For commercial lawyers, the practice of law is transforming. Acting as a semi-independent advisor on specialist risk and legal issues is no longer enough. Today, the business expects much broader appreciation of opportunities and challenges – and that the support and contracts produced by lawyers will directly contribute to the best possible outcome.
Lawyers are no longer operating purely at a transactional level seeking to protect assets and avoid worst-case scenarios. They are being called upon to assess the wider economic consequences of the agreements they help put in place.
Many in-house counsel – and some law firms – would argue that they have always been ‘business advisors’ and in some cases I would agree. But the demands today go much further. As trading relationships change, the nature of legal support must also change. Here are a few of the factors and examples of their impact:
1) many trading relationships now focus on longer-terms outputs or outcomes. This requires underlying agreements to be more flexible, more adaptive to change. Increasingly, it is evident that many existing contract models and underlying terms and conditions are not suited to this world of outcomes – so lawyers are expected to ensure the contracts they produce are ‘fit for purpose’.
2) business leaders are swinging away from adversarial models of contracting, focused on price and risk allocation, and switching to more collaborative, open relationships. These require quite different terms and quite different negotiating skills. Lawyers (trained in win-lose) are required to rethink their traditional approach and also to understand the elements of a ‘collaborative contract’.
3) litigation is very much the exception – and the switch to more relational forms of contract, plus the international nature of many agreements, is accelerating the use of alternative dispute resolution. Once a business realizes how unlikely litigation has become, the focus of the law department changes significantly. It must enable good business decisions rather than sit remotely as a reviewer and approver.
4) the business wants to know whether the contracting process is optimizing financial returns. Lawyers have rarely thought about the big picture of contract economics. Indeed, the impact of terms and conditions or contract structures on financial results can seem very theoretical when viewed at a transactional level. But it is not. Lawyers are being pushed to understand how the contracting process impacts the bottom line.
My recent conversations with General Counsel are noticeably different from those of the past. They want to know more about emerging contract models – for example, relational contracts. They appreciate that they need to be more engaged in understanding how contracts perform – for example, where do things typically go wrong and how could problems be avoided? They recognize the need – and value – of looking across portfolios of contracts to observe common risks and identify opportunities for improved financial results. And they grasp the point that if they do not show leadership in this area, the business is exposed and they are missing the chance to drive real value for their organization.
New technologies are changing the capabilities of the law department, enabling the collection and analysis of data on a massive scale. But also, the nature of business is changing. Traditional compliance and management of risk consequence will be managed through different and lower cost methods. The real art of lawyers must be in helping the business make things go right, not in simply protecting against things going wrong.
An IACCM member posted this question on the IACCM Forum. I am not a fan of such clauses: they always were open to manipulation and today they are even more so. They strike me as a lazy and ill-considered approach to a legitimate issue – and they carry various dangers that can undermine value.
Most Favored Customer (or Nation) clauses are inevitably problematic unless there are independent sources of price comparison. In many cases, even if there are research companies offering data, the most highly negotiated deals are protected by confidentiality undertakings. And even when some data can be accessed, it is usually possible for a supplier to claim that price variations reflect other differences – for example, in risk allocation, availability, volume or term of agreement etc. This means, in my experience, MFN clauses are of limited meaning or value.
However, this does depend to some extent on how much you trust the integrity of the supplier and whether you are clear about your own goals. For example, do you really need to have better prices than all other customers, or is your real sensitivity that you want better prices than your competitors? Must you really be best, or perhaps it is sufficient to be in the top 5 or 10%? Does price really matter anyway, or should you be measuring cost of ownership?
You might make such a provision subject to periodic confirmation by the supplier, making it clear that misrepresentation would be a fundamental breach of the agreement. You can require independent audits, though few large suppliers will agree to this and the cost may be prohibitive. You could commission periodic research which, depending on the market and the nature of the service, may yield practical results.
I would suggest that the real concern here is that you want to ensure pricing remains fair and reflects market trends. Often the only way to test this is by regular market testing via competitive bidding. Such an approach has little attraction for the customer or the supplier – it is expensive and potentially disruptive. So you might consider a clause modelled around the principle that the supplier has responsibility to demonstrate not only that the prices they offer you are the best they offer, but also that they are among the best available in the market. But be cautious that in your focus on price you do not lose sight of broader issues of value. There will always be someone cheaper, but what is the cost associated with ‘being cheap’?
Contract and commercial management may be increasingly important to business success, but that is not translating to significant investment in training or raising skills. The bottom line seems to be, if you want to improve your knowledge, watch your colleagues and learn ‘on the job’.
Of course, there are exceptions – and some companies are making serious efforts to raise the capability and the status of their contracts and commercial staff. Research suggests that their investment yields dividends in terms of profitability, contributing through increased revenues (for sell-side personnel) and lower costs (from buy-side personnel). There is also an apparent – though harder to measure – connection to greater innovation and continuous improvement.
Last week, IACCM produced interim results from its current benchmarking study. It showed a growing divide between leading corporations and ‘the rest’. For example, top quartile performers stand out in terms of the way they develop capabilities; they also use a wider set of measurements to drive organizational performance; and they see major gains in productivity, cycle times, the quality of contracted outcomes.
As an example, in the ‘also-rans’, the primary purpose of contracts and commercial staff is still seen as risk mitigation through oversight of compliance. But about a quarter of respondents see the function’s role in a more positive context of creating competitive advantage, improving business productivity, managing change and facilitating external relationships. It is not hard to guess which group is winning in the market.
The top quartile use different performance metrics; they also invest in training to ensure consistent capability. Their commercial groups operate as business enablers, not in purely review and approval mode. They are also typically holistic in covering the entire contracting lifecycle, rather than providing fragmented support at different phases of the process.
These findings are important and interesting. They support the growing belief that contract and commercial management are key to 21st century business success.
The benchmark study remains open for input and those who participate will be first to receive results. It can be found at http://www.iaccm.com/services/research/
As we all know, too many contracts fail to deliver expected results.
Growing complexity, market volatility, increased interdependence – there are multiple factors that contribute to those failures and are forcing change in the way that organizations interact. Relationships are often too vague, too reliant upon individual memory, to be sustainable ways of managing the performance of commitments and obligations. Contracts, on the other hand, are often too limited in the ground they cover and too difficult to understand and interpret. Traditional approaches to relationship management and contract management are no longer ‘fit for purpose’.
As a result of these changing needs, relational contracting – the integration of the relationship terms into the contract – has been an evolving reality, rather than a planned development. There are no generally accepted model ‘relational contracts’. Indeed, even research into the elements of a relational contract is limited. IACCM has developed core principles – for example, methods and types of communication, the importance of balanced incentives, approaches to problem solving – and is consolidating various research initiatives, but this remains at a relatively early stage. Individuals such as Andy Akrouche and Kate Vitasek have also led the charge in trying to define methodologies that support ‘collaborative relationships’.
Now, there is growing interest by the legal profession and by the courts in making sense of relational agreements, with a number of recent cases highlighting these developments. Andrew White, a partner at law firm Bird & Bird, presented at a recent IACCM UK member meeting and explained some of the impacts. For example, he observed that: “As contracts move towards clearer obligations, remedies move towards an obligation to perform rather than damages”. Such a shift has potentially massive significance, especially on issues such as ‘hardship’. Of even greater import, perhaps, is the increasing use of concepts of ‘good faith’ and their legal enforceability. This is a very new concept in most common law jurisdictions (in the US, it has been a traditional element of law, yet rarely seems to be imposed). For example, the English Court of Appeal recently concluded that contracts have two distinct elements – a performance element and a risk allocation element – and the performance element relies heavily on issues of intent.
So the law is catching up with commercial reality. But commercial reality still has far to go in designing approaches to business engagement that deliver better results. Partly this relates to better and more constructive approaches to market evaluation and subsequent negotiation. For example, suppliers are often held at arm’s length and there are too few opportunities to establish what it might be possible to achieve. Requirements and capabilities are frequently misaligned. Organizational culture or integrity rarely feature in selection criteria. Resources are fragmented, required skills overlooked. The list goes on. But at its heart, while we are beginning to understand the concept of relational contracting, we are not exploring its implications to the way we design, manage or motivate our internal organization or our external trading relationships. Simply writing things into a contract does not make them a reality.
Experience shows that most organizations can develop highly successful collaborative relationships. It also shows that most of them are unable to replicate those successes. In other words, they can occasionally rise to the challenge of doing things differently, but they cannot sustain the effort. They soon revert to form – and that form is generally one where trust is limited, cooperation is an exception and a readiness to blame takes over from a sense of shared responsibility.
This means we have a situation where contracts could be used to reengineer the company. By recognizing the nature of the commitments and governance procedures needed for successful outcomes, an organization can reverse engineer the required capabilities, measurements and management systems (an approach used successfully by the IBM Corporation during a past era of rapid market change). This, in fact, is what lies at the heart of ‘commercial excellence’ – another of the major topics being addressed at IACCM and delivered through its training programs. Unfortunately, senior management rarely thinks of contracts in this way. And that is a missed opportunity.
I am always surprised by the volume of ‘doom and gloom’ mail that I receive. Yes, there are many problems to be solved and some days they can feel quite overwhelming, but I have yet to see an instance where doom and gloom made them any better.
So my natural inclination is to delete the mail – the equivalent, I suppose, of executing the messenger.
Most of us in the world of contracts or law are talented at seeing problems and difficulties. It is a key reason why we are part of review processes. But sometimes, there are members of our community who get stuck and who think that raising issues and objections is a sustainable source of value. These are people who are frequently complaining about the ignorance of others, or the failure of management support, or are incredulous that others ‘just don’t get it’.
Many times I have observed contracts and commercial professionals and managers present to senior management, outlining issues or challenges associated with a particular deal or a policy. Far too often, their approach is to warn of the dire consequences that will follow from some particular action or inaction. Rather like a fire and brimstone preacher, they leave their audience with a fear of being overwhelmed.
Then they wonder why it is that no action is taken, or why they are increasingly left out from meetings. The answer is simple: like those emails I receive, they are simply deleted.
The reason, of course, is that our managers and colleagues want answers and solutions. They want positive proposals for action, not doom and gloom messages that generate inaction. They all have their fair share of issues and problems to fix; they don’t need ours put on top. As professionals, they expect us (rightly) to come with remedies, not complaints about the symptoms or predictions of imminent death.
So next time you hear a colleague on the ‘gloom and doom’ trail, help them off it. Remind them that it is not only a path to nowhere for them personally, but it also sustains a negative image of the entire profession. As one of my former managers used to remind me, if you are feeling negative about something, think the opposite. It is amazing what creative solutions a different mindset can generate.
Even in the most advanced economies, justice is not universal. For many, it remains unaffordable and inaccessible – and this is especially the case for relatively small claims related to the supply of goods and services.
The explosion of on-line trade has made the absence of recourse especially evident. Indeed, over recent years, e-bay has become the primary source of dispute resolution, handling over 60 million claims a year. But those who have made use of this mechanism will often attest to its unsatisfactory nature and the ability of the unscrupulous merchant to ‘work the system’.
UNCITRAL initiated work several years ago to develop an universal system for on-line dispute resolution. It recognized that, while domestic processes for handling small claims might be inadequate, for international transactions they are non-existent. IACCM was involved with this worthy initiative – but it has proven slow to make progress. Now, the UK’s Civil Justice Council is calling for the creation of an on-line court to provide mediation and, where necessary, judgment for low-value claims.
Such a system will only apply in a domestic context, but would represent a welcome step forward in increasing the accessibility of justice. It might also have an interesting impact on the use and attention paid to contracts. If there is an effective form of recourse, both parties will have increased interest in ensuring clarity of rights and obligations.
Every audience that I ask agrees that change is occurring at an ever-faster pace. Yet when it comes to the impact of change, most tend to see it in terms of greater complexity, additional workload or confused priorities. There are few who can express it in terms of longer-term implications to their job or its relevance and value.
Looking for a moment at the world of contracting, we can quickly see that recent years have driven more contracts, wider international use, some convergence between legal systems and practices and – in general – longer and more complicated terms. Right now, we see the growing influence of outcomes (as opposed to inputs) and efforts to develop more collaborative – or relational – approaches. The battles over risk allocations continue to rage, often made worse by regulation.
But these are all symptoms – and unless the issues at the heart of change are addressed, these symptoms will become worse and performance will decline. So what is the answer?
I believe the real point is that our world is shifting from an internal enterprise focus to an external market focus. For contracting, that means we must think less about control and more about enabling. Whether buying or selling, our contracts need to be aligned with generating targeted value. Control certainly remains important, but it is a consequence of good contracting, not its primary purpose.
An internal focus frustrates market alignment, it causes us to be driven by ‘wants’ rather than needs, it constrains innovation, sustains bureaucracy, strains relationships – and it underpins a compliance mentality. An external view is liberating – it demands a focus on understanding needs, assessing value, empowering others, enabling innovation and creating flexibility.
The big difference is a digital age. It is creating an environment where data is prolific and in-depth analysis possible, even when underlying information is unstructured. It is driving integrated communication and real-time reporting, as well as completely new methods in how we construct and disseminate information. For example, contracts can be graphic in form, or make use of videos, virtual reality – and technique that increases efficiency and understanding.
Rather than change being a problem, it allows us to re-think our role and purpose, together with the ways we perform. At a simple level, here are three ideas to consider for your work or business:
– what does it mean if our approach to negotiation became relational?
– what could I do to make my contract a business instrument, more visual and practical for users?
– how can technology capture and deliver contract-related data that would transform my knowledge and focus contracting as an external enabler?