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Legal, Contracts & the Management of Risk

August 20, 2013

The debate goes on and on. What role should Legal have in the negotiation and drafting of contracts? When they insist on transactional review and approval, do they finish up managing risk, or creating risk?

This issue arose yet again in an email from an IACCM member, frustrated by the delays, the difficulty of meeting business objectives, the risk aversion (in her opinion) of the Legal department. So what should the role of the lawyers be, she asked.

I do not know her company so my reply was generalized. Here is what I said. What would you suggest?

“I understand why you are asking these questions and yes, many organizations face similar problems, though many have also resolved them.

In the end, Legal (and any other specialist stakeholder) should be seeking to enable good business decisions and to meet business goals regarding flexibility, achieving value, being responsive to the market. The situation you describe does not satisfy those goals because it imposes a control mechanism that gets in the way of good judgment and delays processing. This creates counter-risks in the name of Legal’s view of ‘good risk management’.

I do not know whether Legal has legitimate concerns about the competence of the Contracts team, but if that is the case they should work to train them better. They should also be offering support for a ‘negotiation playbook’ that would include approved term alternates and the circumstances in which they can (or cannot) be used. They should be thinking about the nature of the reporting they require to understand the use of such alternates and also the terms of delegated authority. For example, one Law Department agreed delegation to staff who had achieved IACCM Certification.

Yes, you should also be looking at overall process performance. We have benchmarks on many things, including cycle times for different contract types. So how do you compare? If you are not doing well, why is that? Where are the major delays and what is causing them? I could give you opinions on the likely problems, but in the end you need a proper process analysis and commitment to reengineering.

All of this can be achieved, but you will most likely need a very senior executive sponsor, because (as your note indicates) there are many stakeholders and they are often reluctant to give up their power. They fear for their jobs and the ‘mystery’ that surrounds their expertise. They may also have genuine and valid concerns about the competence of those who will make decisions, or whether those decisions are driven by inappropriate success criteria (ie that terms are given away in return for price reductions).

It sounds as if you really need to pursue a significant project on this. And the success of that will depend on whether you can gain strong management support for the potential benefits it brings. Perhaps you can tell me what are some of the top management goals right now? What are they saying is important to the business and how would improvements in the contracting process assist in achieving those goals?”

  1. Spot on Tim. I believe its good practice to have established procedures that highlight core value propositions and processes which everyone knows about and plays by. But the processes shouldn’t be so narrow or rigid that they prevent / hamper market responsiveness or the ability to adapt. Process segmentation, matched to differing value/risk bands may be useful.
    I always like to remember where the value/gain is for the organisation; we can then work to minimise non-value add activities/processes, where practicable.

  2. Kristin Eyler permalink

    IN relation to T’s and C’s: I double check everything with the attorney, before executing a contract, PO, placing a phone call, etc.They don’t care because your doing legwork for them. They are getting paid 200 an hour for your questions… don’t be afraid to seek advice even over the smallest liability or risk, you never know an attorney has procedures for every which way a client can take advantage of your company and how to deal with it from previous verdicts or
    “stare decisis.” Tons and tons of situations and cases to base their decisions on. Remember you have not been to law school. From my experience all contract administrators think their attorneys, lol.. Keep a phone log for risky upset clients and convey what they may be trying to do your only performing due diligence. half of the time, I was right, the other half they were right. Never ignore a hunch or feeling too. Thanks for the food for thought…

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