(008) In the Legal Calendar, 2021 is the Year of the Contract
A big announcement came in the summer of 2020 when Deloitte finally declared what many knew was coming – their entry into the legal services business. In short order, Deloitte hired top guns away from established Alternative Legal Service Providers (ALSPs) and law firms to establish a toehold in an ever-increasing market.
With decades of experience helping companies streamline operations, Deloitte knew innovations in contracts would be critical. Thus, they partnered with World Commerce and Contracting (WCC), a nonprofit contract research and advocacy group formerly known as the International Association for Contract and Commercial Management (IACCM), to survey the current global state of contract management and innovation. A report on their findings (released February 2021) is here:
The big stand-out for me was that the COVID epidemic had stripped bare all the failings of how we manage contracts and relationships. As supply chains broke, offices closed and Force Majeure became an everyday concern, businesses scrambled to figure out what their contracts said (if they could find them). Never before had the totality of contracts already signed been more important.
As the dust settles, the effect is clear: A staggering 70% of organizations surveyed said that “…increasing digitization of the contract management lifecycle is a medium-high priority”. What particularly struck me was the difference in contract oversight and management costs between short-term (transactional) business and long-term, complex relationship business. In retail and consumer goods, 2-4% of a transaction’s costs are related to the contract itself. As business complexity increases however, contract costs can exceed 15% of the total. If we don’t change course, that number will surely continue to increase.
That number – 15% – reminded me of another business cost that went from marginal to substantial: Nails.
In my teens, I worked as a carpenter for builders and maintenance services. Generally, I’d need my hammer, a saw and a box of nails to get jobs done. As my work grew from simple rough carpentry to building houses myself as a developer, fastener technology and costs increased substantially. Nails used to be like fuel in your car’s tank: you always needed to have some, and when you ran low, you bought more. The cost of nails per job was usually low enough that you didn’t need to figure it into quotes, or if you did, it was a relatively small flat figure ($100 for 150lbs of nails to build that house).
In construction (as in business), regulations, requirements and complexity increased and created an added cost burden to getting a day’s work done. Loose framing nails became collated fasteners for nail guns. Other nails became screws. Wood connections now needed steel brackets like hurricane ties and earthquake straps. Even the materials themselves changed: engineered lumber like LVLs, LSLs and open-chord trusses replaced chunks of solid wood hewn from trees (which, of course, now required more expensive fasteners).
Early in this transition, I broke even (at best) on a few projects because the hidden cost of all the steel involved. Not only did I need to work with architects to specify and order different types of engineered lumber, but I then needed to perform a pre-build review of the entire project and list out all the fasteners and connectors required. Quantities had to be right – order too many, and I’m stuck with an application-specific part I probably won’t need again. Order too few and I cripple job progress while awaiting more parts.
The silver lining: as I got a handle on the added costs, it became clear that I could easily predict them. I’d take my total lumber costs for a job, multiply by .15, and I’d have my cost of steel.
To draw the comparison, the costs of “keeping the project together” went from 2% up to 15%, exactly the same increase in contract management uncovered by the Deloitte/WCC survey. Just as a construction project now uses myriad wood-based materials and metal connectors, modern business now needs far more than just simple contracts: NDAs, Data Sharing Agreements (DSAs), Master Service Agreements (MSAs) Software as a Service agreements (SaaS), Information Security questionnaires (InfoSec), the list seemingly never ends.
The difference between the two worlds is that fasteners are manufactured under strict quality controls, with periodic internal and third-party stress testing, whereas contracts and their adjacent documents have no standardization or quality control. Very few industries share agreed-upon contract language or formats. We pretty much know how a business relationship will work, and who will do what. So why can’t we figure out what language to use (your paper or mine)?
Between regulations, geographic spread and the ongoing nature of most modern business relationships, the cost of just “keeping the project together” has become a significant portion of the overall, with no perceived benefit to the parties. The good news here is that technology can help solve many of these problems. However, I’m forced to remind readers that Legal Engineering isn’t just about using technology – good engineering means good design, both in systems and processes. Sometimes if you design solutions elegant enough and grow relationships organically, you eliminate the need for all those clunky connectors.
Leave a Reply