The In-House Experience: Valuing Your Contracts and Your Lawyers
In 30 years as in-house lawyer and consultant, I have not yet come across a company that measures and values the performance of its lawyers with reference to the contracts they complete.
By establishing a benchmark of what a good contract looks like for your business you can do 3 things:
- Maximise the value of every deal
- Ensure legal compliance and protection
- Measure and reward the performance of your legal team.
I think this can be achieved by the application of a mathematical formula:
This isn’t it….
…but I do have a model which takes into account, and gives a “weighting” to; the monetary and strategic value of the deal, the complexity, the number and “awkwardness” of the other side(s), the achievement of key commercial terms against pre-set parameters, the achievement of standard boilerplate terms and, finally, the amount of time taken. This model will need to be tweaked for each industry, business, and operating environment but, once established, can be transformative.
By measuring finalised deal terms against the established model, a business can achieve the above 3 things. It can also form part of a system of checks and balances and ensure that all deals are reviewed and compared to the business approved standard before signature.
A similar model can be adopted to measure the conduct of litigation with, if anything, more variables.
The results of such measurement will assist with valuation of the contracts, the lawyers and the business itself and make annual audits easier.
Maximising Contract Value
Most contracts have a key, and obvious, value. The price. This, however is only part of the story. In valuing a deal or a contract, and ultimately the business, the full picture is more complex.
Contracts terms come in an almost infinite variety but there are certain elements which go to the value of the deal itself. How these are weighted will vary according to the industry and the types of rights and obligations involved but the key terms will generally include:
- Price and payment terms
- Strategic value to the business
- The products, services or rights acquired
- Obligations and responsibilities
- Security terms and financial guarantees
- Term and termination
- Guarantees of quality or timely performance.
- Approvals and processes
- “Boilerplate” protections.
The lawyer negotiating and finalising documentation will have to ensure value is maximised. He will be responsible for finalising the deal in line with the agreed key commercial terms and within agreed legal parameters. If he manages to improve on those then this will be acknowledged and credit given when recording the final deal.
Any material variations will need to be agreed internally as part of the approvals and signing process but otherwise the legal team can be entrusted to complete the deal as quickly and effectively as possible. Individual situations and deals will vary and in many cases the commercial team members will choose to remain part of the negotiating team but the balance of responsibility should shift substantively, if not always wholly, to the lawyers.
Initial negotiations will normally establish a deal in outline, probably covering most, if not all, of the key commercial terms. At this point I suggest that the appropriate member(s) of the legal team be fully briefed and negotiating parameters agreed. The deal should then be handed over to the legal team to finalise. This frees up the deal makers to do what they do best and look for new opportunities. It also gives responsibility to a legal team beyond that which they are usually given which will incentivise and motivate them.
Legal Compliance and Protection
This area is generally seen as the lawyers’ responsibility. In most cases no-one else is particularly interested but there is an expectation that all points will be addressed. These generally become more or less standard practice within the relevant industry and so, with judicious use of precedents and templates and some sensible negotiation are reasonably straightforward for the lawyer to deal with.
However they are still of great value and importance. Fines for example can be business-busting in the areas of say competition law and anti-corruption. Lawyers will be expected to finalise deals that cover off all compliance and protection issues with no substantive deviations from the company’s accepted “norm”. This will include so-called “boilerplate” areas such as indemnities, representations and warranties where any such deviations will have to be explained, justified and agreed.
Generally speaking the easiest way for a legal team to ensure compliance and achieve maximum protection is to use the longest clauses they can find for every topic in every contract and then to refuse any suggested changes. However, if your legal team is incentivised to finalise deals speedily they will find more sensible, and straightforward, ways to agree terms while maintaining adequate protection. In time this will lead to sensible shorter precedents and standard forms and a willingness to be pragmatic on issues that do not go to the heart of a deal.
Measuring and Rewarding Legal Performance
Most lawyers in an in-house environment are overworked and under constant pressure to deliver – work prioritisation can come down to who shouts the loudest, or at least who is more senior. However if the value of each contract is established in advance and the lawyer is recognized and rewarded for the speed and quality of the finalised deal then he or she will be incentivised to complete deals quickly, to a certain quality and be rewarded accordingly.
Heads of department can use the tool during catch-up meetings and to form the basis of appraisals. A lawyer can then be recognized for the number of deals finalized and the quality of the finished agreement. Bonus marks can be awarded for deals that are of significant value to a business and for adding value to a deal such as where the lawyer negotiates a more substantial rights or term package than that originally agreed in the key commercial deal.
This brings the lawyers into the business fold in many significant ways. They are no longer an add-on to the process but an integral part of it. They will be incentivised to achieve what is in the interests of the business because it has been defined and agreed. They will also get to share in the rewards and the success itself. In my experience it’s fantastically important to be included and recognized for contributions to success.
About the author:
This article forms part of a continuing series by Richard Dalby on managing, and getting the best from, your in-house legal team.
- Performance & Reward: http://www.halebury.com/the-in-house-experience-performance-and-reward
- Working Smarter: http://www.halebury.com/managing-an-in-house-legal-team-working-smarter
- Management & Delegation: http://www.halebury.com/the-in-house-experience-management-and-delegation
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