How To Prevent Breach Of Contract Lawsuits: Real-Life Lessons
This past week, two of the biggest companies in the world were slapped with lawsuits for failing to fulfill their contractual agreements. First, the state of Pennsylvania sued IBM for a botched software project, where Pennsylvania taxpayers paid IBM nearly $170 million for a project that never happened…
Days later, New York City sued Verizon for breaching a contract that was intended to make Verizon’s high-speed fiber optic internet service available to every household in the city. Almost 10 years later after contracts were signed, nearly 1 million New York households still lack access to the FiOS service and negotiations have hit a standstill.
Beyond the nitty-gritty case details and pointing of fingers, the biggest face-palm of it all is that both lawsuits could have been prevented.
In the case of IBM, the state of Pennsylvania claims that portions of the project were declared complete when they still had code defects, and that these declarations misled the state to continue paying IBM. Staff turnover at IBM was cited as a “defining feature” of the engagement, which introduced confusion and misalignment over how the contract was carried out. In the case of Verizon, the city claims that the telecom agreed to “pass all households” with its FiOS network by June 30, 2014. But Verizon disputes this requirement by using a different definition of the word “pass.”
What we see here are three critical challenges faced by any two parties engaged in a complex services contract:
- inaccurate and imprecise understanding of deliverables and outcomes
- invoices not accurately reflecting “on the job” performance or lack thereof
- lack of an organized system for the handover from contract authorization to day-to-day management
More broadly, these two scenarios teach us is that even software and telecom giants, with access to capital and legal counsel, can fail when it comes to 100% fulfilling on highly complex, multi-year agreements. Which begs the question, is there any hope for the rest of us?
The short answer is Yes. Complex service agreements are no longer about the delivery of goods and commodities, but rather require a long-term commitment, cooperation and collaboration between both buyers and suppliers. This has necessitated a new paradigm for contracts. And in recent years, the field of contract lifecycle management has moved from something that’s “nice-to-have” to “must-have” for enterprises – in part because CLM solutions are of high strategic value to the organization in terms of supporting strong business relationships that last for decades.
So what can businesses learn from the Verizon and IBM cases, to avoid finding themselves in a similar kind of predicament? To start, here are three key things:
- Centralizing all contracts into a single department – Local, distributed contracts appeal to businesses because they appear closer to the people executing it. However they tend to exist in silos, with only certain people privy to certain information. To get maximum visibility into contracts across multiple departments, offices, geographic locations may require the centralization of contracts into a single, “global” department that is responsible for enabling the best possible business outcomes across the board.
- Staying ahead of the latest innovations in contract management technology and artificial intelligence – Businesses can create massive internal and external efficiencies by leveraging technologies that automate the extraction, retrieval, and analysis of different contracts – and become more agile and adaptive in the process. That means staying on top of the emerging technologies and assessing which ones fit best within your business processes.
- Creating new roles and teams dedicated to support the handover of a contract – Businesses can’t simply rely on technology to automate everything to completion. There’s still a lot of relationship management and human interaction required in the hand-off between an authorized contract to how it’s interpreted to how it’s carried about by multiple departments. Having a dedicated staff who are the “contract experts” and can liaison between the organization and its range of vendors will increase the value of all your business relationships over time and find new areas of collaboration.
According to a recent litigation trends survey, businesses are increasingly driven to pursue litigation in order to recover losses, with 24% of corporate counsels expecting the volume of disputes to increase next year. It doesn’t have to be this way. Abraham Lincoln had a point when he said, “Never stir up litigation. A worse man can scarcely be found than one who does this.”
What could turn the tide for business everywhere – from SMEs to global corporations – will be the increasing adoption of new technologies and new operational models that enhance the analysis and management of complex, services-based contracts. This will give businesses a way to stay days, months, and years ahead of the numerous legal risks and obligations and adapt to changing regulatory practices. Ultimately, businesses who adopt these technologies early on and create new teams and processes around these technologies will likely avoid the fate of IBM, Verizon, and others.