The ‘Sales Prevention Department’: Who Has Control … the CEO or the Lawyers?

Just call them the “sales prevention department.”

At any small business, it can be very harmful to the bottom line if the CEO and top executives let their lawyers get out of control.

There are many tools used every day in almost every area of business, such as effective budget forecasting, setting deadlines, leveraging vendors, strategic sourcing, and quality control. Oddly enough, the one consistent area across the corporate world where these tools are nearly nonexistent is law.

Strangely, a typical business is usually unable to effectively oversee its lawyers, and pays a tremendous cost for not doing so.

The goal should be to move to an alternative path where lawyers come under the normal business planning umbrella to drive and extract maximum value. Law should be a profit driver; right now it is sadly the opposite.

A hybrid vision dominates the common business leader view of the legal function: they either care too much (for major disputes or deals) or too little (for everything else).

CEOs, CFOs, and board members can put tremendous value on lawyers, but only within the narrow parameters of a major litigation dispute or merger and acquisition (M&A) transaction. These situations drive a great deal of attention among the players.

Daily practice SEEMS mundane by comparison.

The cost of a corporate legal department and outside counsel expense often amounts to a tiny fraction of overall revenue, usually less than 1-2 percent. As a result, no one particularly cares about driving efficiency and quality control in the legal arena as compared to, say, the manufacturing or procurement departments.

But you actually pay a huge price for this kind of thinking that is not reflected within that 1-2 percent budget parameter. For example, lawyers drive down sales revenue.

Every year, the International Association of Contract and Commercial Management conducts a survey (pdf) of the top contract terms most heavily negotiated by lawyers and contract managers. Every year, the top two terms are: (1) indemnification and (2) limitation of liability.

This makes little to no sense.

These provisions are targeted to one kind of risk: exposure to significant damages in litigation. But think of this risk as being at the very tip of a large pyramid of risk.

At the base, what is your most likely risk? It’s having an unhappy customer who leaves you to go to your competitor.

As a result, the most focused terms in a contract should not be litigation risk provisions, but the terms describing the good or service you are selling, what it costs, when it will be delivered, and when payment is due.

Almost ALL disputes between you and your customers and vendors will involve these issues. And almost all of these disputes, on the sales side, will be resolved NOT by litigation but by your customers simply ceasing to do business with you.

Moreover, your lawyers and contract managers make the process of concluding a deal inordinately painful and time-consuming, costing you sales revenue, customers, sole source vendors, and profits due to slower or lost sales and savings. Consider the entire telecommunications industry, where contracts are routinely voluminous and can involve years-long negotiations. This even affects simple issues.

A Whole Room Full of Experts, and No One Gets It

I once had a client who wanted to close a deal with a telecom vendor to add a new service. The vendor advised the client that the cost would be approximately $20,000 and sent her a new contract.

This new contract rested in a byzantine web of documents. It was a service order attachment to a statement of work that was an attachment to another agreement, which came under a service agreement — which came under a master agreement.

To understand this new contract, one had to understand all the other documents whose provisions applied as well, requiring a person to read and understand hundreds of pages of dense, vague, confusing, overlapping, and often self-contradictory material. Even worse, the new contract contained five pages of confusing liability language and completely lacked the two most important terms: a complete description of the new service to be provided, and the price.

NO ONE at my client, including in-house counsel, sales, IT, finance and procurement experts, could understand this new contract. We set up a conference call with the telecom vendor, and their sales, account representative, IT, paralegal and in-house counsel team attended.

All of them admitted that they couldn’t really explain what the confusing language in the new contract meant. They also admitted that the contract didn’t include a complete description of the service nor the price.

However, their in-house counsel insisted that they refused to change the contract to remove the confusion, describe the service, and set the price. These negotiations took months, and the telecom vendor’s own salesperson grew so frustrated with his in-house attorney that he took to calling me directly (with his attorney’s permission).

He complained about his entire legal department, calling them the “sales prevention department” and asking me to brainstorm ways to save his deal. Ultimately, we were unable to do so, and my client turned to a competitor, closing a deal done right away for the same service.

Now, losing out on $20,000 might not sound like much to a vendor with a multibillion-dollar market capitalization. But how often is this situation replayed, year after year, for this vendor? If it happens hundreds of times, that’s millions of dollars lost.

Additionally, the vendor could also be dragging down sales productivity, causing the company to book less deals each quarter because of these time-consuming negotiations.

Eight Steps to Manage Lawyers That Just Don’t Get It

What’s the alternative? Ask the following questions, and you will be well on your way to a new path forward and capable of properly controlling the legal function and radically increasing its value:

1. Do you send out legal work to outside counsel that your in-house lawyers and contract managers have the expertise to perform?
2. If so, why? Is it because there is too much work to do in a timely manner at a high degree of quality?
3. If there is too much work, have you implemented a speed contracting process designed to complete better quality work in a faster manner? To make clear how achievable this is, I designed a contracts process for a Fortune 500 company that, on average, allowed the company to complete deals 65 percent faster.
4. Have you also implemented a knowledge management system?Implementing a knowledge management system is vital. For every document created, there should be a clear negotiating strategy, with opening and backup positions, walk points, alternatives to the deal, and already written legal language to execute each issue. With a properly crafted system, you can draft documents and negotiate disputes much more quickly, using a “Lego” block-like approach to snap into place your positions and legal language effectively with speed and ease.Knowledge management is the key to greatly improving the quality of your contracts, setting proper customer expectations, clearly defining obligations (especially around the key issues of goods/services descriptions and payment), while simultaneously speeding up the time it takes to put documents together and close deals.
5. Do you also hire law firms for a great deal of legal work that your employees do not have the expertise to perform? If so, then this cost can be greatly reduced by using process improvement and knowledge management to capture a deep understanding of the work performed by outside lawyers and embed that knowledge within your organization, saving you future legal bills while massively improving the productivity and quality of your existing performers. Even better, by doing so you can apply lessons learned to prevent future litigation and transactional meltdowns by improving your non-legal functions and processes that could cause these kinds of problems.
6. Do you measure cycle time for contract negotiations, by type, business supported, and the individuals involved? This is extremely important. Without measurement, you cannot seriously evaluate the damage to sales and savings by needlessly long contract negotiations and lost deals due to frustrated customers walking away. You also don’t know who your star performers are who close deals quickly, and who the laggards are that drive down profits.
7. Do you use strategic sourcingto hire outside counsel? Across the corporate world, legal services is one of the very few areas not generally supervised by strategic sourcing procurement experts. This is because properly implementing strategic sourcing for the legal industry requires a fairly deep understanding of the legal services business, within which traditional procurement savings techniques usually fail.Procurement experts are generally not aware of the wide range of key performance indicators and metrics designed specifically for outstanding legal performance. As a result of this overall lack of technique and awareness, lawyers quite rightly object to coming under the thumb of strategic sourcing and are almost always successful in remaining completely independent.
8. Do you use flat fee and alternative fee agreementsfor all of your outside counsel matters, or do you just pay the hourly rate? The hourly rate incentivizes the worst aspects of legal practice, including inefficiency, overbilling, extremely long-lasting matters, and poorer performance.Making any service provider, including a law firm, focus on how to perform work better, faster and cheaper, is a much smarter move. Flat fee and alternative fee agreements create better incentives, forcing your outside law firms to better understand their people and their business by increasing productivity and quality while reducing waste to make flat fees profitable.

The solution is to move to an alternative path on which you can start answering the above list of questions effectively, bring your legal function under business control, and make it a profit driver for your company.

This topic and more are included in the Vistage Connect™ peer advisory sessions. Learn more.

Jason Mark Anderman is the president and founder of WhichDraft Consulting, where he shows executives how to harness contracts for profits by using speed contracting systems, strategically sourcing legal work, and making alternative fee arrangements profitable — and also created the automatic drafting contracts web site, WhichDraft.com.

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