Will regulation eliminate the need for contract negotiation?
Take a look at this article describing the terms that are now impacted by regulation in the financial services industry. The list is so extensive that the scope for meaningful negotiation appears severely reduced. Already, we are seeing pressure for the creation of industry standards (and indeed, IACCM is working with a large group of international corporations on exactly this topic).
Where finance leads, it seems likely that other industries (and regulators) will follow, leaving the quality of contractual obligations far less to chance or the relative power of the negotiators. So does this mean that contract negotiation will steadily become a thing of the past, replaced by a set of formulaic standards?
I believe the answer is that the focus of negotiations will change substantially over the next few years. Time spent on liabilities, indemnities, intellectual property, data security – essentially, the clauses seen as ‘legal’ – will diminish or disappear because responsibility for risk consequence will become largely non-negotiable. As a result, the parties will become far more concerned with the terms that affect risk likelihood – that is, the more technical aspects of scope, performance criteria and change management – and those that motivate performance – price or charge mechanisms, financial incentives, governance systems.
In this environment, front-end skills in deal or project structuring and back-end skills in contract management become of fundamental importance. Indeed, they are almost implicit in the regulations. Financial institutions must be able to show they have invested in competency in these areas and their suppliers will be challenged to show their capabilities as a requirement of selection.
Elements of these changes are already visible. Many banks and insurance companies are developing their contract management organization and tools; several are inserting questions about supplier commercial capability in their RFPs and selection criteria. But we are still at the beginning of the journey – and the question remains, to what extent will regulators start to drive similar changes in other industries as part of overall improvements in corporate governance?