Negotiation is usually one of the most time-consuming and complex parts of the contract management process. This is because parties often send contracts back and forth whenever they disagree about specific terms. This exchange is known as redlining and plays a vital role in creating contracts that meet stakeholders’ and counterparties’ expectations.
As such, it’s essential to get redlining right. When redlining rates—the percentage of agreements that have some negotiated changes from your contract’s standard templates—are extremely high, this means you’re spending a significant amount of time and energy creating and negotiating contracts. This, in turn, will lower your productivity and make it harder for you to close deals quickly.
Luckily, you can mitigate these problems by using contract templates from top-notch CLM software. These templates will help you speed up the redlining and negotiation process, particularly for mass-produced contracts—such as Terms of Service agreements—that don’t require a lot of tweaking. Templates also have built-in guardrails to ensure 100% automatic contract compliance.
Read on to learn more about what causes high redlining rates. After that, we’ll explore how to use your CLM solution’s templates to reduce your company’s redline rates.
What causes high redlining rates?
Here are the main reasons why redlining rates are sometimes so high:
- Incompatible and extreme terms: You and the other party have very different ideas about the deal. As a result of these differences, they (and you) will be sending revisions back-and-forth until you reach an agreement.
- Cumbersome changes: If you’re using a traditional word processor to redline agreements, manually spotting changes can be cumbersome. This is particularly true if you’re repeatedly having to make the same changes.
Fortunately, you can largely avoid these issues by choosing the right CLM software and implementing an improved redlining process.
First-rate CLM platforms come with a workflow creator that allows you to create contracts from standardized templates. All you have to do is:
- Pick a template type. For instance, if you’re creating a non-disclosure agreement (NDA), choose an NDA template from your CLM’s workflow creator.
- Make the necessary edits.
While using your CLM to create contracts from templates, you should also develop and implement a more streamlined redlining and negotiation process. Here’s how.
How to use contract templates to reduce redlines
1. Use neutral language
You need to make the proper edits to your template to lower the redlining rate.
Try to use friendly, neutral language that doesn’t lean heavily in your favor. You want to show your counterparty that you are open to partnership. When the counterparty sees that you agree with them on the major points, they’re less likely to disagree with you on minor points.
On the other hand, if a counterparty sees that even minor parts of the agreement are biased in your favor, they’re more likely to view the entire contract skeptically. They will probably request many revisions, which will boost the redline rate and lower your productivity.
2. Prioritize editing the most “controversial” sections
Focus on the most “controversial” parts of your agreement, as they are the ones that will probably need the most negotiation. Give them careful attention and edit them until they are neutral enough to pass muster with your counterparty.
To determine which parts of your agreement you should focus on, look at your previous negotiations for the same kind of contract. For instance, if you’re creating a mergers and acquisitions agreement, look at your previous mergers and acquisitions contracts to see which sections required the most negotiation.
Your CLM solution should also enable you to use contract metadata to help you locate friction points.
Once you’ve created a list of those potential friction points, review them. If there are points that you are typically comfortable conceding, you can save a lot of time by adding them to your template.
As for the points that will always require negotiation, see if there are ways to make them less contentious by asking yourself the following questions:
- Are there any problematic words that could be concerning to counterparties? Even a single word can increase redline rates. As such, be on the lookout for more neutral synonyms you can use instead.
- Can you simplify or rewrite specific phrases? In a similar vein, certain phrases may need to be rephrased. Think about the implications of these phrases and how you can reword them so they won’t get redlined.
3. Look at what your competitors are doing
You should also reference how other companies in your industry are handling similar contracts. These market comparisons will inform how you and your counterparty see your contract. If your agreement is too “extreme” compared to other contracts in your industry, your counterparty will likely request numerous changes.
Start by looking through your own agreements. You can have someone review your historical contracts and track important legal terms.
For example, if you’re writing a standard service agreement, you can hire an intern to track key legal terms, such as:
- Scope of work
- Duration of agreement
- Payment terms
- Intellectual property rights
Then, compare these terms with those of other industry contracts. Once you’ve gathered enough information, you’ll be able to determine a range of possibilities for what you and your counterparty should find acceptable and reasonable. This data will also help you confidently negotiate, as you will have ample evidence showing that your position is reasonable.
For instance, you can say to the counterparty, “These liabilities are reasonable according to market trends. Based on our own records and research, 70% of companies in this industry list out the same liabilities.”
4. Refine your templates over time
Continue to work on your templates over time. As you use your templates to create more contracts, you’ll better understand which areas need smoothing out.
Besides making immediate changes as needed, you should also set a schedule for updating your templates and workflows (i.e., quarterly or monthly). This ensures you’re getting the most out of your CLM’s templates.
Choosing the best CLM for contract templates
Redlining and negotiation are some of the most time-consuming—and vital—parts of the contract management lifecycle. This is why redlining rates are often sky-high, especially if you’re not using the right CLM software.
You should choose a cutting-edge CLM platform to reduce redlining rates, thus allowing your organization to transform contracts from barriers to enablers. This software should give you everything you need to create agreements from standardized contract templates. It should also come with the following:
- A user-friendly workflow designer that you can use to develop templatable contracts
- A cloud editor that lets you collaborate with stakeholders and counterparties in real-time
- Contract data reporting tools that let you stay on top of bottlenecks and other productivity issues
Once you have the right CLM platform, you’ll be able to make your business faster, more controlled, and more collaborative than ever before.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.