COVID era is creating conditions for more and faster legal innovation.
The widespread havoc that COVID has wrecked on corporate supply chains mirrors the impact that it has had on society at large. Key suppliers that once were highly dependable now find themselves unable to staff their factories and distribution centers and unable to reliably obtain inputs from their suppliers who are dealing with COVID. Surveys by the Institute for Supply Chain Management reveal that nearly 75% of companies have experienced COVID-related supply chain disruptions and that 44% of companies have no contingency plans for these disruptions. See LIzzie O’Leary, “The Modern Supply Chain Is Snapping,” The Atlantic, Mar. 19, 2020.
Supply chain disruption seems likely to continue, even though some countries are starting to reopen their economies. Simply because a factory’s workers may now be allowed to return (often in limited numbers) does not mean that they actually will feel safe in doing so.
If the second wave of COVID outbreaks occurs, the impacts on supply chains could be even more severe than what we have seen yet today. Even if the world does not experience the second wave of COVID outbreaks, it seems more than possible that COVID could fan the pre-existing flames of nationalism (especially during a U.S. election year), yielding tariffs, embargos or other actions that impact supply chains. See, e.g., Don Lee, “As coronavirus cripples global supply lines, more U.S. firms looking to leave China,” LA Times, Mar. 19, 2020 (discussing prior impacts of tariffs on supply chain disruption and reconfiguration).
These forces have caused many companies to conclude that they need to revamp their supply chains, both to fill current gaps and to make them more agile and better able to react to further disruptions. Innovative law departments can make a material contribution to this effort.
Agile supply chains
Agile supply chains have several characteristics. First, they do not expose companies to single points of potential failure wherever possible. Second, they are designed to allow suppliers to be added or replaced with relative ease in a largely friction-free manner. Third, they include an element of intelligence that allows the business to see leading indicators of risk and take corrective action proactively. See generally Thomas Y. Choi, Dale Rogers, & Bindiya Vakil, “Coronavirus Is a Wake-Up Call for Supply Chain Management,” Harv Bus Rev, Mar. 27, 2020 (discussing the value of data-driven supply chain agility).
All supply chains, whether agile or sclerotic, are comprised of relationships that are defined by contracts. As the owner of the contracting process, law departments play a material role in determining how just how agile the supply chain will be.
How law departments can drive supply chain agility
1. Contract-driven business intelligence
Law departments control one of the greatest data troves within companies – their database of executed agreements. Consider the value to the business if a GC were to have gone to each of the company’s key business units in January 2020 and provided them with a report showing:
- The suppliers they depended upon who are located in China
- The subset of those suppliers that had minimum commitments, exclusivity, termination provisions, etc. that resulted in lock-in
- The subset of those suppliers that could be replaced (either via not submitting orders, termination, etc.) and a listing of alternate suppliers located outside of China with whom the company has an existing supply agreement.
It’s likely few law departments were set up to provide this level of business intelligence. Going forward, they could be.
Providing data-driven business intelligence from contracts starts with ensuring that the contracts contain the relevant data points. If you want to use contract data to report on where the supplier is located, you need to have that data in the agreement. If you want to be able to report on where your supplier’s suppliers are located, you need to get that data as well. This could be in the contract itself or a form that the contract requires suppliers to keep up to date.
It then requires that the contracts be stored in a compliant fashion that allows for reporting/analysis and consolidated in a single location.
A certain amount of intelligence can be derived from standardized reports from a Contract Lifecycle Management (CLM) system. This requires foresight and configuring the system and the process so it can be used to produce these types of strategic insights. This is well worth the additional effort, but you’ll never be 100% prescient in predicting what reports you need. This means that you need to supplement the reporting function with an AI-driven analytics engine that can extract data from contracts without prior coding or tagging.
None of this is perfect, but the typical law department hasn’t even scratched the surface in terms of what is possible today.
2. Transactional velocity
Reconfiguring a supply chain depends upon being able to add and remove members of the supply chain in a largely friction-free fashion. The impact of this cannot be underestimated. Data shows that the top 20% of companies require slightly more than half the time to complete contracts as the remaining 80% and do so for approximately 40%+ less the cost. See Bryan Ball, “Contract Management: How the Best-in-Class Maximize Their Potential,” (Aberdeen Group, July 2017); Tim Cummins, “The Cost of a Contract,” (IACCN, November 20, 2017).
Companies that can perform at best-in-class levels will be more agile in rebuilding their supply chains and moving with the velocity necessary to capture new business in challenging times. Achieving transactional velocity requires several things.
First, the company’s supply contracts must contain the provisions that allow for this to happen. This is a balancing act. On the one hand, the contracts must include all provisions necessary to allow for the required collection of data and for the flexibility necessary to shift purchases as required by any exigency that might arise. On the other hand, they need to be devoid of the extraneous terms and overreaching positions that generate needless friction. This creates a tremendous premium on understanding what provisions present a real risk as opposed to something that is academically significant but virtually irrelevant as a practical matter.
Second, the company needs to look at its contract delivery mechanisms. Bespoke, printed agreements take a lot of time. Click accepts are quick. Companies would be well advised to look at their contracting architectures and negotiating strategies to see whether they can do business on order forms with embedded terms and/or click accepts. This requires that both vendors and purchasers take a pragmatic approach toward doing business as opposed to trying to win on points that are theoretically important but practically irrelevant.
Third, the company needs to review its negotiating process. Does it have a clear escalation matrix that allows the right person to be engaged seamlessly where required? Does it empower the person handling the deal to conclude matters as efficiently as possible? Much of this comes down to a reasoned foundation regarding what truly matters.
3. Supply chain expertise
Law departments historically have undervalued supply chain expertise, with procurement contracts being thought of more as something to push to someone other than a “real lawyer” than as a source of critical business value. Companies are starting to wake up to the significance of this value in light of the data showing that the average company suffers from contract value leakage equal to roughly 9% of revenues annually. See “Poor Contract Management Continues To Cost Companies 9% Of Their Bottom Line,” IAACM, Apr. 29, 2020. The COVID-induced supply chain disruptions will only cause this number to grow.
Bringing this back to a topic especially familiar to Legal Evolution readers, recent events highlight the value that a T-shaped legal professional can bring when she has deep knowledge of how supply chains work, how they relate to their company’s business strategy, and what issues are truly meaningful.
To be a true expert in these areas requires expertise in how supply chains relate to business strategies, where true areas of legal risk lie, what data points to collect in contracts for now and the future, how to design appropriate processes to capture and mine that data, what systems are necessary to deliver the requisite performance, etc. The payoffs from having this expertise can be huge, and savvy law departments will both invest in top talent for these roles and track the business metrics necessary to show the value delivered.
Most companies have a critical need to rebuild their supply chains and to do so in an agile fashion that insulates them from future disruptions. Innovative law departments can play a huge role in achieving this objective. Law departments that step up to this challenge stand to materially impact the company’s bottom line and see their role within the company increase. Those that don’t stand to hold their companies back.