When Contract Policies Do More Harm Than Good

We've written before about the "one size fits all" approach to contracting, and the problems it can create. Now IACCM President Tim Cummins has blogged about the same problem, with some interesting new research data.

In short, a hard line approach to standard form, take-it-or-leave it contracts seems to be back-firing on the Legal teams that seek to impose it, at least on the procurement department. Why, because suppliers don't like it, they push back and negotiate, and Legal ends up getting dragged into the process more than they would like.

Instead of using flexible tools like automated document assembly to empower procurement and accelerate cycle times, the IACCM research shows that:

1. Contract cycle times have been increasing; and
2. Legal is seen as a "road block" by 40% of procurement teams.

Further evidence that standard form inflexibility really doesn't work for business contracts. Contract automation is a much better solution.

Everything You Ever Wanted to Know About Risk

If you ever wanted to learn about risk -- what it is, where it may be hiding, how to manage it, and how to pass it on to someone else -- then RIMS is the place for you (and thousands of other insurance and risk professionals). The Risk and Insurance Management Society is having its annual gabfest, and it’s on right now at the San Diego Convention Center.

Sessions include everything hot in the insurance world right now, from California Wildfires (no pun intended), to Contractual Risk Management: A Potential Hot Potato (ditto). This latter session makes a good point about what a wonderful and dangerous tool your corporate contracts can be for shifting risk around. Stick the right clause in here and, hey presto, a big scary risk lands in someone else’s lap. Stick the wrong clause in there, and an even bigger risk lands in yours. It’s easy to see why more and more people are interested in tighter contract standards and processes.

If you want to create tighter contracts without huge legal bills, then drop by the Exari booth (3114) at RIMS. We’ll be more than happy to show you the latest web based tools for creating great contracts, with a whole lot less risk.

For RIMS conference info, visit www.rims.org

Why Law Departments Struggle to Improve Productivity

As mentioned in a previous post, the ACLA/CLANZ Legal Department Benchmarking Report 2008 found that Australian and New Zealand general counsel overwhelmingly view workload / time pressure as the most pressing issue they face.

However, relatively few law departments manage to improve their productivity and thereby reduce the workload of their lawyers. According to former CLANZ president Ron Pol (whose company conducted the survey for the benchmarking report):

"Many legal teams could implement systems to improve productivity and save money. The hold-up is not usually financial – there’s always budget to boost productivity – but more to do with attitudes. One general counsel recently told me that his legal department would rather just tell the chief executive that they’re doing a good job than take the risk that objective measures might indicate areas for improvement. For most of the participants in this research, however, ‘it works, so why change?’ is probably the wrong question. ‘It works, but can it work better?’ is the mark of a new breed of legal managers, constantly on the lookout for new ways to improve the effectiveness of legal service delivery. For some companies and government agencies, even a 10% improvement can mean millions of dollars in savings."

I certainly agree with Pol that process improvement can potentially deliver millions of dollars in savings. However, I think there are a number of reasons why some law departments are unable to unlock these savings, including:

• Background - the majority of in-house lawyers started their working life in law firms. Process improvement projects often don't make sense in law firms where the "time billing" business model prevails. Accordingly, in my view, most lawyers are not taught to think in terms of analyzing and improving business processes.
  
• Attitude - lawyers, by nature and by training, look for risks before they look for opportunities. As with anything, the opportunity to save money by improving processes has attendant risks. Accordingly, for many general counsel a process improvement project just feels too risky.
  
• Organizational culture - it is difficult to imbue any team (let alone a law department) with a culture of continuous improvement. However, for an exception to the rule, see the Dupont Legal Model.
  
• Resources - law departments are often simplistically viewed as cost centers that should not be allocated the resources (people, processes and systems) necessary to successfully implement process improvement projects.
• Metrics - in the case of Australian and New Zealand law departments, the dearth of industry data has meant that there has been a lack of awareness of what's actually possible.

The good news is that our customers are testament to the fact that there are innovative law departments out there that have managed to embrace change and save their companies millions of dollars as a result. But more on that another time.

Benchmarking Data for Australasian Law Departments

In the United States, legal industry consultants have been publishing law department benchmarking reports for years. (See, for example, the annual law department surveys produced by Hildebrandt and Altman Weil.) Such reports provide the proactive general counsel with lots of useful information for analyzing the current performance of his or her department against that of industry peers and taking corrective action where appropriate. Unfortunately, similar data is far less common for legal departments in other countries.

So, the release this month of the ACLA/CLANZ Legal Department Benchmarking Report 2008 was big news. Commissioned by the Australian Corporate Lawyers Association (ACLA) and the Corporate Lawyers Association of New Zealand (CLANZ), the report delivers the results of a survey of more than 125 Australian and New Zealand companies and government agencies that together spend over a billion dollars on lawyers each year.

One survey metric of particular interest is the list of most pressing issues for general counsel. 32% of respondents cite high workloads / time constraints as the most pressing issue their law department faces today (more than double the next most pressing issue).

Click chart to enlarge

The top six issues (by percentage of respondents) are:

• Workload/time pressure (32%)
• Attract/retain/motivate good lawyers (15%)
• Demonstrate value of legal dept (14%)
• Keeping appraised of activities with legal implications (9%)
• Reduce outside legal costs (8%)
• Resource/budget limitations (6%)
  

Asian Legal Business found it surprising "that a reduction of outside legal costs ranked only fifth on general counsel's list of most pressing issues." I, however, am less surprised given that many law departments have long had sophisticated tools for managing outside legal spend (such as tender processes, panels, mandatory estimates and e-billing).

I would expect workload to be far more of a problem because, in my experience, relatively few law departments actively try to improve productivity and deliver meaningful workload reductions. So the question then is, why do so few law departments try to improve their own productivity? Well, that's a topic for another post.

Non-standard Standard Terms

Each year, the International Association for Contract & Commercial Management (IACCM) conducts a survey of negotiated contract terms. For 2007, the top 10 negotiated terms (according to participants from in-house legal, contract management and procurement groups in 800 organisations) were:

1. Limitation of Liability
2. Indemnification
3. Price / Charge / Price Changes
4. Intellectual Property
5. Termination (cause / convenience)
6. Warranty
7. Service Levels
8. Payment
9. Delivery / Acceptance
10. Confidential Information / Data Protection

Now, the above list seems reasonable enough to me. But I am curious about the reliability of the underlying data, as it would be very difficult for each participant to maintain accurate records on the number of negotiated terms across their portfolio of contracts. To achieve this, they would need a system in place that tracks:

• What constitutes "standard wording" for every clause (or at least for the main ones) in each contract type
  
• The total number of contracts the organisation has executed
• Those clauses in each executed contract that deviate from the standard wording

There are contract creation and management systems that can track the above information. But, I'd be amazed if any organisation has managed to define and systematise its contracting processes to the extent necessary to track such detailed information across its entire contract portfolio.

That said, the IACCM is to be applauded for leading the effort to define, measure and improve organisational contracting processes.

The Problem with February 29th

I don't like February 29th. It creates too many problems.

My great aunt was born on a leap day, and I can never remember when I'm supposed to wish her a happy birthday. 28 February risks prompting a reaction of "What, I look that old?" On the other hand, waiting until 1 March creates the potential for an "I can't believe you forgot!" Finally, there's always the chance that she's a hardcore leapling - only wanting to celebrate when there is a 29th.

Leap days can also create contracting headaches. For example, you've been asked to turn around a new agreement by yesterday. You grab an old document and start editing it. You correctly enter "29 February 2008" as the start date. Then, knowing it's a one year agreement, you inadvertently put "29 February 2009" as the end date. In all the rush, you miss the fact that you have entered a non-existent date. You better pray that the parties remain friends.

What we really need is a replacement for the Gregorian calendar (or a smarter way to draft contracts).

What the heck's a CLM?

My first exposure to the concept of a CLM was when I started work straight out of law school. I was involved in a due diligence and I received an email from a partner telling me to collate another set of contracts (of which there were thousands) in time for the next morning. I meant to forward the email to my fellow grads telling them what a !@#$%^&* the partner was. Unfortunately, I hit "Reply" instead.

Times have changed, and these days CLM is just as likely to refer to Contract Lifecycle Management software (or simply Contract Management software). But what is Contract Lifecycle Management? While there's no single definition, it encompases an organisation's entire contracting process, including:

• Creation
• Negotiation
• Approval
• Execution
• Storage
• Commitment Management
• Renewal

Interestingly, according to the IACCM's Contract Management Software: Market Sizing And Status Report, "[a]doption of contract management software has been slow, even though studies have consistently reported the benefits achieved by those companies and organizations that have implemented."

The reason? A lack of defined processes. In most organisations "contract management remains one of the last undefined areas of activity... As a result, successful contract management software projects require a commitment to process definition which raises tough political questions regarding ownership, authority and accountability."

So, where does that leave us? Basically, when done properly, automating the contracting process provides great business benefits in the form of better control, workload reduction, risk management and cost/revenue improvements. However it needs a powerful executive sponsor to make it work.