Technology

Driving Deal Velocity Within The Corporate Legal Department

Don't disrespect the CLD.

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As leaves fall and frost approaches, budget season reaches all its glory. Last month we talked about building a case for investment within the law firm — but how does the case change within the Corporate Legal Department (CLD)? At the very mention of this topic, many of my colleagues in the CLD will shudder involuntarily and remind me that the CLD is just a cost center and that any investment in it must have an equal or greater impact on cost savings.

The reality couldn’t be further from the truth. While the CLD certainly isn’t billing out hours to drive the revenue of the business, it has an important role in the completion of the fundamental corporate revenue driver: the contract. Just about every revenue moment in a corporation’s life is tied to a contract of some sort; and if you can reduce the time required to get contracts through the legal process, you’ll increase your revenue — I guarantee it.

Here’s a quick example: let’s assume that a firm sells enterprise software and is negotiating a 3-year subscription deal for $3.6M. The negotiation of the license on average takes 120 days. Under these assumptions, if the negotiation started on January 1st, the deal would close (roughly) on April 30th and the company would start recognizing revenue in May, for a total of eight months of revenue in the year. This works out to:

1st year revenue = (8 months revenue / 36 total deal months) * $3.6M total deal value, or

1st year revenue = $800K.

Now let’s assume we’re able to (safely) cut that negotiation time in half, so that the deal closes in 60 days. Now, the deal closes (roughly) on Feb 28th and the company begins revenue recognition in March, for a total of ten months of revenue in the year. Doing the same math, we can see:

1st year revenue = (10 months revenue / 36 total deal months) * $3.6M total deal value, or

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1st year revenue = $1M.

By shortening the negotiation cycle, we’ve increased the in-year revenue of the deal by $200K, or 25 percent. That’s a metric that will get executive management’s attention in a hurry and will open the door to investment in a way that no cost-cutting conversation ever will. The dirty secret of business is that top line, or revenue, is much more difficult to drive than bottom line.

One can argue that the revenue difference is just timing — the contract value is that same, it just starts later — but that’s a fallacious argument. We must assume that the relationship with the customer will be ongoing, and that the initial contract will lead to a renewal down the road. The delay in revenue due to slower deal velocity represents irrevocably lost economic value for the firm.

Of course, the job of corporate counsel is not simply to push contracts through willy-nilly, but rather to protect the company from risk. Bad contract vehicles and/or terms lead to poor economic results down the road, so the key question is, how does one increase deal velocity without a corresponding increase in risk?

Answering that question requires the collection of data, with the goal of better understanding where (and how much) time in the contracting process is being spent, and the value associated with each step of the process. The good news is that a tool to measure exactly this already exists: your matter management solution. These solutions are typically used by corporate counsel to follow matters that are relevant to the department, such as litigation or corporate structure.

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By expanding the scope of the “matter” being cataloged and tracked within the solution, it’s possible to measure the effectiveness of the CLD and its ability to manage contract drafting and negotiation. This information could ultimately be used to identify trends that can drive the velocity of deals moving through the department.

As a starting point, we would look at contracts executed over the past year and look for some of the following metrics:

  • How many requests for contracts have there been (by type, by business unit, customer type)?
  • For each contract type:
    • How long on average does the deal take to close?
    • What percent of deals did not close due to legal issues and why?
    • What language is most heavily negotiated? Why?
    • What are common patterns in requests from opposing counsel?

The astute reader will notice that this type of analysis is eerily similar to the type of ongoing analysis performed by sales management when looking at current and historical deals. Using that same discipline, we can look to identify areas of friction in the legal pipeline and develop solutions to reduce that friction — and by extension, shorten deal velocity. Here are some simple examples:

  • Are attorneys overwhelmed with requests? This will drive slow response time for simple requests. The approach here is to identify low-value activities (e.g. NDAs) and automate or drastically simplify the activities so that they no longer occupy valuable attorney time.
  • Is certain contract language always changed? While it’s typical to work from a standard form for an MSA or EULA (or other contracts), sometimes there’s a mismatch between the market standard and the company’s form and, as a result, language for one or more clauses is always being negotiated. One can remediate this situation by modifying the language to better match the market standard and reduce unnecessary cycles.
  • Are there common requests for change? Even with relatively standard language, certain clauses (e.g. Governing Law) are always subject to frequent change requests in negotiation — each of which pulls counsel in to review. For these cases, an approach is to create a playbook with acceptable (counsel approved) alternative language and delegate the authority to change language (within the confines of the playbook) to the business.

These are just a few issues and corresponding approaches to address some that you may uncover when you have data to review. Identifying and measuring key performance indicators (KPIs) provides essential insight into where the department’s time is really spent and drives optimization of time and resources.

Legal professionals tend to look at their business from a legal risk perspective — but finding innovative ways to make the department work more efficiently sometimes requires a different lens. Increasing the efficacy and efficiency of the contract negotiation process can have a material impact not only on the life of the CLD, but also on the financial performance of the company. In next month’s article, we’ll take this concept a step further and apply it to trends in negotiated contract terms.

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Dean Sonderegger is Vice President & General Manager, Legal Markets and Innovation at Wolters Kluwer Legal & Regulatory U.S., a leading provider of information, business intelligence, regulatory and legal workflow solutions. Dean has more than two decades of experience at the cutting edge of technology across industries. He can be reached at Dean.Sonderegger@wolterskluwer.com.

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