Who is on Your Contracts Team?

How do you integrate strategy and risk into your day to day business activities? Let’s take a look at your contracts as an example.

By Mark J. Guay, PC, Strategic Solutions, www.markjguaypc.com

In the recent Special Report of the National Association of Corporate Directors [“NACD”], their research staff wrote an article entitled; “In Year of Change, Strategy And Risk [are the] Top Board Agendas” [www.nacdonline.org]. They based their research on thousands of email surveys they sent out asking directors to participate in their annual governance survey. They concluded that two of the highest priorities for a board of directors are Strategic Planning and Oversight and Risk and Crisis Oversight. So how do you integrate strategy and risk into your day to day business activities? Let’s take a look at your contracts as an example.

Why? Contracts affect your relationship capital [outside subcontractors], your human capital [inside employees], and your knowledge capital [intellectual property]. So you need to address strategy and risk in your contracts management plan. Here are three important points to help you do so.

First, determine HOW your company integrates risk into its weekly contract negotiations and other activities? You can do so by identifying the range of major risks in your company and then decide which risks you should manage inside and which risks you can safely subcontract out to a third party [outside]. Then, for each process you have in place, ask yourself what risk management is embedded in it and then align your company contracts and policies around it.

Second, identify WHO is responsible for the execution of risk management in your contracts? What is the relationship between your board, your management, and your employees? If your board is pretty much the same as your officers, and there is little difference between your governance and management team, then they will collectively need to define your contract risk strategy and then implement it. Why? In the July-August HBR article [www.hbr.org] entitled “The Execution Trap’ the author writes:

“[I]f we can’t draw a line in the organization above which strategy happens and below which execution does, what is the use of the distinction between strategy and execution, between formulation and implementation? The answer is none at all. It is a pointless distinction that in no way helps the organization. In fact, it does great damage to the organization.”

Third, understand WHAT are the key ways to shift risk in your contracts. If you are a company manager, you are at the front line of your risk strategy so you need to broaden your role to execute these policies. Remember, contracts are not just a “form” that cover a specific transaction. They are your front line risk management firewall. To do so you must first understand key “risk shifting” devices such as indemnifications and disclaimers, warranties and limitation of liability, covenants and conditions, dispute resolution and waivers, etc. in your company contracts in light of your evolving business model.

Lastly, there are two schools of thought regarding contracts. One approach, basically a cost /transactional approach, is based on the premise that contracts are just another legal form that needs to be tweaked. A company simply uses a ‘form” until they are involved in litigation when they seek legal advice and counsel. We call this approach the “Forms to Litigation Plan” (“FLP”). The other approach, basically a value approach, is based on legal counsel working as a team with company managers to draft appropriate risk management positions into your contracts. This creates a “flywheel” where a business can grow exponentially as a result of good risk management practices.

A good company is based on the team approach. Why? The work is proactive and collaborative - not reactive and competitive. So who is on your contracts team?

MarkGuay is an active attorney in Newburyport and a SCORE Client. Mark is a past president of the Newburyport Bar Association and a past director of the National Contract Management Association.