The Great Awakening
For commercial lawyers, the practice of law is transforming. Acting as a semi-independent advisor on specialist risk and legal issues is no longer enough. Today, the business expects much broader appreciation of opportunities and challenges – and that the support and contracts produced by lawyers will directly contribute to the best possible outcome.
Lawyers are no longer operating purely at a transactional level seeking to protect assets and avoid worst-case scenarios. They are being called upon to assess the wider economic consequences of the agreements they help put in place.
Many in-house counsel – and some law firms – would argue that they have always been ‘business advisors’ and in some cases I would agree. But the demands today go much further. As trading relationships change, the nature of legal support must also change. Here are a few of the factors and examples of their impact:
1) many trading relationships now focus on longer-terms outputs or outcomes. This requires underlying agreements to be more flexible, more adaptive to change. Increasingly, it is evident that many existing contract models and underlying terms and conditions are not suited to this world of outcomes – so lawyers are expected to ensure the contracts they produce are ‘fit for purpose’.
2) business leaders are swinging away from adversarial models of contracting, focused on price and risk allocation, and switching to more collaborative, open relationships. These require quite different terms and quite different negotiating skills. Lawyers (trained in win-lose) are required to rethink their traditional approach and also to understand the elements of a ‘collaborative contract’.
3) litigation is very much the exception – and the switch to more relational forms of contract, plus the international nature of many agreements, is accelerating the use of alternative dispute resolution. Once a business realizes how unlikely litigation has become, the focus of the law department changes significantly. It must enable good business decisions rather than sit remotely as a reviewer and approver.
4) the business wants to know whether the contracting process is optimizing financial returns. Lawyers have rarely thought about the big picture of contract economics. Indeed, the impact of terms and conditions or contract structures on financial results can seem very theoretical when viewed at a transactional level. But it is not. Lawyers are being pushed to understand how the contracting process impacts the bottom line.
My recent conversations with General Counsel are noticeably different from those of the past. They want to know more about emerging contract models – for example, relational contracts. They appreciate that they need to be more engaged in understanding how contracts perform – for example, where do things typically go wrong and how could problems be avoided? They recognize the need – and value – of looking across portfolios of contracts to observe common risks and identify opportunities for improved financial results. And they grasp the point that if they do not show leadership in this area, the business is exposed and they are missing the chance to drive real value for their organization.
New technologies are changing the capabilities of the law department, enabling the collection and analysis of data on a massive scale. But also, the nature of business is changing. Traditional compliance and management of risk consequence will be managed through different and lower cost methods. The real art of lawyers must be in helping the business make things go right, not in simply protecting against things going wrong.