Better contracts, Episode 7: the Four Dimensions of contracts (the one with Time)
What you’ll get out of this episode
We will look at contracts in a fresh new way: not as A4 sheets of paper (real or virtual) but as tools for building relationships. I will introduce you to the Four Dimensions of contracts and the Better Contracts Canvas, which will help to explain why existing practices and tech focus on efficiency but fail to address the core dysfunctions around relationships and trust. In this and upcoming episodes of this series, I will show you how thinking about contracts across the four dimensions can help you get practical results.
Why relationships?
Technology is shrinking the world. The economy is shifting from products to services, from transactions to relationships. Cloud computing, automation, artificial intelligence, global choice and social distancing are challenging the normal human experience. This means that relationships are both harder than ever and more important than ever.
Businesses which are good at building relationships will win; those that are not will lose.
Contracts are failing
Contracts are the lifeblood of commerce. So they should play a key role in creating relationships and building long term trust. Yet contracts and contract processes - as they exist on the ground in daily reality - are dysfunctional. They are poorly understood, they create bottlenecks and they often erode trust.
Most companies who are trying to fix this are focussing on efficiency (automation) and risk (data). But those are largely process- or supply-side problems and do not really address the problem of relationships, which is a human end-user problem. Moreover, an excessive focus on technology as the go-to solution for inefficient contract processes misses out on the huge gains to be had from non-tech solutions: simplification, process improvement, contract design. This is partially a problem of distribution (“the future is here, it’s just not well distributed”), but I believe the cause is deeper than that.
It’s not a 1D problem…
A contract (whether on paper or Word or built with an editor inside an automation platform) is a two dimensional construct. It’s a flat piece of A4. In practice it’s actually only one-dimensional because you can only expand it downwards on the page. Moreover, the process is usually linear: template -> draft -> internal ping-pong -> external ping-pong -> signature -> archive. Contracts are usually “put in a drawer” after signature and forgotten: businesses will use completely separate documents, processes and systems to manage the underlying subject matter of the contract.
Perhaps that’s because that A4 sheet of paper is just not very capable. Solving a complex problem like business relationships is tough if you’re doing it with a one-dimensional tool and a linear process.
A lot of tech replicates this one-dimensional world, just speeding it up. The best tech does more than that. Outside of tech, there are amazing things you can do if you address the problem in a multi-dimensional way. So let’s unpack those dimensions.
The first dimension
Let’s start with the first dimension: the Foundation. This is where traditional contracting lives. It includes the contract itself (the legal and commercial information it carries) and the contract process (its lifecycle). Much of the people-process-tech trinity is inside Process.
The first dimension.
There is a third component to this: Communication. Communication is the way in which the contract and the contract process are conveyed: both internally during the creation and alignment process, and externally during negotiations. How do you know it’s the right contract? How is it explained internally? How is risk exposure agreed? How is it introduced to the other side? How do you agree whose template to start from? The information and process components can’t work without some level of communication. They certainly can’t work well without good communication. That’s why, for example, change management is so critical when implementing automation technology.
Information and Process is where, traditionally, most professional effort is consciously directed: working on templates, the drafting process, approvals, controls, automating the whole or parts of it. Communication is usually part of it but I’m not sure how often it’s explicitly treated as a core objective. This is the reason why businesses are poor at communicating with the other side when it comes to contracts: it often doesn’t get more sophisticated than trying to be the first to shoot your template at the other side, usually very late in the deal lifecycle. This is why trust usually takes a downward plunge once the lawyers get involved.
…because it’s a 4D problem
Introducing the Better Contracts Canvas
To make contracts really work as useful business tools - especially for building relationships, I believe a more dimensional approach is needed. Better contracts means looking across multiple dimensions - consciously. In fact all of the best work being done out there in data, tech and legal design is doing just that.
I am therefore excited to introduce the Better Contracts Canvas: the Four Dimensions.
The Better Contracts Canvas: Four Dimensions (c) Denis Potemkin 2021
I will be exploring each of the dimensions in more detail in this series, and giving you practical ways to use it to improve how you do contracts. For now, an overview.
Second dimension
The second dimension is Data: the extraction of data and insights. This is about making contracts easier to automate and teasing out risk, patterns and learnings. While there is a lot of technology for extraction and insights, there is still frustratingly little in terms of Structure: the creation of structured content from the get go. As with all dimensions, this is not just about technology. (Re)writing contracts to make data extraction easier is an opportunity irrespective of where you are with tech. This is all about helping the business to understand how they build relationships and how to do it better.
Third dimension
The third dimension is Design: turning your flat one-dimensional pages into something deeper, through information architecture, language and visualisation. I take a very broad view of design, and behavioural aspects come into this also. This is all about making contracts more human: getting people on the same page more quickly, building trust and creating enjoyable experiences.
Fourth dimension
The fourth dimension is Systems or Time: making the contract more useful than a mere snapshot that records the deal. At its most obvious, it’s about connecting with other processes and systems (for example smart clauses that connect with ERP systems and can execute tasks - like issuing a notice or penalty - based on certain triggers during the contract lifetime). However there’s much more to it: the ability of the contract to accommodate change events, and whether the contract and its process helps with connected business tasks. This is an area that is relatively new in tech and is underlooked outside of tech. It’s about making the contract a more useful component in the deal lifecycle and the broader business ecosystem.
The fourth dimension is not esoteric and not necessarily about tech. It’s very actual. The way you design and manage multiple SOWs under a master agreement, or the way you track and allocate ownership of new intellectual property arising under a development agreement, are basic real-world examples of this dimension. It’s all about making the contract useful beyond that point in time when you sign it.
For the nerds
Here’s a more detailed representation of the Four Dimensions. It’s an infinity canvas (a fractal architecture I use to model, well, pretty much everything). This means that each of the dimensions are explorable in further detail, and I will be doing just that in upcoming posts.
The Better Contracts Canvas: Four Dimensions (c) Denis Potemkin 2021
The role of technology
I don’t treat technology as a separate component in this canvas. Technology is an enabler, so it can implement and enhance any of the elements in the canvas.
As a matter of current practice, certain parts of the canvas are more tech-driven than others. For example, data is primarily a tech play while legal design is an artisanal process. That can change and will. Structured data should be the way contracts are created and will be increasingly so, and automation of visual design is starting to happen.
How do you use this canvas?
I will be teaching that during this series. For now, some ideas to get you started:
Focus on communication when looking at your contract process: how you communicate internally and with the other side. Consciously apply common sense: communicate early, frequently, with clarity, and make “build trust” the first objective. Give the business the tools to help them do this (as an example, consider a friendly summary of the key terms of the contract which they can include early on in the sales or offer deck). If you want something more advanced, start communicating with purpose rather than with templates (see the end of Episode 6).
Make your contracts more structured and better at handling data. Isolate key variables and negotiables and put them in a Key Terms section (see Episode 1). You’ll thank yourself later.
Improve the information architecture of your templates. Try making them more modular (see Episode 2 ).
Think about behaviours: what habits can you and your team introduce now, that improve collaboration and trust? I shared some ideas in Episode 5.
Final thoughts
The Four Dimensions is the first component of the Better Contracts Canvas. There are other components to the Canvas, which I use in my work and which can help you get the best results. I will be telling you about them over the next episodes. If you don’t want to miss it, sign up to my newsletter!
To see how I turn these ideas into practice take a look at Majoto: everything I know and believe about contracts, wrapped up in an automation solution. Or get in touch with me directly if you’d like to learn how I apply these ideas to solve customer problems.