Does your Legal Counsel Contribute to Your Company's Health?
In our last article, we talked about the connection between a healthy deal and company's health, and how a smart and correct usage of the legal counsel, can assist the company to achieve healthy deals, and consequentially become healthier.
This time, we will examine another level of contribution of the legal counsel to the company’s health.
A research conducted by McKinsey over 15 years, covering 270 listed companies, revealed that companies who focused not only on performance but equally on the company’s health, deliver roughly three times the returns to shareholders as those of unhealthy companies, and increased their EBIDTA by 18%.
According to this survey, there is a direct correlation between the company's health and its financial and operational performance.
The health of an organization is based on its ability to align around a clear vision, strategy, and culture; to execute with excellence; and to renew the organization’s focus over time by responding to market trends, in order to sustain record performance over time.
McKinsey's health index tracks nine dimensions and thirty-seven practices that management teams focus on to deliver those outcomes, and discovers that there are four combinations of practices, which are associated with sustained success.
One combination is called Leader Driven, and one of its management practices is risk management.
Another combination is called Market Focused, and one of its management practices is focusing on customers.
To what extent can the legal counsel of the company assist with these combinations and management practices?
As for risk management, the legal counsel must know how to map, asses and value the real and actual risks of the company and generate mechanisms that will help it to manage and reduce these risks.
For example, a company delivering projects depends on acceptance tests, is facing the risks of failing to deliver the project, delays in its revenue recognition and losing the deal.
The legal counsel must know how to create smart acceptance tests mechanisms in the contract, that will lower the risk of failing to deliver, will assist the company to recognize the revenues on time and assist it to deliver the project successfully.
Another example is the penalties the company will incur if it will not meet the SLA of a customer, penalties which may amount to unlimited sums.
The legal counsel must know how to create smart, logical and efficient mechanisms in the SLA, that will reduce the risks for actually incurring penalties, and set a cap.
The number of examples that can be given, equal to the number of deals and contracts.
So, in terms of risk management, the legal counsel is critical to the company's health.
As per the second combination, Market Focused and the focus on customers, some more interesting examples can be analyzed.
Technological transactions for example, often involve a POC (Proof of Concept), where the POC is a part of the sales process.
During the POC, the legal counsel has an important role of closing the contract, and the way the legal counsel interacts with the customer has a large effect on the sale.
A tough legal counsel, who insists on a rigid contract, who is not willing to compromise nor be flexible, may lead the customer to think that the company is too rigid, too tough and too difficult, may have serious doubts about continuing its engagement with the company and may decide to work with the company's competitors instead.
The legal counsel can help the company to strengthen its relationship with the customer, if it will know how to conduct the negotiations in a particle and efficient way, while bearing in mind the shared goal of passing successfully the POC.
Another example is friendly and simple contracts, which the company uses with its customers and business partners.
Rigid contracts may intimidate customers and may cause the company's reputation to be perceived as tough, uncompromising and out of date. We are all familiar with the contracts the banks are using, and banks are often perceived as heavy, rigid and old organization.
The contract the company is using is a product, and an important part of the sales process and the user experience the customer is facing.
This example illustrates the importance of the legal counsel to the company's health.
There are many more examples, and we will analyze some more in the future.
The question is, does your legal counsel contribute to your company's health?
The answer depends on the way the legal counsel is being used, and of course on the legal counsel itself.