Legal and Contract Management Outsourcing

Can contracting be outsourced? That was the topic I discussed this weekend with Henrik Lando, Professor of Law & Economics at Copenhagen Business School and David Karabinos, co-founder of EquaTerra and a leading expert in outsourcing.

David made the following observation about corporate outsourcing strategy: “Imagine a two-by-two matrix with core and non-core activities on one axis and Do-Well and Don’t-Do-Well on the other. If you do a true and accurate analysis of what your company does, and plot them in the matrix, then you have a better feel for what you should outsource.”

Our discussion was driven by my response that, if you believe outside observors (The Economist, miscellaneous governments etc.), most organizations don’t do contracting very well. So on that count, it should be a candidate for outsourcing. Yet if you believe academics like Leslie Willcocks, Kate Vitasek and Oliver Williamson, then the growing uncertainties of a global economy mean that contracting is fast becoming a critical area of ‘core competence’. So that would imply it should be kept in-house.

In reality, relatively few companies have undertaken extensive outsourcing of their contracting process. And one reason for this is that very few have grasped that it is a process. In most places, it remains a relatively disjointed set of activities – which is of course why it is done so badly. Roles and responsibilities are frequently not well defined; stakeholders work to different agendas and objectives. Risk is not well communicated or managed.  And things that are not understood make very poor candidates for outsourcing, because no one has any real idea of the underlying cost and it is almost impossible for the outsourcer to deliver services when there is no clear point of internal ownership.

Henrik Lando recently had the chance to discuss the role of contracting with Nobel prize-winning economist Oliver Williamson. Their conversation confirmed Prof. Williamson’s view that a ‘well-governed contract’ may do more to deliver results than a heirarchical relationship – hence supporting the idea that contracting competence is increasingly ‘core’. So does that mean we should not consider this a candidate for outsourcing?

David, Henrik and I all agreed that some areas of contracting can be outsourced. David cited the extent to which it is already happening with the Legal role, but admitted that other areas have been slow to follow. “Elements of complex contracting can certainly be outsourced (legal, financial monitoring, performance monitoring, contract administration). We tried to sell this as something third-parties could do for our clients at both TPI and EquaTerra. However, only legal is something that our clients (buyers) really accepted as legitimate to give to a third-party.”

In my opinion, the reason for this is largely due to the poor definition of process and the fact that this leaves affected resources hard to identify. “Because virtually no one sees it as a process, there is no definition of activities that allows intelligent division between what should be retained and what could be outsourced. And it is this lack of definition that results in the fact that companies are generally ‘not very good at contracting’.”

Companies incur heavy costs because of this failure to develop robust contracting procedures. For contracts and legal professionals, it means we remain overwhelmed with tactical support and cannot readily drive strategic change because of poor visibility into data and because we lack the time. Selective outsourcing is the right way forward. Leading the changes needed to make it happen is a great way for contracts and legal professionals to be seen in a new and more strategic role by executive management.