In my post on legal heroism I mentioned in passing that my clients would prefer that I don’t do a good job. A reader asked me if the word “don’t” in that sentence was a typo – surely my clients want the very best from me?
Well, no. Or, at least, not always.
To non-lawyers, like my reader, that statement is counter-intuitive. Why would anyone want their lawyer to do a bad job? So I should probably explain…
Let’s start by asking what a good job looks like. The core of my job is drafting and negotiating contracts with customers and suppliers, so I might sum it up by saying that I’ve done a good job if I’ve achieved the best possible contractual position for my employer within the applicable constraints.
Those constraints might include one or more of the following:-
- the deadline for the transaction
- the respective bargaining power of the parties
- the priority of the transaction compared to other work
- corporate policies about what can and can’t be agreed
- regulatory requirements
So you would accept that you needed to compromise on some points in order to conclude your contract before any deadline that had been set, or that you couldn’t achieve a particular outcome because the other side is in the stronger position. But if you’ve protected your position as far as you can in that context, you’re entitled to see that as a successful negotiation.
Now, you could have a long discussion about what “the best possible position” means (I’m of the view that contracts should satisfy both parties if possible), but I think that this serves as a definition of success for our purposes.
So what does my client want? (By the way, when I say “client” in this context, I mean the people who instruct me on a day to day basis – usually the sales team or the purchasing team. There’s a whole discussion to be had about this, but maybe another time).
Well, most salesmen get a bonus of some sort for bringing in sales. That means that what they want above all else is speed – lock the sale in with a contract, and then move on to the next one.
Mostly these bonus schemes are pretty basic, and pay out a cash amount based on the expected revenue or profit. There’s not often a claw back if the contracts turn out to be less profitable than expected – after all, that’s not the salesman’s fault, is it?
Which means that sales managers don’t care whether any particular outcome is achieved in a contract. All that matters is that it’s done quickly, so they can get their bonus, and I can get contracts done a lot quicker by just agreeing to everything that the customer wants.
It’s similar on the purchasing side: our buyers want to make savings, and the quicker they do it the easier they meet their annual target. That target is usually measured on budgeted expenditure, so it doesn’t matter if the supplier doesn’t deliver – and so again the actual terms of the contract don’t make any difference to the reward that the buyer receives.
This effect can be exacerbated by the incentives of the supplier’s sales force. Under the Sarbanes-Oxley Act, US businesses (which includes the parent companies of most of the tech suppliers that I deal with) must have binding commitments in place before they can recognise sales revenue. Sales bonuses are aligned to this, and the effect is that bigger discounts are on offer at the end of reporting periods so that the supplier can give a boost to their accounts – but only if the contracts are signed by that deadline.
So in general my clients do better if I complete contracts quickly. The easiest way for me to do that is to agree to the other side’s position on as many points as possible. You may not be surprised to learn that this is what my clients urge me to do.
And that’s what I mean when I say that my clients would prefer that I don’t do a good job: “Why waste time worrying about things that will never happen? You’re just holding everything up”. And so on, and so on.
To be fair, these incentives do make sense in basic financial terms. Most sales-focussed businesses use their order book as a key measure of health, or at the very least to set budgets, and you can’t really include something in the order book unless you’ve got a binding commitment from the customer. The sales manager’s incentive is aligned to that.
But it seems to me that schemes like this lock in conflict between the sales team and the legal team. They incentivise sales managers to demand unrealistic and conflicting deadlines, and lead them to ignore or downplay contractual risks.
So how do you fix that? The most obvious way would be to make bonus payments over the life of a contract, according to the actual profitability or saving that is achieved. That would at least encourage some focus on risks to those things.
Or, more radically, what if you flipped the incentives around? Maybe the sales manager could be rewarded according to how close the final contract is to a specified set of positions, and the legal team could be rewarded according to how quickly it was done?
Of course, we like things to be straightforward, and to be neatly tied in to financial years, and so on. So maybe these suggestions wouldn’t work, or maybe the sales managers would just go somewhere where they could get the big lump sum bonuses more easily.
But I’d be interested to hear about how this works in other sales-focussed organisations. Over to you lot…