Common Contracting Problems
As mentioned in a prior article, one of the biggest complaints about procurement is it takes too long. Contracts faces the same complaint. And in his book, Sign Here 2nd Edition, Alex Hamilton lays this out, plus more problems, such as: (1) contracts cost too much, (2), they hinder relationships, and (3) contract teams are stretched too thin. Hamilton also lays out great solutions for solving all of these problems. And speaking from personal experience, Hamilton perfectly nails down problems. This article will focus on the problems and the next article will focus on solutions.
The First Problem, Contracts Take too Long:
According to the Association of Corporate Counsel’s 2019 report, the average time to review a contract was 30 days. Why is this? In part, a lot of companies use outside counsel to review contracts. And how do outside attorneys bill? Hourly! And usually it’s a junior associate reviewing the contracts and that associate likely has a billable hours quota. Thus, while the billable hours alone is incentive enough to drag out and complicate a simple process, the problem compounds itself with a junior associate trying to meet a quota. The problem goes deeper because these delays result in delayed revenue recognition, and spill into the next problem.
contracts costs too much:
According to World Commerce and Contracting, the average company spent just under $6,200 USD in 2017 to review even simple, low dollar and low risk contracts. This is mind boggling. If we look at public agencies, they typically have a micro-purchase threshold. A lot of times I see public transit agencies setting this threshold at $10,000 (In today’s dollars). Some transit agencies actually require these contracts to be reviewed by staff and outside counsel if the supplier wants to use their terms and conditions. After accounting for inflation, the cost is roughly $7,980 today. Thus leading to the next problem.
Contracts Hinder Relationships:
Such policies above serve as a tool of punishment and thus makes dealing with a buyer frustrating and not worth the time. This isn’t to say the seller is completely innocent either. Often times a seller will send unreasonable terms which makes the contract difficult to sign and results in such reviews. Buyer’s will do this as well. Thus, each side is already signaling a lack of trust and the relationship is damaged and the value of the relationship quickly evaporates. This leads us to the next problem.
Contracting Teams are Overstretched:
A lot of times the contracting team has a heavy demand and few people. Thus is another reason why contracts take an average of 30 days to review. Meanwhile, Legal and the contracting team are asked to do more with less. Thus, contracting teams often don’t have time to improve processes and spend too much time focusing on tactical rather than strategic work.
Finally, while this all seems daunting and insurmountable, the good news is there are solutions. The next article will lay out solutions to these problems, some of which Hamilton talks about as well in his book.
