The confluence of concern about risk and demands to cut costs results in a dilemma for many contracts, procurement and legal groups. It generates the frequent question ‘How do we do more with less?’
Of course, if one is simply looking at cutting cost without substantially reducing service levels, the main solutions are to automate and / or to outsource or move some activity offshore. However, concerns about risk typically imply increased review and approval – and hence greater workload. And for smaller organizations, offshoring is not likely to be a practical solution and outsourcing may not generate any cost savings.
In my experience, any successful effort to improve the quality of service while cutting or maintaining the cost of service depends on thoughtful segmentation of the contract base. This does not mean dividing deals based on revenue, or ‘strategic importance’, or similar techniques which frequently bear no co-relation to actual risk.
I thought it might be helpful to share a couple of methods that we have used with our members at IACCM. I’d welcome other ideas or approaches so please make a comment if you have one.
Method 1: DEAL TYPE
– Commodity (standard offering, low risk, single country)
– Solution (integrated offering combining products or services in a pre-established combination, or involving multiple countries)
– Custom integration (integrated offering as above, but with higher level of complexity / risk due to extensive customer terms that have not previously been approved and / or engagement of third party sub-contrsctors)
– First of a kind (unique elements – could be customized product or service, unique terms and conditions, unique involvement of third party)
Within each of these deal types, identify sub-elements. For example, ‘a commodity’ might be a standard product or service and behind this you might be selling, leasing, licensing.
The solution / custom integration / first of a kind would all most likely involve some combination of hardware, software and services.
This segmentation is designed to allow most deals that are in the commodity and solution category to be handled within the sales organization, without need for involvement by other functions. They would be captured in the system to ensure visibility. An exception might be multi-country deals, which require contract management involvement to ensure compliance with country rules, tax and intercompany etc.
A further consideration in all the above is the pre-existence of a valid Master Agreement (own or customer’s) that applies to the deal. Again, this is primarily relevant for commodities and solutions. The Master Agreement may or may not apply when looking at a custom agreement or first of a kind.
Outside this core aspect of sales agreements, there are of course other contract types and these would have standard review and approval paths, with defined stakeholders:
- Confidentiality / NDA
- Agent / remarketer agreements (including involvement of an agent or remarketer on a specific deal)
- Teaming agreements
- Joint ventures
By taking this approach, it should be possible to design modular agreements where relevant sections can easily be added or removed depending on the content of the deal. This then fits well with automation.
Moving on from there, a CRM system or process should ideally assist in identifying broader commercial risk associated with a specific customer. For example, the request may be for a standard, low risk product, but the specific customer may have a poor record on payment, or may have an unusual number of claims under warranty or acceptance or whatever. It is smart to consider these risk factors and whether they may generate the need for a review to consider amendments to the standard terms – for example, insertion of an interest clause for late payment.
Method 2: CONTRACT TYPE / TERMS MATRIX
Another approach can be to develop a matrix of terms (left hand column) and agreement types (across the top). For each term identify the ‘owners’. For each agreement type, identify the set of terms that apply and whether these are the same across agreements, or vary by agreement. You can also highlight whether there are pre-approved fall-back terms and what approvals are needed to use them (or where they can be obtained). Within the sales process, the account team / business unit can then confirm whether they are using the approved offering for that contract type, or whether they need exceptions. By highlighting the exceptions, they also then know who has to be consulted to approve them (the relevant ‘owners’). I have a sample of such a matrix.
So please, add your thoughts on this important question of how we deliver more timely and appropriate services, at a time when cost and resources are under such pressure.
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Tim, how can I get a copy of your sample matrix of clause ownership? I am intrigued by the concept and believe it would streamline negotiations a bit for my contracting team.
Rob
Rob, I will make sure it gets posted to the IACCM library and that we mail you a copy.
Tim:
Just stumbled across your website. Brilliant!
I have lived my career as a firm believer that pro-active corporate law, particularly in the areas around contracting and associated processes and procedures, is an area where a typically administrative/overhead department such as the legal department can bring true value to the client (the corporation) and its shareholders.
It is in this vein that I now assist international companies in designing a proactive, holistic approach to the contracting process, together with training of key contract process owners. The goal (and outcome if followed) is to reduce and mitigate risk in contracting when expected results verses actual results are compared. (I am a big believer in auditing and tweaking a process as needed).
Many thanks for your insightful articles, your wonderful website and for fighting the good fight. As lawyers we need to protect our clients proactively, not protect our pockets in hopes a client is reactive.
Suzanne, thanks for your comments. It is great to observe that the number sharing your view has shifted from a trickle to a trend … what we hope to do at IACCM is provide a unifying forum where all those voices can come together and truly represent a force for significnat change. Please continue to share your thoughts and experiences – they add tremendously to the ‘body of knowledge’!