As we face a new crisis, we ask why legal hasn’t learned the lessons from the 2008 financial collapse that other sectors have already taken advantage of. Rico Burnett, Global Director of Client Innovation weighs in on how in this crisis, it’s time to change and learn, before another decade is wasted. Contract Risk Management must be a focus.
After the economic crisis in 2008, the financial industry was hit with some of the most stringent regulations it’s ever faced. From the influential Dodd-Frank Wall Street Reform and Consumer Protection Act, to the special regulatory powers set up by the Federal Reserve that expanded its jurisdiction over other financial institutions and the authority to intervene in case of another market emergency. Banks and financial institutions essentially had to play ball and do better with contract risk management.
This spread to corporations with finance teams operating in a regulation-fueled environment. But for the legal teams, there was little change apart from a dawning realization that contracts and obligations were suddenly of paramount importance. Deals throughout the supply chain were in jeopardy due to economic hardship for example, and organizations rushed to check their legal rights and provisions.
And yes, contract clauses were rewritten, definitions of hardship were expanded, and provisions were re-read more carefully. But essentially law firms were simply contracting the same way they had always done it. Best practice from other sectors had little impact, risk was still left unmanaged (or misunderstood) and technology was still glaringly underutilized.
Now in 2020, we are undergoing a very different kind of crisis. But the significant role of contracts is the same; organizations are once again rushing to find where they stand from a legal perspective. The three major lessons learned around best practice, contract risk management, and technology by other sectors during the 2008 financial crises, have yet to find fertile ground – more than a decade later – in the legal services sector.
For example, most marketing emails from law firms landing in a GC’s inbox last week will be focused on dissecting (in high legalese) the challenges presented by a Force Majeure clause. At no point is the commercial impact of the COVID-19 pandemic mentioned, or the challenge of contract risk management better in this scenario. Law firms are enticing clients by doing the same thing they have always done; telling them that each clause is different and requires individual analysis and specific attention.
But why should all the clauses be different and why hasn’t legal woken up to the fact that there is an alternative way that heralds greater opportunity for them?
For example, does each clause require unnecessary and incomprehensible language? Why have we not learned the lessons from 2008, like the banking industry, to adopt best practice and draft contracts with more standardized commercial provisions, hardship and frustration clauses that are easy to navigate and consistent across the business?
To say that this has just been a challenge over the past decade is overly generous. There have been wide-reaching campaigns, starting with Nixon in 1972, right up and beyond Obama in 2010 who signed the Plain Writing Act to get lawyers to draft agreements, contracts, and government documents in layman’s terms.
Writing in Harvard Business Review and as GC for GE Aviation’s digital services unit, Shawn Burton sets out the case for plain language contracts. He started five years ago and has already seen a marked commercial difference, not only in the speed of business (contracts took 60% less time to negotiate) but also in client appreciation.
Simply rewriting clauses to be as wide as possible has the opposite effect for the commerciality of an organization – it delays agreements, slows down business and in some cases can even extinguish deals if opposing counsel refuses to sign.
Commercial reality needs to be considered, not just to create frictionless business, but primarily because it helps mitigate risk. For example, if there are 100 contracts and 99 of them are worth $1,000, but one is worth £1m, then it’s obvious where the legal attention needs to be. Except with a lack of commercial understanding, law firms tend to pay equal attention to all the contracts.
Standardized contracts with more universal clauses (ones that are written in plain English, but obviously still hold enough weight to protect a business) means legal teams have more time to track just those with critical differences across the major contracts. This then ensures focus is on the most vital issues and highest commercial risks. The banking sector, post-2008, knows exactly where it needs to focus its attention in the event of another market crash by understanding liabilities, and the appetite for risk that each organization carries.
How has the banking industry done this? In part by using the final element in the trinity of lessons learned. Technology.
The FinTech sector has seen a huge boom in the past several years – valued at about $127.66 billion in 2018 and is expected to grow to $309.98 billion at a CAGR of 24.8% through 2022. The banking industry has been using technology to more effectively conduct their business, trades, and investments, but to also get their risk in order and better understand their contracts and obligations.
It’s now time that legal follows suit. Being forced to work from home amid lockdown due to COVID-19 has meant many legal teams have had little choice but to embrace technology. Lawyers should use this newfound acceptance of IT to start getting client contracts in order – categorize clauses, use technology to conduct risk scoring for clients and understand their appetite for risk, balanced against the commercial realities of doing business.
The impact of the COVID-19 pandemic has shown that little has changed in the legal industry since 2008. The past decade or more has been a missed opportunity for law firms to add more value and become a partner, not just a supplier to their clients.
By developing best practice, better understanding risk – particularly commercially – and maximizing the benefits that technology initiates, the legal sector can ensure the next decade isn’t lost to simply just doing the same work, in the same way, with the same results. To get you started with your contract risk management, we’re offering a complimentary contract review of up to 100 of your most important contracts.