Capturing The Value In Your Legal IssuesTreat Your Contracts As A StrategyWritten by Craig M. Kaiser, Founding Partner Written by Craig M. Kaiser, Founding Partner Written by Craig M. Kaiser, Founding Partner Contracts aren't just pieces of paper. They're an integral part of your business strategy. Founding partners Gregory Phillips and Craig Kaiser have been working together for almost 30 years. Starting at Bracewell LLP, a large Texas-based law firm, they eventually both worked as in-house counsel at Compaq, the prominent PC hardware maker and major player at the beginning of the technology boom. It was at Compaq where they learned the tremendous value that legal counsel, specifically contracts, can add to a business. Unfortunately, many business owners don’t see their contracts as a part of their overall business strategy. They’re simply pieces of paper -- a nuisance they have to sign. But when you view your legal contracts this way, you are missing out on what could be significant revenue. How Compaq Did It Early on, Compaq used their contract negotiations to add value to the company. One strategic move they made was to not hold any inventory of their own. By specifying this in their contracts with suppliers, the supplier was then obligated to house all inventory. (This is known in the industry as JIT inventory, or, “just-in-time” inventory.) Compaq was also strategic in its contracts with logistics and freight providers, putting as much cost on those providers as possible. These negotiations eventually allowed Compaq to grow from a $10 billion company to a $50 billion company. In fact, a little-known fact about these strategic negotiations is that Tim Cook, the current CEO of Apple, worked at Compaq for just nine months during the time the company was developing these contract strategies. He left Compaq to work at Apple and reportedly took these strategies with him. Today, Apple uses some of Compaq’s original contract strategies for products such as the iPhone and iPad. How You Can Do It Too Clearly, contracts can bring great value to your business. And you don’t have to be a company the size of Apple or Compaq to reap these benefits. We work with mid-sized businesses every day, and their bottom lines have benefitted greatly from being more thoughtful and intentional about what goes into their contracts. For example, our client Stephen Wright who owns Wright Business Technologies — a managed IT service — came to us for help when he was dealing with a few one-off disputes. At the time, Steve didn’t have any contracts with customers and suppliers. Business was good at about a million a year, but we knew if Steve could get a few contracts in place, business could be exponentially better. After creating some standard contracts and working strategically to negotiate them, Wright Business Technologies grew seven-fold over the course of six years. Contracts add value to your business. But not just any contracts. The templates you download from the internet will not necessarily lead to business growth. In fact, they could do the opposite. When it comes to ensuring your contracts add value to your business, use the following strategies: Strategies to Ensure Your Contracts Add Legal Value 1. Treat your contracts as a strategy. The first strategy is just that: be strategic. Compaq’s original strategies are a great example. How much expense can you put on the other party? What existing contracts do you have that are costing you more than they’re worth? Do you have any verbal agreements that need to be contractually bound? By locking in a client on a retainer, your revenue could become more consistent. Or, by assigning terms to a current vendor, you could be saving money. The point is to see contracts as business-added value, rather than simply another piece of paper you have to sign. POLL What are the biggest risk in your contractual relationships? (Check all that apply) What are the biggest risks in your contractual relationships? Monitoring expiration dates and automatic renewal periods Lack of standardization of contract systems, formats, and clauses Inability to locate and retrieve contracts Keeping up with legal and risk compliance No clear owner in the company who is responsible for overseeing performance of the contracts Failure to track commitments, deadlines, deviations and milestones Other 2. Develop the right terms It’s no use having a stack of contracts if the terms within them aren’t useful. This was a lot of what we did with Wright Business Technologies. One term owner Stephen wanted to stipulate in every contract was that he would not be responsible for a client’s data loss no matter what. This has saved him from what could potentially be a huge liability and expense. Because he is protected in his contracts, data loss doesn’t have to be a concern or a cost. POLL Where do your contracts reside in your company? (Check all that apply) Where do your contracts reside in your company? Hidden in an underground bunker command post, deep in the bowels of a hidden bunker Secure online management system Unknown Other 3. Develop an effective contract management system. According to a study done by Contract Works, a contract management software company, businesses save an average of 57% in their contract processes if they are using a managed system. Using a system that automates how your contracts are stored, when and how payments are sent, triggers for renewals, etc., is vital if your contracts are going to ultimately bring you value. If you fail to manage your contracts efficiently, you fail to save money, and you may find yourself accidentally spending more than necessary. DuPont, the mammoth science and innovation company, recovered $5 billion in five years simply by looking at their contracts and better administering them. For example, in their deal with Motorola, who provides walkie talkies for their numerous plant employees, DuPont found a clause they had previously overlooked that guaranteed a $500-million discount should DuPont purchase a certain number of walkie talkies. DuPont had qualified for this discount for years but hadn’t noticed this clause until they began better administering their contracts. This ended up saving DuPont millions, and eventually billions, each year. Knowing your contracts or appointing an individual or team to know your contracts backward and forward can add great value to your business. We recently took a survey to see how businesses are currently managing their contracts. Here’s what we found: 68% of businesses keep their contracts online in a secure system while 20% keep them in a filing cabinet. 42% use one individual or group within the company to manage all contracts while 38% use a contract management software. 59% identified monitoring expiration dates and automatic renewal periods as the biggest risk they face in their contractual relationships. How you manage your contracts matters. We recommend having a secure online management platform that will help in the areas of contract initiation, the approval process, and administration and performance. POLL What management system do you use for tracking your contracts? (Check all that apply) What management systems do you use for tracking your contracts? Manual tracking by a single person / group Manual tracking by multiple people / groups Contract management software Nothing identified. Contracts tracked by people who work with the subject matter Looking At Your Contracts As A Business Strategy How are contracts adding value to your business? Are they adding value? Have you recently lost money due to missing a contract deadline or overlooking a clause? Do you have any existing contracts that need to be reevaluated? All businesses would benefit from looking at their contracts as a part of their business strategy. Contract strategy doesn’t just save you money, it makes you money. Next time you pull out your iPhone, remember that.