Michael Black, VP of Sales at BetterDoctor, remembers participating in contract negotiations that dragged on for months and eventually stalled, thanks in large part to the company’s law firm. After nine months of negotiations, the sale ultimately fell through – a nightmarish result for every sales team. Needless to say, he doesn’t remember those negotiations fondly.
“It felt like the law firm was doing everything it possibly could to justify its role in the sales contract process,” he said. “So much so that it seemed like they had very little experience with this type of purchase. That inexperience led to many billable hours and ultimately we couldn’t come to an agreement.”
As one might surmise, longer response times translate into longer contract negotiations, and that back-and-forth can be costly in more ways than one.
Aside from the amount of money lost in a drawn out contract review process, the bigger problem lies in potentially losing the entire deal itself. Sadly, studies show that Black’s experience is far from unique:
- In AdvanceLaw’s survey of 88 general counsel from large companies, including Lenovo, Shell, Google, Nike, Walgreens, eBay, Panasonic, Nestle, Progressive, Starwood, Intel and Deutsche Bank, more than half indicated that ‘Big Law’ attorneys are “less responsive” than freelancers and attorneys at smaller firms.
- A 2007 Aberdeen study of 189 companies across various industries found that contract management – including the creation, negotiation and approval of contracts – contributed to a whopping 18 percent of an enterprise’s sales cycle. And of the companies surveyed, a one-day slow down of the sales cycle equated to a loss of $80,000 on average.
- A 2012 follow up study found that high performance companies were able to complete contract review and approval in eight days on average, compared to 47 days for slower performance companies.
- The independent 2012 International Association for Contract & Commercial Management study found that poor contract management costs companies nine percent of their annual revenue on average.
- And a more recent 2016 Apptus study found that 65 percent of legal professionals identified time lost on administrative tasks as their biggest pain point.
Below, we’ve outlined the primary culprits responsible, and solutions to help combat these roadblocks. Poor contract management costs companies nine percent of their annual revenue on average.
Poor contract management costs companies nine percent of their annual revenue on average.
At the end of the day, sales contracts have to compete for a law firm’s attention with a multitude of other priorities and responsibilities – whether it be with work for a higher-paying client or with a “more lucrative” transaction.
“The reality is that if it’s a smaller client or smaller contract, the law firm is going to prioritize the hand that feeds them the most money,” says UpCounsel global transaction lawyer Jann Moorhead. “So the needs of a smaller client are going to be low on the totem pole, and the firm doesn’t necessarily communicate that a contract is straightforward but not a priority because, they don’t want the client to be unhappy.”
In-house counsel face similar pressures. A 200-person business might only have a few in-house legal resources managing every legal project for the company. So even if a sales contract is relatively straightforward with few objections, sales teams might have to wait a week or so to complete it. If the workload is especially heavy, in-house counsel might even wait a week before deciding to outsource the contract, adding yet more time to the sales cycle.
For example, Marty Lundstrom, assistant general counsel at Charming Charlie, is one of only two in-house lawyers managing all the legal concerns for an almost 400-store international fashion retail chain. More than half of general counsel say that ‘Big Law’ attorneys are “less responsive” than freelancers and attorneys at smaller firms.
More than half of general counsel say that ‘Big Law’ attorneys are “less responsive” than freelancers and attorneys at smaller firms.
“The highest and best use of my time is not looking at a $5,000 contract,” she said. “It is thinking about the bigger picture issues.”
So even if a sales contract should only take an hour to review, it likely isn’t the in-house legal department’s biggest responsibility that day.
“Especially if the sale is small to average, it’s understandable that reviewing the contract is not a priority for an in-house lawyer,” said Black, the VP of sales at BetterDoctor. “It’s not worth the effort or risk to negotiate it.”
Contract Review is Passed Down to Junior Lawyers
The traditional process in which work is delegated at most big law firms is another common cause of gridlock in the contract management process. More often than not, contracts end up in the hands of associates – the lawyers who, generally speaking, are fresh out of law school.
Partners often view contracts as an easy legal task not worth their time and expertise, so they punt them to associates as learning opportunities.
Associates drafting your contracts doesn’t exactly bolster the speed, or efficiency, of the process.
Jason Smith, Senior Director and Legal Counsel at Apttus, sketches out the typical thought process of a law firm when approached by a company as follows: “The law firm says, ‘You know what? That’s no brainer stuff. We can throw it down to John, the new associate who has been here six weeks. He can fill out some forms and we can charge them $500 per hour.’” “There are a lot of time delays because there are more meetings and senior partners have to review the work of junior associates.”
“There are a lot of time delays because there are more meetings and senior partners have to review the work of junior associates.”
Moorhead seconds Smith’s amusing representation, agreeing that junior lawyers usually end up lengthening the time it takes to complete a contract. “Junior lawyers are really afraid of messing up because they’re inexperienced,” she says. “They’re afraid they’re going to do a bad job and be sued for malpractice or that a senior partner is going to fire them, and since they don’t yet have a sense of what matters and what doesn’t, they’re going to take much longer to execute on a contract.”
Too Many Cooks in the Kitchen
Another snag in the contract management process emanates from the bureaucracy inherent in Big Law firms. “You’ve got layers of lawyers involved in reviewing things,” Moorhead said. “So there are a lot of time delays because there are more meetings and senior partners have to review the work that the junior associates are doing.”
There’s probably no better illustration of the bureaucracy at Big Law firms than the following list, which outlines the convoluted process a typical law firm goes through to complete a sales contract:
- Buyer agrees to sale, passes along their boilerplate contract
- Contract passed along to traditional law firm partner
- Partner passes work onto junior associate(s)
- Associate redlines contract, sends back to partner
- Partner reviews associate’s draft and makes changes
- Law firm meets with sales team to go over objections
- Sales team meets with buyer to bring up objections
- Buyer meets with their legal team to consider responses
- Associate drafts a new contract
- Partner reviews the new contract and sends to buyer
- Buyer sends sales team a new contract
- Occasionally the contract is again passed along to the partner to start the cycle again until all objections are addressed and both parties sign
Each step eats up time, slowing down the sale and giving the buyer more opportunities to back out.
Time is Money (Literally): More Billable Hours Means More Revenue
Moorhead points to the real culprit behind the muddled and time-intensive contract management one usually finds at law firms: its business model. The issue, she says, is that the business model at traditional law firms actually incentivizes slower sales cycles, and, in turn, higher costs.
“The problem is that it’s both a profession and a business,” Moorhead said. “The lawyers are supposed to be providing their professional expertise and do a job for the client where they are best protecting them and looking out for their interests.” The business model at traditional law firms actually incentivizes slower sales cycles, and, in turn, higher costs.
The business model at traditional law firms actually incentivizes slower sales cycles, and, in turn, higher costs.
“At the same time, they’re a business, and for a business to be successful it has to make as much money as it can. That’s where the conflict is … which means you can spend one hour on a two-page contract where you don’t dot every i and cross every t because it’s really not necessary, or you can spend ten hours on that same contract and make a whole lot more money.”
The solution? Speed Up Your Process
The solution starts with combatting the inefficiency that strangles the sales contract process.
To that end, studies show that companies that work on improving sales contract processes speed up their sales cycle and increase their net earnings:
- Aberdeen’s 2007 study of 258 companies across various industries found that companies that invested specifically in speeding up sales contract management reduced their sales cycle by 15 days while saving $1.2 million on average.
- Their 2012 follow up survey of 132 companies found that the best 20 percent of contract management solutions enabled the approval of a contract within eight days on average, compared to 47 days for companies that invested less in contract management. This resulted in average contract savings of 17 percent for companies with the best system.
While the companies in these studies attribute a shorter sales cycle and increased bottom line in part to better contract management technology (e.g., automated contract creation and approval processes, electronic signatures, searchable contract repositories), a key component identified was formalizing a process at the executive level to assess the efficiency and effectiveness of contract management.
Apttus Senior Director and Legal Counsel Jason Smith believes contract management technology paired with quality legal review is a smart solution to help speed up the sales cycle: “I would definitely recommend to companies, start with something that can automate a contract, but then engage somebody with expertise to validate.”
Online Legal Marketplaces Excel with Quality, Timely Transactional Agreements
When dealing with straightforward sales contracts, online legal marketplaces can provide a quick, workable solution to sales contract gridlock, without sacrificing quality.
Reduce Time to Find Attorneys
Lundstrom says that she doesn’t care if a lawyer comes from a traditional law firm, as long as she or he does a good job. She does, however, value how online legal marketplaces reduce the time it takes to find quality attorneys. Companies that invested specifically in speeding up sales contract management reduced their sales cycle by 15 days while saving $1.2 million on average.
Companies that invested specifically in speeding up sales contract management reduced their sales cycle by 15 days while saving $1.2 million on average.
“I don’t use law firms, I use people in law firms,” Lundstrom said. “But [with online legal marketplaces] I don’t have to send a retention letter, renegotiate rates and have law firms bid every time I have a job to find the right person. That’s just a pain, I don’t have time for that.” Lundstrom also added that the flexibility they provide in being able to hire for either ad-hoc or ongoing projects allow her to take quick action on an as-needed basis.
Incentivize Quality Work Done Quickly
Compared to a traditional law firm, online legal marketplaces incentivize quality along with speed. Lawyers from online legal marketplaces are only hired for a single task, as opposed to being on retainer. Thus, they need to deliver quality work in a timely manner so that they will be hired again for the next job.
“One of the beauties of online legal marketplaces is to allow companies the flexibility to reach quality attorneys at lower rates and not feel like they’re stuck because of some arrangement,” said Moorhead.
Find the Exact Experience Needed
Online legal marketplaces quickly pair specific jobs to lawyers with the exact experience needed. Rather than working with a law firm that shuffles work through their bureaucracy of less experienced associates, only one qualified lawyer does all the work. This makes completing a sales contract much more efficient.
“With online legal marketplaces, it’s like taking Uber and eHarmony and applying those two concepts to the legal marketplace,” said Smith. “[Like eHarmony], they do the data analysis on both sides of the transaction to find the best fit. From the Uber perspective, it’s about right time, right fit, right moment … quickly and seamlessly.”
Provide the Best Price Possible
Finally, online legal marketplaces are likely to provide much more cost-effective legal assistance. Rates are lower because you’re not being charged for any overhead costs like a marketing team, and attorneys are competing for your business and able to lower their rates without meeting a law firm’s billing requirements. Online legal marketplaces incentivize quality along with speed.
Online legal marketplaces incentivize quality along with speed.
“From a cost perspective, [using an online legal marketplace] is just a real impact on our business and our bottom line,” Lundstrom said. “We want quality service, and we get it at rates we can afford as a small business.”
Compared to firms where prices are often set as high as they can safely get away with, online legal marketplaces can act as an affordable alternative. And this is especially true given today’s climate, where billing rates are already high — and getting higher. Citi Private Bank’s Law Firm Group, for example, found that the hourly rate of senior partners typically range from $1,200 to $1,300 per hour.
Furthermore, whatever the size of the law firm you choose to work with, your company needs to be very careful, and precise, when laying out the budget for your legal projects. Many companies are surprised when they receive exorbitant bills for what they thought were a few 15-minute phone calls and some quick legal advice. Be sure to encourage transparency, and plot your budget as carefully as you can.
Additionally, consider Aberdeen’s findings, and how much time you can shave off your sales cycle by investing in better technology and better processes. Less time wrangling law firms means more time and money for your business.