The Bizzle

"Saving your ass since 1999"

A game of risk

A couple of weeks ago I wrote about why sales managers (sometimes) don’t want me to do a good job. The quick version is that they want contracts done quickly, which is an aim that I can best achieve by agreeing to everything that the other side wants. 

That was a quick piece, a squib if you like (and you’re visiting from the nineteenth century). I set up a binary question – who’s right, me or the sales managers? – and, as with most such questions, things are a bit more complicated than that. 

So I always had in mind that I would do a couple of follow ups exploring the issues in more detail. My decision about which one comes first is made easy by the anonymous commenter on the earlier post: 

Srlsy bro, you could redo this mathematically and figure out how much YOU are costing your clients by insisting on a hedge for ridiculous events that will never occur, when what they are trying to do is push product and beat a competitor.

 … 

There is an optimum, and it probably is not hedging everything. I suspect your clients have a far greater understanding of this real world scenario than do you, the eager beaver “Now I am Become Law, the Destroyer of People.” 

It’s not that they want you to do a bad, job, it’s just that you yourself and your legal trivia matter very little, and they got shit that needs to get done. 

This is a fair challenge, I think. It’s important for commercial lawyers to ask themselves whether the points they raise in a negotiation are the ones that actually matter, or whether they are trying (as my commenter says) to “hedge for ridiculous events that will never occur”. 

As it happens, I’m sure that most commercial lawyers, and most of their clients, would agree that they should take a risk-based approach to contract negotiations. But the tension comes from the different way that people perceive risk. 

There’s tons of literature on this, and you can take your pick of anything from Sutherland’s Irrationality to Taleb’s Black Swan. The main theme is that people are bad, and often spectacularly bad, at assessing both the likelihood and impact of any given event. 

For example, people tend to worry far more about rare incidents that receive lots of media coverage (such as plane crashes) than they do about frequent events that don’t (such as car accidents), even though there is far more chance that they will be involved in the latter. And people tend to assume that events that haven’t happened in the remembered past (such as a global credit crunch) have very little chance of happening in the future. 

These are general habits of thought, and are obviously present to a greater or lesser degree in individuals according to their personalities. Some people might worry obsessively and irrationally about unlikely events, whilst others might be blasé about even the biggest risks. 

In a contract negotiation, then, one might reasonably suppose that the salesman (who tends to be optimistic) downplays genuine risks while the lawyer (who tends to be pessimistic) talks up remote possibilities. This is no doubt a gross generalisation, but I’ve certainly seen this dynamic a fair few times. 

It’s not unheard of, for example, for a salesman to start rolling his eyes when a negotiation turns to a technical or complex point like intellectual property or limitation of liability. But if the former is your competitive advantage, or if a bad result on the latter can threaten the viability of the business, it seems hard to argue that they are entirely theoretical points. 

On the other hand, I’ve seen plenty of lawyers argue the toss for hours on points that on any reasonable analysis will never become an issue in practice. My favourites are the discussions where ever more extreme what ifs are proposed in an attempt to hold onto a point that should have been conceded after 30 seconds.

How then should one decide what are the genuine risks that the client needs to mitigate for a successful negotiation, and what are the remote possibilities that one can (as the lawyers’ phrase has it) take a view on? 

One way that an in house lawyer can approach this challenge is to agree with interested parties from around the business, including the sales team, what are the key risks that need to be addressed in its contracts. In theory this means that all of the negotiating team, and their stakeholders back at the farm, will be on board with most of the points taken in the negotiation (there will always be some individual issues that are unique to a specific transaction, and therefore lie outside of the framework). 

This is the approach that my team has taken. All of the risks covered in our framework (there are about 15, which seems reasonable for contracts that can be worth a few tens of millions) are based on either real business drivers, such as order book or profitability, or on things that we know from experience are likely to be practical issues in day to day service provision. 

This helps us to focus in negotiations on what matters, and to avoid taking largely theoretical points. It also gives us the ability to explain why we’re bothered about the points that we raise, because we’ve been challenged on and justified them in internal discussion first. 

It’s not a perfect system, and (this was the context of my original post) it’s not unknown for a sales manager to try and get us to ignore one of our key risks for the sake of a quick completion. Salesmen will be salesmen, after all, and there’s those pesky incentives. 

And I’d be lying if I said that I’ve never fallen into the trap of trying to best the other side on every point, whether or not it really mattered. Once, in a break in a particularly long and gruelling day of negotiation that I thought I’d pretty much got the upper hand in, my sales colleague took me aside and in a pleading whisper asked me, “Can’t you let them have just one thing?”

 Well, I learnt from that, and in every negotiation since I’ve tried to dial down the legal trivia and focus on what’s really important. Srsly, bro.

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9 responses to “A game of risk

  1. The LegalWeasel May 22, 2011 at 4:28 pm

    It’s not just lawyers that sales interacts badly with. In my previous career as a design engineer, I lost count of the number of times sales have oversold a product, or glossed over the timescales of a development project, in order to make the sale.

    Sales are focussed solely on the point of sale, what leads up to it, and the commission. They have no great thought for the ongoing relationship that they bring into existence, as they seldom have to deal with it.

    It’s all a matter of perspective.

  2. Tom Kilroy May 22, 2011 at 4:30 pm

    Wilson TGB
    It’s an excellent post. Under many regulatory systems, including the one in London, the Board of a company is responsible to determine the risk appetite of their business and explain that to the shareholders. Part of Legal’s job is to ensure the Board’s risk appetite is put into practice. If that appetite is “hell yes, anything goes”, fine. If it’s something else, Legal’s work needs to reflect that.

    Your “risk playbook” idea is a really good one. I previously worked in the PFI space for a provider and we used a similar approach, which works well with really heavy duty long term contracts. The other thing we used to do was very detailed financial modeling of risk and its impact on profit over long periods (25 years). There were a couple of people in each deal team from Finance whose job this was. This caused us to walk away from some contracts which others bid for (some of which are now losing money).

    I think this kind of sophisticated risk management is quite a long way past the kind of “Sales” that “Srsly Bro” has in mind. Any fool can sell things and lose money.

  3. Shireen Smith May 22, 2011 at 7:26 pm

    Excellent post and excellent comments. The reality is that legal work is boring to many business people. While some are delightful clients, and respectful of the work lawyers do, there are too many of the other type. These regard contracts as legalese they don’t expect to (or want to) understand. So, instead of taking the trouble to ask you for explanations about sticking points, and then make the commercial decision whether to override the legal downside you’ve spotted, they separate the deal from the contract. This effectively dumps responsibility for the commercial decision onto the lawyer’s shoulders. Your role as lawyer then becomes a dual one of identifying the legal pitfalls while also deciding whether to risk them – all while not having the time or opportunity to understand the reality of the risks. Not a happy place to be for any lawyer.

  4. Dylan White May 23, 2011 at 9:24 am

    As a business development manager who is now moving over to the dark side and intending to practice law, I have clearly seen both sides of this debate. In my experience it is not simply the role of the in-house contract lawyer to get his red pen out and strike out huge chunks of offending clauses. If the job is done well there will be en exchange of information and a mutual respect for the others’ position. During my time dealing with corporate in-house lawyers I made it my business to understand which clauses were likely to cause an issue and would include negotiation around such matters in the initial building of the deal. I wouldn’t walk into the counsel office without having first scanned the contract myself to identify where I thought there might be issues and highlighting those areas. In return for this I would expect the lawyer to consider the economic reality of the deal and be prepared to make small compromises on what might be considered moot points. The name of the game has to be teamwork and a spirit of cooperation should be nurtured between commercial and legal teams, (not always easy I know). It is important to remember that it is in the best interests of both teams that deals get done.

  5. David Hamilton May 23, 2011 at 2:25 pm

    This is the crux of the issue: ” This helps us to focus in negotiations on what matters, and to avoid taking largely theoretical points. It also gives us the ability to explain why we’re bothered about the points that we raise, because we’ve been challenged on and justified them in internal discussion first.” We must always, whether negotiating a contract or trying a lawsuit, keep the goal that has been defined and discussed in advance, clearly in our minds. Whether in negotiations or trial, the fog of war can cause the goal to become blurred, which leads to making unreasonable demands or ridiculous objections. Good post to remind us all of what is most important in our jobs as lawyers, which is serving the client’s needs while preserving the issues that are fundamental to the mission.

    • John Bingham June 15, 2011 at 9:57 pm

      Legal Bizzle could you post something about the specific risks identified in your framework?

      • legalbizzle June 15, 2011 at 11:49 pm

        I did think about this when I wrote the post, but I was worried that it would be difficult to avoid revealing something confidential. I will think on it, and see if I can come up with a way to do it…

  6. Pingback: Revolting pedants « The Bizzle

  7. Gaston Bilder (@BRIClawyer) June 19, 2011 at 9:02 pm

    Again, excellent follow up to the previous comment. I follow a similar structure of key risks/frame, but have found that even those – pre-agreed with all the negotiation team including sales – sometimes are too rigid. For those situations I take out the crystal ball and try to argue about unknown probability vs. potential outcome (also grealty unknown).

    Another type of issues, where I like to spend more time are the practical -day to day issues which are recurrent (more likely to arise in the deal, eg. is 20 days enough?), with a focus on those closer to the money, time or commercial terms.

    @gastonbilder

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