How to Transfer Inflation Risk to Your Outsourced Contract Review Partner
April 20, 2022
The attached article talks about how inflation is driving up the cost of labour in law departments, forcing in-house counsel to ‘do a little bit more.’
Here’s the problem. Counsel are already doing more – a LOT bit more. Most in-house commercial lawyers have a contract support request queue that is much longer than anyone could get accomplished in a week, much less a day. They perform rote, repetitive work for 70+% of their day. This forced work is not the greatest and best use of their talents. It likely also results in higher risk for the company because the lawyers cannot properly focus on their fiduciary duties to manage risk in contracts.
So, this tight labour market is precisely the time to engage an outsourced contract review partner to support the review and negotiation of low business risk, business-as-usual contracts. It will relieve in-house lawyers of their workload and transfer the risk of labour cost volatility to your partner, who manages the volatility best.
So, how does this risk transfer occur? Here’s a common scenario. A law department has 50 agreements per month: buy-side, low risk, and low-high complexity. After assessing the agreement types, negotiation intensity, and artefacts like playbooks, the outsourced partner determines that .5 of a senior lawyer, two mid-level lawyers, and two junior lawyers can handle this workload.
The partner could provide the law department with a fixed monthly fee for a certain volume of contracts. The mix and number of agreements month to month are variable (in one month, high complexity is the predominant agreement, and in the next month, low and medium complexity). Providing the resource mix to be able to handle this volume is the responsibility of the partner. If there are now two senior lawyers needed, two mid-levels, and one junior lawyer, the partner will need to figure out how to staff it in a managed services context. The monthly fixed fee doesn’t change; the risk of the variability transfers to the partner.
The partner will likely build an annual 3-5% Cost of Living Adjustment (COLA) into the contract, which is fair. You still have cost predictability and the partner needs to ensure uninterrupted service delivery while meeting Service Level Agreements (SLAs) and managing costs within parameters of the labour market, inflation, churn and other dynamics. Risk-shifting has occurred.
How can the partner absorb this risk and sustain the service? It’s because we view these relationships in 3-year horizons. The profitability may be variable at first, but over a 3-year horizon, we will learn enough about the trends to manage our teams to optimise our efficiency and, therefore, our economics. Plus, we spread this risk over multiple customers. A law department does not have this luxury.
So, hedging inflation risk does not mean that in-house lawyers need to dig deeper and work harder. Use an outsourced contract review partner to help and save yourself the pain!
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