The importance of contracts in valuing performance of your legal team

It is not the standard practice, but in this blog we will be exploring why your company should measure the performance of its lawyers against the standard of the contracts they complete.

Richard Dalby from Halebury recommends establishing a benchmark of what a good contract looks like for your business, as this allows you to not only maximise the value of every deal, but it also provides you with a valuable tool in measuring and rewarding the performance of your legal team.

So how can you set this benchmark? By considering every aspect of the contract and giving appropriate weighting to each aspect, including: the financial value of the deal, the complexity of the contract, the number of stakeholders and companies involved, the achievement of key commercial terms against pre-agreed criterion, the agreement of standard boilerplate terms; and the length of time spent on the contract. This framework will have to be adjusted for different industries and circumstances but it can help to provide an established model.

Maximising Contract Value

Of course the most obvious value of any contract is the price, but this does not provide the full picture. When calculating the value of a deal or a contract there are many other variables which should be considered.

While there are many different contracts terms, certain elements will affect the value of the deal itself, including:

Price and payment terms

Strategic value to the business

The products, services or rights acquired

Obligations and responsibilities

Security terms and financial guarantees

Term and termination

Guarantees of quality or timely performance.

Approvals and processes

“Boilerplate” protections.

The lawyer in charge of negotiating the contract needs to make sure that all of these aspects are considered to ensure the highest possible value. The lawyer will be expected to prepare a contract that is in alignment with the agreed key commercial terms and within pre-agreed legal parameters, but if they are also able to improve on these terms then credit should be given to them once the contract has been finalised.

A different tack could be used when it comes to negotiations in order to shift responsibility to the legal team. Whilst initial negotiations will often involve a reasonably detailed outline of the deal, the legal team should be in charge when it comes to finalising it. The relevant lawyers should be briefed on the negotiating terms and then given the responsibility to close the deal. The benefits of this are twofold; the legal team are motivated by this increased responsibility, and the commercial team members are free to move on to the next opportunity.

Measuring and Rewarding Legal Performance

By calculating the true value of a contract rather than focusing on the financial value only, the onus is on the lawyer finalising each agreement to get the best possible deal. Lawyers should then be recognised and rewarded for completing successful agreements of a high quality, in order to motivate them to continue maximising the value of each contract.

This performance against the agreed framework of what is expected in a good contract can be used within staff appraisals. Lawyers can be rewarded not only for the number of deals finalised and the financial value of the contracts, but also the overall quality and true ‘value’ of the agreement. For example if a lawyer has negotiated an agreement with a more substantial rights or term package than was included in the original commercial deal. By rewarding the legal team for the work they have done, they will help incentivise them to help achieve success for the business.