Digital transformation – the role of legal support

October 2024 | SPOTLIGHT | RISK MANAGEMENT

Financier Worldwide Magazine

October 2024 Issue

With the increased use of technology in our day-to-day lives and the processing of large amounts of data, organisations are under constant pressure to transform their businesses through digital transformation. Though a widely used term, ‘digital transformation’ does not have a uniform definition, and it may have a different meaning for each organisation depending on where it is in its digital technology journey. At a high level, digital transformation usually includes: (i) IT modernisation, such as cloud computing, digital optimisation and the invention of new digital business models; (ii) organisational change using digital technologies and business models to improve performance and drive innovation; or (iii) the use of new, fast and frequently changing digital technologies, such as generative artificial intelligence (GenAI) to solve problems.

Irrespective of how digital transformation is defined, it is usually about a number of different end goals, which may include updating end of life or redundant systems and infrastructure, moving to the cloud and ‘everything as a service’ (XaaS), using big data, AI and machine learning for analytics, and/or creating and using new technologies such as internet of things (IoT) connectivity, automation, blockchain and so on, and more generally, using technology efficiently and effectively to save costs and increase revenue.

A digital transformation project could be viewed in phases. In our experience there are six phases (which can be combined if needed or may run in parallel depending on the scale and urgency of the digital transformation) that could be used.

Phase one involves assessing the current infrastructure, processes and procedures and documenting concerns, issues and insufficiencies and the associated costs with remediation.

Phase two involves engaging the relevant internal stakeholders to obtain feedback on concerns or issues and desired outcomes.

Phase three involves engaging external stakeholders, suppliers, customers and advisers to create potential solutions.

Phase four involves using proofs of concept or small trials to test the new infrastructure, processes or functionality to assess performance and issues to see whether the desired outcomes are being achieved.

Phase five involves taking learnings from phase four to develop a baseline functionality and requirements and develop and agree build and deploy plans. It is at this stage that organisations start to establish applicable terms and conditions. Some organisations may combine this phase with phase four.

Phase six involves implementing and rolling-out approved changes, at scale.

Any organisation undertaking a digital transformation project should involve its legal team (both internal and external) within each phase.

As part of phase one, it must be acknowledged that digital transformation projects can lead to significant contractual challenges, particularly in terms of updating existing agreements to accommodate new technologies. The legal team could review and potentially renegotiate terms and conditions to ensure they are aligned with the deployment of new digital solutions. This may involve assessing the consequences of amending or terminating existing contracts and documenting any legal risks associated with the transition.

In phase two, and potentially in parallel with phase one, the legal team can play a useful role in engaging with internal stakeholders to understand the implications of new technologies. This may include discussions with subject matter experts to grasp how the technology functions, its benefits, and the potential risks to the business. Such engagement is crucial for drafting internal policies that accurately reflect the use and limitations of the technology.

During phase three, the legal team could work with external stakeholders and subject matter experts to understand how the new technology will be used by the business in relation to its suppliers and customers. This is a collaborative effort that helps ensure the digital transformation aligns with the needs and expectations of all parties involved, setting the stage for successful implementation and adoption of the new processes and technologies.

As part of phase four, the legal team could ensure that such proofs of concept are performed on limited terms that: (i) do not impose more liability than necessary on the organisation; (ii) do not inadvertently transfer intellectual property (IP) or disclose confidential information to the supplier; (iii) ensure costs are managed; (iv) permit exit and disengagement without adverse consequences; and (v) allow for the negotiation of appropriate and detailed terms and conditions governing a long-term relationship if the decision is made to deploy the new technology. The contractual activities in this phase must be carried out carefully as it is an important exercise in validating the effectiveness of the digital transformation solutions to ensure they meet the organisation’s needs before moving forward with full-scale implementation.

Legal support is important in phase five for the reasons outlined below.

First, negotiating appropriate detailed contractual terms. The legal team could negotiate suitable contractual terms with suppliers, ensuring that the agreements reflect the organisation’s risk appetite, requirements and the specifics of the technology being implemented. The appropriate allocation of risk needs to be carefully considered.

Second, establishing legal obligations. The legal team could be responsible for establishing any additional legal obligations that apply to the organisation’s use of the new technology. This ensures that the organisation remains compliant with relevant laws and regulations as it adopts new digital processes.

Third, guiding the build and deploy plans. The legal team could contribute to the development and agreement of build and deploy plans. Their expertise is useful in ensuring that these plans are not only technically and operationally sound but also legally robust.

Fourth, protecting IP. As new technologies are integrated, the legal team can ensure that the organisation’s IP is protected. This includes safeguarding proprietary information and preventing unauthorised use or disclosure.

Lastly, compliance with laws. Legal support can ensure that the digital transformation complies with all applicable laws, including data protection, privacy and cyber security regulations.

In phase six, the legal team could support the rollout of the new terms and conditions agreed with the supplier, employees or customers, as applicable, by developing new processes and procedures required to secure compliance with contracts and policies. This should ensure that all parties are aware of and comply with the new documentation.

For most organisations, digital transformation requires a shift away from traditional thinking and toward a more collaborative, iterative approach and the legal team can guide the organisation through the contractual and legal risks effectively if immersed in the project from the start.

Sam De Silva is a partner and Fatima Butt is an associate at CMS Cameron McKenna Nabarro Olswang LLP. Mr De Silva can be contacted on +44 (0)20 7524 6223 or by email: sam.desilva@cms-cmno.com. Ms Butt can be contacted on +44 (0)20 7367 3663 or by email: fatima.butt@cms-cmno.com.

Sam De Silva and Fatima Butt

CMS Cameron McKenna Nabarro Olswang LLP