IACCM - International Association for Contract & Commercial Management

There is a growing body of evidence indicating that traditional legal approaches to the management of risk are too narrow. They can frequently result in unintended consequences that themselves represent risk to the business. Best practice organizations are tackling this by greater integration of the Law Department into the business and through more rigorous evaluations of probability and consequence, undertaken by people or teams with cross-functional skills and perspectives.

McCormick (2004) defined legal risk as the risk of loss to a company that is primarily caused by: (1) a defective transaction; (2) a claim (including a defense to a claim or a counterclaim) being made or some other event occurring which results in liability for the company or other loss; (3) a failure to adequately protect assets owned by the company; or (4) change in the law.

He did not define the boundaries of his thinking, but based on IACCM experience, we feel that Legal Risk must include not only external risks (of failure to comply with the law or to raise grounds for dispute - for example through ambiguity or conflicting terms); but also the internal risks that may result from the interpretation or application of those external factors.

Lawyers draft terms that are designed to comply with the needs of the law. However, such compliance may carry very real internal costs. It may reduce competitiveness or cause internal process inefficiencies, either of which means that selected terms and conditions have an economic cost. And the desire to protect a legal position may often lead to a failure to consider the ethical position - and therefore increase the likelihood of litigation.

If lawyers do not understand or research the impact of the terms they have drafted or the policies they propose, and explore whether alternates might drive different results, they have clearly created a 'transaction defect'.

A recent study by researchers at the University of Michigan Law School provides some excellent examples. They explored the terms typically employed by the major automotive OEMs in the US and whether these represented 'economic logic'. They discovered many examples where the way terms have been established and implemented is not beneficial from a financial performance perspective. A great example was in the field of warranty, where the contract terms and procedures have caused resolution of claims against suppliers takes nearly 5 times longer in the US OEMs compared with companies like Toyota and Honda.

Other work - for example, by the Faculty of Economics at the University of Groningen - has demonstrated the impact of contracting behavior on high-tech alliances and the fact that a 'one size fits all' approach to standard terms will often sub-optimize results in key strategic relationships. And Ed Dauer, Dean Emeritus and Professor of Law at the University of Denver, has indicated how a mentality that seeks to protect in the event of litigation frequently increases the probability of that litigation occurring. He draws on examples from the banking and healthcare industries to highlight the danger of approaches that are based on self-defense, rather than procedures that generate trust and collaborative resolution of issues. As a leader in the growing 'proactive law' movement, Dauer represents a challenge to many of the conventional approaches - and perceived interests - of traditional attorneys.

New approaches are not solely dependent on new attitudes. It is clear that technology also has a part to play, by enabling consolidation of data and experiences and the ability to make portfolio assessments. But readiness to question old methods is key to change - progress depends upon leaders who seek a new role for the contracting and relationship process. That new role focuses on prevention of disputes through rules and procedures that encourage superior relationship and governance techniques. Such approaches recognize that to err is human, but that dishonesty or subterfuge merit punishment.

In today's complex, multi-cultural business environment, approaches to legal risk require a new blending of legal and ethical standards that will in turn restore social trust in the integrity and value of the profession.

(My thanks go to Tobias Mahler from the University of Oslo, plus the many other outstanding speakers at the recent "Commercial Contracting For Strategic Advantage" conference in Helsinki, Finland. They inspired this article and the continuing research that will promote 'best practices' in handling legal risk. Anyone interested in learning more about the Proactive Law movement should contact Helena Haapio - helena.haapio@lexpert.com)

Maturity Model Launched: New Benchmarking And Quality Tool For Contracting Capability

A team led by Stephen Potts, IACCM Board Member and Director of Contracts & Procurement at Siemens, is currently progressing work to define a standard contracting and negotiation process model. This will be a task and activity based assessment, rather than seeking to define specific organizational roles or responsibilities.

One of the hallmarks of any profession is the presence of recruitment companies. For many in our community, especially those in sales contracting and contract management, there has been a notable lack of specialist firms. This has inhibited recruitment and career development. It has also limited support services in areas like salary surveys.

As a worldwide association, IACCM has actively encouraged the growth of consultancies and placement firms. We have especially supported the development of international capabilities, to support the needs of both corporate and individual members.

The commercial contracts recruitment sector is most developed in the UK, where several firms have vied for leadership. One of these – Campbell Birch – has been a strong supporter of IACCM since inception and recently opened a US office. We interviewed one of the principals, Suzanne Birch, to understand differences she has observed between the European and US market and also to discuss some of the leading trends in recruitment and related issues.

Q: What differences have you observed between the European and US market?

A: Interestingly, the job roles in sales contracting and contract management seem to be converging. In some countries, the term ‘commercial manager’ has been used and typically depicted a wider set of responsibilities. Historically, the US ‘contract manager’ tended to be a bit more administrative, often focused only on post-award activity. Now those differences are blurring and the role and status of contract management groups is both secure and rising in most leading companies.

But when it comes to recruitment, there are certainly differences. One thing I have really noticed is the much lower level of trust and openness in the US. In Europe, candidates are much more forthcoming about age, marital status, personal details. These are things they almost always include on their resume or CV. This means we are far more able to help qualify and advise candidates for a role and avoid people wasting their time. I'm not meaning by this that there are discriminatory practices - just that personal circumstances are often very material in whether there will be a good fit. I feel that in Europe candidates and employers expect the recruitment consultant to be a ‘trusted intermediary’, and therefore filling a ‘quality’ role, whereas in the US it often seems more about maximizing the number of candidates, or a ‘quantity’ role.

Q: Do you think this difference may be due to laws – for example, around discrimination?

A: Not really – the EU laws on age, sex, cultural and racial discrimination are actually pretty similar to those in the US. I just feel there are different assumptions about bias – and there could be many reasons for that. Maybe things will change in Europe as integration there proceeds – perhaps there are issues that are more masked in Europe.

Q: What are the most common reasons for contracts or commercial staff to leave their job?

A: In my experience, there are two overwhelming causes. One is where you have an environment of almost constant change and uncertainty, accompanied by poor communications. The other is when people feel undervalued.

The issue of being undervalued takes two forms. One is financial – but not necessarily because of dissatisfaction with existing pay. We have seen many situations where internal promotion leads to an active job search. This may seem strange, but many companies today offer very limited increases with an internal promotion – just 3 – 7% is not uncommon. That is very disappointing and demotivating to many people. They feel they could get considerably more by moving to another company – and often they are right.

The second form is where the role itself is simply lacking in status and respect. Some of the highest paying companies are seeing major attrition because they do not give their contracts and negotiation staff any real authority or empowerment. That makes a job stressful. It is most commonly a conflict with Legal, where perhaps the law department refuses to delegate and demands review of almost everything.

Q: What about bonuses? There are very mixed opinions about whether commercial contracts staff should be ‘bonused’ or whether this will cloud their judgment and objectivity.

A: There is definitely a trend towards more deal-based bonuses, especially in the services area. Up to 30% is now not uncommon and we come across instances where it can be much higher. It is fair to say that the scale of bonuses is not across the board – this is not like Sales commissions. They are coming on top of the basic salary, which remains aligned with market rates, and are being used selectively to reward performance on major deals.

The bonuses are also applying to both pre and post-award professionals. In the pre-award phase, they are associated with winning new business and there are few ‘controls’ around pay-out. This works in companies with robust risk registers, where there are good checks and balances. In the post-award role, the parameters are mostly revenue, profitability and growth. We have also seen a few schemes based on milestones.

Q: “Homeworking’ is a trend we have seen significantly impacting our community in recent years. From a career and recruitment perspective, do you have any comments on this – has it impacted people’s opportunities?

A: Yes, and I think we are seeing some push-back by employers who feel it doesn’t always work well. As with all models, it tends to be good for some people. But it is easy to get lost, to disappear. And this means not only a loss of visibility, but also a real challenge to maintaining skills, developing new methods and techniques. Some companies have found home workers tend to become less flexible, more resistant to change. So we are seeing employees who are career-minded make increasing efforts to work from a company location two to three days a week – and some companies are now starting to require this. However, that can be difficult in a country as big as the US, where the drive for working from home may be more to do with geographic coverage and efficiency.

Q: Overall, how do you see the prospects for commercial contracts staff – is it a flourishing role?

A: Absolutely. We are working at peak capacity. Finding good candidates for the wide range of openings is our biggest challenge. Many companies are wrestling with complex deals and market opportunities; they need not only the skills of good negotiators, but also talented post-award staff. We are seeing increased consolidation of contracts and negotiation resources into a single and far more powerful group. The lines between sales contracting and procurement are also increasingly blurred. Overall, it is an excellent time to be part of this emerging profession.

Here are three recent examples of contract terms that led to litigation. What do you think the court decided? Send us your suggestions - and we will reply with the answers!

Case 1. Was Seller in breach when it leased a parcel of land within one mile to a company that planned to operate a “Buffalo Wild Wings” on the premises?

"Seller will not after the date of this agreement sell, lease or permit to be occupied any real estate which Seller owns, manages or otherwise controls within one mile of the Land for the purpose of constructing, or having conducted thereon, any fast food ([quick-service-restaurant]) restaurant or restaurant facility whose principal food product is chicken on the bone, boneless chicken or chicken sandwiches."

Association News
Published by IACCM,
90 Grove Street, Suite 01,
Ridgefield, CT 06877
USA