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Maintaining Balance: Building Trust

February 20, 2008

Is executive management losing its grip?

The speed of change in today’s markets makes top jobs increasingly demanding. Maintaining the right balance between control, collaboration, empowerment and innovation is a tough task. Yet that is also what executives are paid to do. And an increasing number are getting it wrong.

I am observing a growing number of corporations – especially US-headquartered multi-nationals – where the Legal organization is gaining increased power. And they are exercizing that power with a renewed focus on standard terms and conditions that are blatantly unreasonable and confrontational. Some are doing this on the buy-side, others on the sell-side – and when these two perspectives meet in the market, the only people who are empowered to fix the probelm are …. the lawyers.

At the same time, the CEOs of these companies are talking about trust, speed, collaboration and the adoption of ethical standards. With the exception of ethics, these are qualities and characteristics notably absent from the measurements of the typical legal group.

The issues surrounding today’s global trading environment, the uncertainties, the regulations, the speed of change – these understandably make executives nervous and open to the argument that ‘we must get tough, we must have stronger controls’. Yet at the same time, those executives recognize the need to engender trust, to encourage innovation and to build brand reputation.

Sadly, few appear to understand that these qualities and attributes require a careful balance in their company’s policies, practices and rules. Success in today’s markets demands a combination of fairness and firmness that is lacking in most legally-driven cultures. Lawyers assume failure; they are protecting the business from catastrophic consequences when things go wrong. Their task is not to focus on structuring relationships or governance systems that increase the chances that things will go right, nor are they typically accountable for the economic outcomes of the deals that are transacted.

As lawyers gain control over contracting and the principles under which negotiation will occur, they also create an environment that potentially destroys trust, collaboration and the framework for honesty and transparency. This undermines the value that can be achieved from the contract, because it creates a confrontational and protective relationship. focused more on the allocation of fault than on the mechanisms for success.

Risk experts flourish in an environment of fear and uncertainty. True leaders recognize that uncertainty represents opportunity.  So while the Legal function is an important stakeholder in contracting policy and practice,  it is but one of several interest groups and allowing it to have ownership of the ‘the contract’ is an extremely dangerous and risky step, unless accompanied by increased accountability for contract outcomes.

In today’s environment, where contracted relationships are becoming the life-blood of corporate performance and competitivemess, the failure of executive management to recognize the importance of contracting – and their readiness to allow one pressure group to gain control – is an indication of the struggle that Western corporations will have in maintaining competitiveness. This importance and complexity means that executives must focus on the management and measurement systems that will induce ‘good practice’ in the formation and management of trading relationships.

IACCM studies, as well as those of groups like CAPS, suggest that relationship and communication skills will rise to the top over the next couple of years. These will be accompanied by a new level of accountability and on-going governance. Some Legal groups recognize this and either a) step up to the challenge (e.g. BT, Hewlett-Packard, LGE), or b) step aside and allow others to lead the transformation.

Sadly, a few miss the point altogether and use a period of heightened risk and uncertainty to drive functional power and interests. In ths, I am sure they are not alone. But that does not make their behavior right.

4 Comments
  1. David Munn permalink

    Tim,

    While I don’t disagree that lawyers are often guilty of the kinds of excesses you cite (e.g., “renewed focus on standard terms and conditions that are blatantly unreasonable and confrontational”), I don’t think it’s fair to blame only the lawyers.

    In my experience (as a lawyer typically representing the seller) it’s at least as common to see this type of overreaching behavior on the part of the buyer’s procurement organization. It’s as though they are all going to seminars where they learn the latest techniques for making life difficult for sellers and coming back to the office and adding clauses to their form contracts to cover every possible thing that could go wrong.

    The typical 50 or 60-page contract we receive from the buyer’s procurement group is not only “blatantly unreasonable and confrontational,” it’s also mind-bogglingly complex in the way it intertwines concepts like indemnification and limitation of liability throughout the document in ways that seem designed to trip up even the most sophisticated negotiator. While reading these types of contracts may help stave off Alzheimer’s, this approach does little to facilitate getting a deal done efficiently or creating “the right balance between control, collaboration, empowerment and innovation.”

    In many ways the lawyers on the sales side truly are accountable for the economic consequences of the deals we work on. The last thing we want is to be accused of preventing a deal from getting done (the old “sales prevention department” criticism of Legal). So we work hard to try to be creative and to understand the buyers’ needs and to get deals done in ways that make sense for both sides. What we’re often confronted with, however, are rigid approaches by the buyer’s procurement people, who all too often are unwilling or not empowered to bend from their unreasonable positions. In my experience it’s much better to deal with an experienced, smart, and creative lawyer for the buyer than with their procurement people.

    I do, however, agree with your basic premise that businesses should take more control of the contracting process and not give the lawyers (or procurement groups) undue control. Too often the business abdicates responsibility to the lawyers for dealing with what should be business issues. At the same time lawyers need to realize that most issues we tend to think of as legal issues (e.g., indemnification and limitation of liability) can be boiled down to a business issue of risk allocation in the end. While lawyers can play a valuable role in calling attention to situations where there is real risk and exposure, they need to understand that the business people ultimately need to be empowered to make decisions and take risks, which we hope they will do while taking into consideration the broader goals and best interests of the organization.

    David Munn

  2. David, thanks for your comment. Of course, I think you and I are largely in agreement and certainly I understand your observations.

    There are a couple of things that bother me.

    I think many Legal groups feel that today’s risk environment means that they must be more involved. Others are becoming more involved because the business people are frightened of making decisions. But whatever the driver, it is resulting in a noticeable trend for Legal to reduce empowerment – which in my view is completely the wrong direction. They need to think more creatively about how to maintain control without the need for personal involvement or completely rigid rules.

    For example, you are right about those long and devious procurement contracts. But if you push beneath the surface, our research suggests that Legal are ‘the power behind the throne’. Unreasonable behavior by the negotiator from procurement is often because they have no authority to negotiate; this power is reserved to the legal group. And those ‘carefully crafted terms’ you reference rarely come from Procurement – they are not typically authorized to write contract terms, especially those related to areas like liabilities or indemnities.

    Second, I am finidng growing inconsistency between in-house groups over how much they want to be involved in the business. Some feel they should be conversant with – and advise on – wider commercial issues. Others see this as a threat to attorney -client privilege and outside their remit. I don’t mind so much which route they take as long as they then think through the consequences in terms of workload management, control systems and their rights and obligations in respect of the wider contracting process. Either take control AND accountability, or step aside and focus on enabling others.

    My hope in writing this is solely that people will sit back and think; we need far greater coherence and that would be enabled if there was greater consistency in the rules and the ways they are applied and negotiated.

  3. Doug Curtis permalink

    I think that the managers and executives are very involved in these matters and decisions. The attorneys I speak with tell me it is their plant managers and COO’s insisting on these clauses. I think they see it as a way to decrease insurance premiums and deductible expenses by trying to shift costs to suppliers. One even told me, “you insure everything, we pay no claims, and we pay you for your insurance premium in the purchase price.” Of course, the low bidder does not add the insurance cost. The real result of these policies- the purchasing company is supplied by fly by nights or those with nothing to lose (or perhaps someone who does not review the terms).

  4. Interesting. Of course it’s not possible (or feasible) to buy insurance to cover many contractual liabilities that the buyer wants the seller to assume.

    Maybe the same kind of thinking is behind this clause in an RFP, which I’ve not seen before:

    “Does your firm agree with the attached Contract Terms and Conditions? If no, redline the attached document, reattach the revised file using the Attachments icon in the activity bar, and reference the file name in the Additional Info section below.
    Vendors are strongly discouraged from non-compliance, as failure to agree will result in factoring of bid prices by at least an additional 20% and may result in disqualification of your bid.”

    If they were buying commodities that approach may make sense, but in this case they are buying specilized and sophisticated software and/or services. It’s possible the buyer in this case has developed a very fair contract that a seller should be able to accept, but more likely it’s one-sided and and unreasonable contract, at least in some respects.

    Seems like this approach might reduce initial transaction costs, but if the seller caves in to this, what are the implications? It seems the buyer’s main goals are risk shifting and low cost. Certainly not facilitating the trust, collaboration, and innovation Tim writes about above.

    I wonder who thought that up. Procurement? Executives? Lawyers?

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