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Wrestling with Corporate Contracts

Originally published June 11, 2009

Corporate contracts are where the corporate jewels are. It is in corporate contracts that the reality and the specifics of the obligations and opportunities of the corporation are defined. Understanding the vital importance of the corporate contracts, it is amazing that executives in most corporations have only a glancing or indirect handle on what is inside those contracts. If you ask a manager or executive, “From the standpoint of what is in your corporate contracts, what is the position of the company?” – the answer comes back as an opinion, not as a factually based reply.

So why is it that executives don’t really know what is inside their corporate contracts?

There are several good reasons for the confusion surrounding corporate contracts. The first reason is that there are so many of them. For a large corporation, it is not unusual to have thousands of contracts. It is one thing to pull information from five or ten contracts. It is another thing entirely to try to pull information from a hundred or a thousand contracts all at once. The sheer volume of corporate contracts is a factor unto itself.

The second factor is that corporate contracts represent the march of the corporation over time. It is not unusual to have corporate contracts that go back twenty or thirty years (or even longer, depending on the business). The truth is that in twenty or thirty years, the business position of the corporation has changed and, in some cases, changed a lot. Corporations try to create “standard contracts.” The problem is that a standard contract only represents the needs and interests of a business as of one moment in time. The instant the needs of the business change, a new “standard contract” is drawn up. Only now, there are a bunch of the old “standard contracts” in place that can’t be changed without a whole lot of negotiation and hassle with existing customers.

Another factor that occurs over time is that mergers and acquisitions occur. While corporation A may well have had a “standard contract” when the merger with corporation B occurred, corporation A inherited a bunch of contracts that were anything but “standard.”

The fourth factor relating to management’s inability to really understand what is inside the corporate collection of contracts is that the contracts are written in legal prose. The problem with anything written in prose is that prose does not lend itself to easy translation to a standard relational database. Databases were designed to handle repeatable transaction-oriented data. Bank teller transactions and airline reservations are made to order for standard databases because the same structure of data is repeated over and over in each transaction. Not so with contracts. Each contract is its own self-contained entity and may or may not be similar to any other contract.

The fifth factor creating challenges for management in the understanding of information locked inside a contract is the need for contracts to account for exceptions. Even where there is a “standard contract,” there will be many relationships defined by the contract that are slightly different from the norm. These differences must be accounted for by the contract. This means that even with a standard contract, the standard contract really is only the beginning point for negotiations. Each new contract may have clauses added or deleted, rates and terms changed, and so forth.

There are then a whole host of reasons why executives in the corporation don’t really understand what is contained in their corporate contracts.

The truth is that corporate contracts are unstructured, and information systems fit best with structured information.

One approach to dealing with corporate contracts is to try to go into the contracts and create a standard business model for the contracts. The theory is that if a standard business model can be created for the contract, the contract can then be reduced down to a standard data structure. Once the contract is reduced down to a standard data structure, it is easy enough to take that standard data model and define it to a computer. In theory, the approach of trying to standardize the data found in a contract is one way to address the issues of gaining access to the information inside a contract.

Of course, once the information inside the contract is computerized, it is easy enough to determine the corporate position on any subject that has been defined inside the corporate contracts. Business intelligence tools can quickly and accurately access the information and produce reports and results.

The approach of trying to create a single structure of data for all contracts however falls apart in the face of the reality of numerous contracts. The problem is that in many cases, the exceptions to the standard contract make the creation of a standardized information model very difficult to create and keep up to date. If corporate contract information is to be standardized, ALL the information inside those contracts must be computerized. And trying to capture ALL of the information inside the contracts where there are many contracts and exceptions to the standard contract is just not realistic.

A better approach is to read the corporate contracts and pluck the information out of the contract without relying on a rigid structured standard set of variables. In doing so, ALL data, ALL conditions, and ALL exceptions to the standard contract can be captured. And with new technology, it is possible to take that data found in corporate contracts and enter the data into a standard relational database management system.

Instead of trying to define a standard structure for all contracts, each contract has its data “integrated” – and through the integration process the data can be computerized. (For more information about the integration process for unstructured data, refer to the book Tapping into Unstructured Data, W.H. Inmon, Prentice Hall, 2007). The process of integration assumes no such standard data model, and as such, the integration of text in corporate contracts is able to be computerized regardless of how many exceptions and additions exist to the standard corporate contract.

Once the process of integrating text into a database is used, executives of corporations can know what information is in their corporate contracts.

  • Bill InmonBill Inmon

    Bill is universally recognized as the father of the data warehouse. He has more than 36 years of database technology management experience and data warehouse design expertise. He has published more than 40 books and 1,000 articles on data warehousing and data management, and his books have been translated into nine languages. He is known globally for his data warehouse development seminars and has been a keynote speaker for many major computing associations.

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Posted June 12, 2009 by Chris Noonan

Bill's observations are absolutely essential to best practice corporate governance .... without an effective knowledge of not only the obligations of contractual matters but also the implied policies that are constructed within contracts, an organization operates in a world approaching "organizational amnesia"

Take Bill's ideas to action ! 

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