Organizational culture is becoming an increasing area of focus for every business. As recent events have shown, the speed and power of social media activity demands heightened sensitivity and rapid response mechanisms. Shifts in social expectations (as well as global variations in those expectations) result in often unpredictable pressures that can instantly impact corporate reputation.
This challenging environment means that organizations must increasingly review their commercial policies and practices. For example, traditional measurement systems have often led to damaging behavior – whether it is placing unfair pressure on small suppliers or using unethical practices to win sales. Partnering programs and the selection of suppliers are also high risk areas, with potential ‘guilt by association’. In some cases, policies and practices are driven by regulation – for example, the use of conflict minerals or child labor. In others, it is about avoidance of possible litigation – for example, discrimination or sexual harassment. But there is also a growing need to exercise judgment on a wide range of decisions that impact organizational image and these, it is suggested, are in many ways best addressed through a clear and common ‘culture’ – a set of norms and values espoused by all employees.
There is current debate over where ‘cultural responsibility’ should reside. For example, given the frequent role that the General Counsel has over compliance issues, should they also be the ‘custodian of culture’? Ultimately, the tone may be set by the Board, but there needs to practical oversight and implementation.
It seems to me that there are two linked but distinct aspects to this topic. One is the internal manifestation of behavior and the other is external – the link to society and markets. It is this latter aspect that is especially relevant to commercial teams, who are in many ways uniquely placed to be making the sort of balanced judgments needed to manage reputational risk. Lawyers and the law are fundamental considerations in making ethical and reputation-enhancing decisions, but this is only one aspect. Recent incidents that are damaging corporate reputations are mostly not illegal – they are simply reflecting corporate values and cultures that are increasingly alien to societal norms. Trying to keep pace with those trends and making smart commercial decisions requires careful and inclusive analysis and counsel.
Twenty years ago, many corporations had powerful commercial groups with clear responsibility for business practices and ethical standards. The forces of globalization destroyed most of those groups because they were seen as an impediment to getting business done. Management focus shifted to ‘growth at all costs, ethics be damned’. Steadily, the world has come to realise that such approaches destroy environments, undermine society, drive inequality and dishonesty. So we are at a point where we need to rethink approaches to decision-making, ensuring that short-term expedients are not at the cost of longer-term interests. Perhaps that means appointing an ‘owner of culture’, but I suspect it is more about designing effective and streamlined review and approval processes that clearly include ‘social impact analysis’ as a core element of risk assessment.
A guest blog by Sally Hughes, Chief Operating Officer of IACCM
Social trust is high on the political and corporate agenda. Open contracting is attracting growing attention as one way to increase public confidence in the transparency and integrity of business and government dealings. To date, the private sector has had limited engagement in the debate on open contracts and many legal and contracts professionals show scepticism about its practicality. But with 23 governments having signed up to the principles of Open Contracting, and with active interest from institutions such as the World Bank, OECD and World Economic Forum, it is surely time to engage.
Last week, I represented IACCM in a fascinating keynote panel discussion at the 2017 Open Contracting Conference held in Amsterdam. The session was moderated by Adrienne Klasa, Editor of This is Africa at the Financial Times Group and my fellow panellists made up a distinguished group, bringing diverse perspectives on the subject of Open Contracting. Dr. Eber Omar Betanzos Torres is the Undersecretary of Public Administration in Mexico, who through 2017 has been the Chairperson of the group of 5 governments, (Colombia, France, Mexico, United Kingdom and Ukraine,) who founded the “Contracting 5”, leading the work to foster openness, innovation, integrity and better business and civic engagement in government contracting and procurement. Last week it was announced that Argentina would join this group, formally making it the Contracting 6; Zuzana Wienk is a member of the Steering Committee of the Open Government Partnership as well as founder and program director of a leading Slovak political watchdog – Fair-Play Alliance; and finally, George Ofori, Deputy Chair of the CoST (Construction Sector Transparency Initiative).
Open Contracting – The Future
The panel’s remit was to look at the future of Open Contracting, to try and cut through the hype and discuss and debate the strategies needed to maximise its impact; can it be the new “normal” in the next 5 years? It is a lofty aspiration. IACCM was particularly requested to comment from a private sector perspective, looking at the role of the private sector in accelerating the Open Contracting agenda and the actions that they can specifically take. The private sector was notable in its absence at the conference and therein lies one of the first challenges – how to get them in the room?
At IACCM we are in the fortunate and privileged position to be working closely with both private sector and public sector; indeed, having started out 18 years ago as an Association that was founded in conjunction with a small private sector group, the percentage of our membership from public sector has grown exponentially over the last 7 years, the reasons for which are the subject of many other blogs. There is no doubt that governments around the world are driving commercial reform initiatives, from upskilling staff, streamlining processes and even attempting to simplify contract documentation. However, when I speak about these initiatives to companies that supply in to government, the response is universally along these lines, “It all sounds very interesting, but the reality is that our experience working with governments hasn’t changed, it’s still the same old unwieldy and unnecessary complex documentation seeking to allocate unreasonably onerous risk to the supplier, still the same old bureaucracy, still ultimately the same old lack of transparency.” So, no wonder then that the private sector is sceptical.
What are the incentives?
There are certainly incentives for the private sector to get on board with the Open Contracting initiative; those organisations that care about trust and integrity, care about their reputation, should be at the forefront. However, if they are not observing any change from governments, despite the work that is clearly underway, then the incentives largely disappear, it’s viewed as one way traffic. There are so many other questions to pose: What are people going to do with the data if it is publicised; are they really ready for it? What about the arguments for the need for confidentiality in situations of national security? How can we make “data” open and useable without significant investment in technology? Even with the challenges that private sector is navigating in implementation of appropriate technology, this remains an area where public sector is woefully lagging in comparison.
Open Contracting is a complex issue and whilst I sincerely hope that it will have made significant progress in 5 years’ time, for it to be the new “normal” I fear is over ambitious; but we certainly shouldn’t be disheartened or distracted from maintaining that objective.
A need for open dialog
So, what is the role of the Private Sector in Open Contracting? Firstly, it needs to come to the table and take the opportunity to influence the conversations on this important debate, but importantly the Public Sector needs to listen to the real challenges that are still experienced when working with government institutions; this won’t happen without open dialogue and greater publicising of the case studies demonstrating the successes that can be achieved through greater openness and transparency. Sanjay Pradhan, CEO of the Open Government Partnership gave a moving opening presentation at the conference; he reminded us all that we need to move from commitments to credible implementations and we need courageous and committed leadership.
As digital communication steadily transforms social expectations, it should come as no surprise that there are growing demands for ‘open contracting’ – an end to the secrecy and complexity that masks business dealings and performance.
This week, a global forum in Amsterdam confirmed that Open Contracting truly is on the International agenda, raising understanding of the critical role that contracting plays in delivering fairness, transparency and value in trading relationships.
The players in this growing movement wield tremendous influence – organisations that include the OECD, the World Economic Forum, the European Commission, the BTeam, CoST, a myriad of national governments – and of course IACCM.
What’s it about? Increased efficiency, improved standards of governance and ethical standards are high on the agenda. While the drive may be largely from public sector, there is tremendous relevance and benefit for private companies. Greater consistency will reduce costs. Transparent processes will open opportunities to greater competition. Simplification will increase the chances of successful outcomes.
Ultimately, Open Contracting demands increased competence from both public and private sector. It requires a focus on skills, resources and systems that drive integrity in data flows and fact-based decision making. It is a program that has potential to deliver benefit to every citizen, everywhere. At last, high quality contracting has been recognised as a critical ingredient for global economic growth and success.
The IACCM vision and mission has taken an enormous step towards realisation and contracting is steadily moving up the government and business agenda!
IACCM’s recent study of the state of contract management automation revealed low satisfaction ratings and poor levels of adoption. While there are some very successful instances of implementations led by the Legal function, in general systems selected by Law Departments were especially prone to failure – in fact more than 40% more likely to be underperforming.
Contract management software takes many forms, but is tending to be bundled into the overarching category of ‘Legal Tech’. This is misleading and problematic. In a corporate environment, lawyers are just one group amongst many on whom successful contracts depend. In fact, in terms of the overall workload associated with creating and managing contracts, the Law Department typically represents well under 5%. By branding what is quite obviously business technology as ‘Legal Tech’, we simply undermine broader business understanding and adoption.
’Legal Tech’ is certainly an entirely appropriate term in the context of technology used by law firms – in the same way that FinTech is used to describe technology for the financial services industry. But in-house Law departments are not separate and independent businesses. They need technology that integrates them into the business, not that separates them from it.
So as a profession that likes clear and appropriate use of language, it’s time for lawyers to recognize the boundaries of the term ‘Legal Tech’.
Contract success is directly impacted by the motivation of the parties. Research increasingly shows that traditional forms of contract are demotivating and therefore can be directly responsible for under-performance. The way that terms are expressed, the extent to which they mandate specific actions and the degree to which they provide a relational structure are of particular importance.
A growing number of studies indicate a strong link between levels of autonomy and the quality of performance. Essentially, the less people feel they have autonomy, the lower their level of motivation and the greater the risk of unethical or dishonest behavior.
When we write contracts, we face many choices in how prescriptive they are. The same is true in the way we approach their negotiation or management and the associated communications with the counter-party. An approach that is rigid, formulaic and inflexible does not promote or allow the type of conversations and incentives that encourage innovative ideas or alternatives that increase value. The imposition of unreasonable levels of risk or unilateral demands for price reductions are similarly demotivating. They undermine goodwill and any sense of ‘we are in this together’. So what should we be doing differently?
The American Business Law Journal published an article by Todd Haugh which explores the role of ‘nudges’ in driving behavior. It reveals that communications or actions that increase or imply oversight may generate superficial compliance, but ‘workers may want to get back at a regime they see as too strict or overstepping’. Therefore contracts that mandate ‘how’ work is to be done, rather than ‘what’ is to be achieved, are likely to result in poor performance and disappointing results.
In ‘The Goldilocks Contract’, researchers from the Stanford Graduate School of Business investigated the impacts of contract structure and terminology on performance. They also found that the more the contract terms seek to impose control, the greater the impact on motivation. ‘Subtle reductions in the specificity of a contract’s language can boost autonomy, which increases intrinsic motivation and improves a range of desirable behaviors’. A range of experiments showed that less specific and less ‘legalistic’ contracts increase the counter-party’s persistence, creativity and cooperation. This is especially true with regard to the ‘legal’ terms (and methods of expression), which are often drafted in a way that appears threatening. The ‘technical’ or business terms should be designed to offer structure – for example, if they establish clear methods of governance, this will be beneficial.
There are many reasons why contracts are essential instruments, but in order to generate desired results careful thought must be given to the impact they have on performance. Traditional structure and wording is clearly not contributing to success.
Recent years have seen growing interest in approaches to contract design and expression. There are many factors behind this, among them the increased use of contracts and also their greater length and complexity. As vehicles of communication, most contracts are dire, with average reading levels that put them out of the range of mere humans.
Initiatives have ranged from the use of ‘plain language’, to the development of style guides and, more recently, the introduction of graphics and pictures that increase the ability of users to understand and perform contracts. But how much does all of this really matter?
It seems obvious to many people that contracts contain important information and these include rights and responsibilities related to performance. On that basis alone, it appears both reasonable and expedient to make agreements easy to understand. Recent research goes further by suggesting that the nature of the language used in a contract has a material impact on the behavior of those receiving it. Excessive ‘legalese’, for example, is perceived as threatening and is therefore demotivating – hardly a desirable result when the purpose is to encourage performance.
But now, research undertaken at Binghampton University in New York has revealed even more extensive possibilities for future contracts – the use of ‘text talk’, such as emojis, exclamation marks and abbreviations. ‘Textisms’ apparently bring a value typically missing from written documents – they convey the nuanced meaning typically achieved only in spoken conversations, thereby reducing the chance of misunderstanding or adverse reactions when there was no bad intent.
Contracts today frequently generate negative or hostile reactions. That is really the last thing we should be doing when we are embarking on a joint project or trying to generate shared benefit. So perhaps we need a new style guide for contract drafting that brings us into the 21st century and reflects modern methods of communication. It isn’t just that emojis and ‘text talk’ would make contracts more accessible; it would also (according to the research) increase our chances of a successful and harmonious outcome. And that, surely, is what we are all trying to achieve?
Over the years, I have had the good fortune to witness multiple instances of contracts failing to achieve their desired results. Organizations use many different techniques to ensure failure, but I have observed several that seem to be especially popular. I thought I would share them, in case you’d like to try them out. Alternatively, perhaps you would like to contribute additions, or highlight your personal favorite.
The top ten are divided into ‘do’s and don’ts’. We will start with the ‘don’ts’.
DO NOT
- Gather and assess complete requirements: it’s best to surpise the counter-party with your true needs or capabilities after the contract is signed.
- Take account of stakeholder views or interests: they will only create obstacles and cause delay.
- Test supplier capabilities to deliver: it’s price and savings that really matter, so forget those people in the business who demand quality and performance.
- Address uncertainty or volatility when you draft contract terms: it is often obvious that things will change, but that will be someone else’s problem.
- Try to make your contract intelligible: we all know that contracts must be structured and written in a way that no one will readily understand or be able to use.
So what are the ‘must do’ techniques?
DO
- Use power to impose maximum risk on the counter-party: negative incentives and unfair terms will ensure limited collaboration and are useful in creating an environment of blame.
- Use legal terminology which makes your contract threatening and didactic in tone: research has shown that this approach is effective in demotivating your counter-party.
- Specify as precisely as possible how work is to be performed: it is best to ensure that there is no chance of innovation or improvement in how services are delivered.
- Pass the signed agreement to someone with little or no training to oversee performance: not only will this hasten failure, but it also offers someone else to blame.
- Ensure that the counter-party is rapidly held accountable for anything that goes wrong: after all, it is always someone else’s fault.
Statements of work, scopes of work – the growth of services contracting means they are becoming steadily more important. And we know from IACCM research that disagreements over scope are the most common source of claims and disputes – so getting them right is important.
IACCM has produced a short podcast, available in the Member Library, with suggestions on how to improve the quality of an SoW. It builds from this checklist of ‘ten tips’.
- Understand whether it’s a Statement of Work or a Scope of Work – or a combination of both
- What contracting/commercial model should you use and how does this impact the SoW? (Hardware, software, SaaS? GaaS? Performance-based? Outcome-based?
- Be clear about what your RACI is around your SOW. Is there clarity over who will draft the SOW and their competence to do it?
- Be clear what is in and out of scope
- Ensure thorough understanding of requirements (too many SoWs are fundamentally flawed by incomplete or imprecise proper requirements analysis – and a tendency to suppress or ignore inconvenient requirements)
- Validate the capabilities of both sides (can the requirements be met?): who is best equipped to do what? Is the scope realistic? Cost and risk efficient?
- Ensure adequate review of the draft SOW (stakeholders)
- What is the likelihood of change and how will it be managed?
- What are the roles and responsibilities in ongoing implementation – obligation extraction and management
- Think about setting milestones, and whether the SOW might need redefinition when a particular milestone is reached – do you need an agile approach?
I think most people would agree that lawyers are in general very intelligent people. But that doesn’t mean they are always equipped with the right or the best intelligence – and recent research suggests that they are ignoring changes that could equip them to deliver better results.
Lawyers today base many of their decisions on opinions, rather than facts. That is because their access to data is inevitably limited – there are a finite number of precedents or examples that can realistically be accessed. It is also because some key aspects of legal work are based on personal taste and judgment – for example, what clauses to include in a contract or what words to use in its drafting.
An element of personal judgment is always valuable in any professional discipline, but the more that this judgment has a sound base of analytical data, the more likely it is that the right outcome will be achieved. It is in this context that lawyers are facing a remarkable opportunity – but it is an opportunity that many consider to be a threat. It’s time to think differently.
Awakening to a new world
According to a recent report published by Thomson Reuters (“Ready or Not: Artificial Intelligence and Corporate Legal Departments”), less than 5% of in-house counsel are actively using or considering the use of artificial intelligence. Less than 10% see artificial intelligence having a role in identifying risk or predicting outcomes. For most, any real impact from this technology is viewed as being at least five years away – and even then, they think it will largely affect costs and efficiency. So it is perhaps not surprisig that few feel any great sense of urgency to understand more.
I think they are wrong – very wrong. And I will explain why with an example.
AI is fast coming of age
Last week, I sat through a demonstration of an artificial intelligence system, developed by an in-house lawyer and in enterprise-wide operation at a US$33 billion corporation. Drawing from a database of multiple past contracts, with some 30,000 terms and term variants, the system undertakes automated analysis of any incoming customer contract (about 80% of the corporation’s business is undertaken on customer terms). The output from this analysis is a color-coded report on the extent of individual term variation from accepted business ‘norms’. More than this, the system also suggests pricing actions based on those variations.
At present, if the report identifies significant departures from the norm, it then goes to a qualified contract management or legal reviewer. They undertake a risk and mitigation analysis, using a pre-formatted approach which then feeds back into the system. Behind the scenes, that system is quietly storing and learning, readying itself for the day when much of the mitigation work can also be undertaken by the machine.
Intelligent … but redundant?
So does this mean artificial intellligence will soon replace the need for lawyers? As the example illustrates, an AI-based system can indeed make better use of data because it is not limited in terms of volume or speed. Therefore it will offer not only more fact-based information, but it will also be far more astute at assessing probability and consequence.
However, what all that data offers us is the chance to use human intelligence in different ways. Our work will increasingly be focused on interpreting the ‘facts’ that AI offers – for example, in identifying where a change of policy, process or practice might give us a source of cost reduction or competitive advantage. We will also be able to undertake risk scenario planning, not just on an individual agreement, but across entire portfolios (for example, a business unit, a geographic region, a customer set or contract type). And of course, an AI system cannot anticipate or deal with change or unexpected events (though it can help us quanify their consequence – often within minutes).
Artificial intelligence will rapidly become pervasive. Successful businesses will be those that are most effective in marrying AI with human intelligence – in other words, equipping intelligent people with intelligence. It is time for the 95% who believe that change is somewhere in the distant future to awaken, prepare and ensure they are ready for these exciting, though challenging, changes. At IACCM, that is certainly the support we are providing to our members.
Commitment Matters 