexical Labs, we work with customers who have a clear vision of technology transforming contracting rather than speeding-up existing processes.  This creates a virtuous circle of faster and more decisive contract review and negotiation and better risk management.
  
  Technology can join up the dots in the following ways:
  -  Creating and/or reviewing contracts in line with the customer’s policies.
  -  Visualising and presenting contract data on dashboards so that decision making is accelerated.
  -  Automatically creating risk reports which form the basis of a risk register.
  -  Automatically showing improvements of risk positions throughout the negotiations so that the value added by the contracting teams can be assessed.
  -  Allowing contract playbooks to be updated in line with real time data.

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Trend #5 - Legal Design

Legal design is the application of design thinking principles to the delivery of legal services.  The purpose is to make legal services and processes more human-centred, usable and enjoyable (just as the driver and passenger experience is put at the heart of car design).  Whilst empathy is at the heart of legal design, there are compelling business reasons for adopting it, such as cost reduction, business acceleration and brand enhancement.

Common tools are graphic representation, visualisation, plain English summaries of legalese and user friendly technology.  

An early pioneer of legal design was Shawn Burton at GE who led a radical simplification of GE’s customer contracts around 2015  - see ‘Shawn Burton - Honey I shrunk the contract’ https://www.ge.com/news/reports/keep-simple-plain-english-helping-ge-keep-business-humming

Shawn’s work led to faster contracts and sales and arguably improved GE’s risk position by making responsibilities clearer in the contracts.  He challenged the widely held view that that complicated contract language assisted risk management. 

Lexical Labs has been involved in various projects involving legal design in the E&C sector.  Here are a couple of examples.

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End to end NDA solution

One engineering and equipment manufacturer wished to transform the process of finalising NDAs and tracking them after signature.  Previously, the company had a complicated NDA template and any deviations from the template needed approval by the legal team.  Because most NDAs handled by the company were on third party paper, the legal team was often bogged down by NDA review.  NDAs were taking weeks to review and finalise which was delaying sales and business opportunities.

Working with Lexical Labs and a legal designer, the company designed a process that streamlined NDAs as follows:

• Own terms NDAs - The company automated NDA production using the OneNDA template and some simple automation in their document management system.  NDAs were sent out with an e-signature docket.  This dramatically reduced the number of NDAs which required negotiation and meant that business teams were empowered to run the process with minimal help from the legal team.
• Third party NDAs - The company also set-up a simple checklist in Lexical Labs Tiro system which compared incoming NDAs on third party paper to a set of principles reflecting the OneNDA standards and rules.  As Tiro reviews concepts rather than looking for a particular wording or phrases, it only highlights substantive differences and also helps edit the contract.  Incoming NDAs could therefore be largely handled by business teams (with a small percentage of problematic NDAs being sent to the legal team).  Often, if Tiro gave a green light, NDAs were often sent directly to e-signature.   

The benefits were faster conclusion of the NDAs and therefore accelerating business, more consistency and a better human experience.  Business managers felt empowered and counterparties could see the professionalism and efficiency of the process, thereby enhancing brand reputation. 

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User friendly digital contract playbooks

A contract playbook is an essential tool for any contracts team looking to scale and ensure its contracts are negotiated consistently. By establishing standard and fall back positions, playbooks provide negotiators with clear guardrails within which to operate. 

Playbooks save time because they contain everything that a contract negotiator needs to review a contract, including clause wording, explanations to business teams and the other party to the contract and when things need to be elevated and approved.  Better risk outcomes are promoted.

Our customer used legal design techniques to incorporate their playbook into Lexical Labs’ automated contract tool.  The software automatically scores the contract against the playbook and links explanations and suggested clause wording to the relevant clause of the contract under review.  Users can also automatically create reports against the playbook.   

The outcome is both time saved and a smoother process.  For example, business teams could ‘self serve’ on contract review using the software, either to handle low value and risk contracts entirely or by conducting initial business critical reviews of more complicated contracts before the legal or contracts team.  

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Trend #6 - Smart use of insurance

Traditionally, insurance has been used to manage risks associated with contracts.  For example, business interruption insurance.  

Given the inherent link between contract risks and insurance, insurers are increasingly focused on assessing how successfully enterprises are negotiating their contracts and managing risks that arise from them.

Innovating enterprises are responding to this and using it to their advantage.   By actively demonstrating their technology assisted and informed approach to risk management, companies are able to bring down the cost of their insurance and target it more effectively.

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Trend #7 - Legal professionals as designers and creators

Finally, arguably the most exciting trend is around the people themselves.  Pioneer legal professionals (meaning lawyers, legal operations professionals, legal engineers, data scientists and others) are becoming designers and creators in their own right.  Of course, this chimes with their business customers who are themselves creators.

In the old world, an individual lawyer or contract specialist might review and help negotiate 100 contracts per year  (maybe more or less depending on their complexity).  In the new world, that lawyer uses their experience to create a contract playbook (either a written guide or in software) that allows the same lawyer to support their business colleagues in negotiating 500 contracts. They scale their legal function and free-up time for personal involvement in more strategic and complex legal issues.  

Likewise, legal professionals are able to create apps which are capturing their knowledge and expertise and making it more widely available.  For example, a simple portal to a set of frequently asked questions or utilising their company’s own ‘chat bot’ to answer questions of business colleagues.

Similarly, the legal professionals who have set-up the means to capture and analyse data are influencing key decisions in the company.  For example, legal professionals who have data on actual risk outcomes based on ‘risk loops’ mentioned above become true risk advisors. Or a legal professional might ask questions of their contracts which inform business planning.  For example, does a particular structural approach to business (such as owning or leasing assets) produce a more profitable outcome.  Or which customers who have signed a contract with one division might be cross-sold to another?  

We can see an exciting opportunity for the legal professionals to shape ethical, environment and social responsibilities within the company using similar approaches.