Bankers: Forget the Regulators, Focus on Risk

Last week there was a sell off of Wall Street and Banking stocks because the market fears that new Obama-administration regulation and oversight is going to reduce revenue and profits. The Wall Street Journal tells the sell-off story (New Bank Rules Sink Stocks) and the looming political battle (Obama vs. Wall Street) in case you missed all the fun.

With President Obama turning up the political heat on Wall Street, it's clear that change is coming, one way or another. But predicting the exact form of that change is no easy task. Will it be new levies on big banks? Will it be forced break-ups? Will it be salary and bonus caps? Will it be some other cocktail of regulatory intervention designed to outlaw whatever high-risk activities are out of fashion with lawmakers from one month to the next?

Nobody really knows.

About the only thing you can bank on is that taxpayers won't tolerate a system where public funds are used to underwrite the high risk activities of private banks. Which means politicians won't stop meddling until this moral hazard is cured.

So what's a banker to do in the meantime?

Despite all the regulatory uncertainty, there is one thing that all banks can do right now: improve risk management.

This can take many forms, but an obvious example is through a smarter approach to documentation. What can you do to improve visibility into your portfolio of derivatives contracts (ISDA Masters, CSAs, Structured Notes, and the like) so that you know more about where you might be exposed? If you don't know which contracts are affected by a ratings downgrade trigger, and what the impact might be on your liquidity, how can you manage the risk? What can you do to ensure that future transactions include the best legal language for protecting the bank's position in a liquidity crisis or where a counterparty fails to meet its obligations? What systems can you put in place to ensure that the contractual risks of a deal are not disproportionate to the revenue upside.

By implementing smarter systems for creating and managing derivatives, lending and securities documentation banks can benefit in three ways:

1. The risks buried in existing contracts are more visible, and thus can be managed before they become a problem.

2. A much tighter approach to risk management can be built into all future contracts.

3. As regulators demand more data and reporting on risk management, the cost of complying with those demands will be much lower.

For all these reasons, we think automated document creation or document assembly is a very smart investment for Wall Street firms right now. What's not to love about cutting risk and cost at the same time?

Related Posts:

What you don't know can hurt you

Updated: How to ensure your document assembly project fails

As with all IT projects, there are a number of sure-fire ways to send a promising document assembly initiative off the rails. And that's regardless of how good the technology is.

So, what can you do to turn a great idea into an unmitigated disaster?

Don't tie the project to a pressing business problem

The technology's cool. (Company X implemented it and they love it.) Plus we've got 'use-it-or-lose-it' budget we have to spend. We don't need everyone to agree upfront what success will look like. We'll find a business problem to solve along the way.

Skip planning

Clarify the problem? We don't have time to do all those workshops and all that analysis stuff. Everyone's way too busy with their day job. And the users don't know what they want anyway. Better to leave them alone. We'll just make some assumptions.

Encourage scope creep

It's good to keep adding things as people think of them. No need to get hung up over importance or competing priorities. The more features the better. Usability's overrated.

Avoid change management

Of course we want people to use the system. But, we're running out of budget. We can't waste time listening to them complain that nobody spoke to them. This is the way it's going to be. They can like it or lump it.

Don't seek executive sponsorship

The executives don't get it. Better to fly under the radar and then show them what a great job we've done once we've finished.

Update: Boil the ocean

A phased approach? That's for wimps. We're going to tackle everything at once. That way we'll be sure not to miss anything important. (Thanks to MAC for that tip.)

It really is the case that "the soft stuff is the hard stuff." If your project doesn't have capable, motivated team members backed up by strong stakeholder support, it doesn't matter how good the technology is. The initiative will fail.

Related posts:

Document Assembly Solution: Buy Vs. Build

Why Complexity Matters

Wanted: Guest Authors on Document Assembly and more

In the coming months, you're going to see posts on this blog from some "new" authors and hopefully, welcome back some old ones. We took a look around the company and realized that we have a lot of experts with varied areas of specialty within Exari.

The blog will continue to focus on document assembly, contract issues and various types of document automation, and will include more industry-specific posts. For example, just within Exari we have experts on banking, insurance, sales, legal, financial services, professional services, IT and communications, to name some.

In an effort to be as robust and useful a source as possible on these topics, we invite you to propose articles you would like to see here or those which you would like to submit for publication. We look forward to hearing from you either in the comments below or by email.

To get an idea of the type of content we are looking for, check out these posts:

Time for Banks to Innovate? and What you don't know can hurt you.

And, if you want to see which industries are most relevant, visit our Solutions Section.

The billable hour debate rages on

A recent General Counsel Roundtable (GCR) analysis found that the best ways to control external legal spend are (in order of effectiveness):

1. Fixed fees (a set fee "for all work in a given subject area for a period of time")


2. Risk sharing (bonuses/holdback for successful/unsuccesful matter completion)


3. Flat fees (a set fee for a particular matter)
   

In other words, to manage costs law departments need to align fee arrangements with desired outcomes rather than with law firm inputs (billable hours). Common sense? Apparently not.

It's certainly not how law departments pay for most of their external legal work.

The 2009 Altman Weil Chief Legal Officer Survey found that nearly three quarters of law departments reported that 10% or less of their legal fees were non-hourly. (There are exceptions of course. 30% of Telstra's legal work is not based on time [full disclosure, Telstra is an Exari client]. Pfizer wants 75% of it's 2010 legal spending to be fixed fee. And Comcast is asking its outside lawyers "to do more to jettison the traditional hourly billing rate.")

So, if the market for legal services is competitive (which I think it is) and large law departments have purchasing power (which they do at the moment), why is so much external legal spend still time-based?

I think the reason is best captured in Can Lawyers Live in an Approximate and ‘Good Enough’ Universe?, a fantastic blog post in which Ron Friedmann argues that lawyers are uncomfortable with approximations. Lawyers have grown up with time-based billing. Time can be tracked in a very precise manner. Outcome-based billing, on the other hand, requires estimates; scary stuff for risk averse, perfectionist lawyers. And don't forget that 90% of in-house lawyers started in private practice, which means their "general view of value is based on perceptions developed within law firms."

As I've said previously, the move away from time billing will be a slow process. Not because it is inherently complicated, but because it requires significant change. In mindset more than anything. Steven Levy put it best in a comment he made on AFAs (alternative fee arrangements):

"Underlying fixed fees – and most AFAs – is the requirement that law practices 1) understand how they do the work they do and then 2) approach it with a plan not just for the legal issues but for how to do the work itself."

While these capabilities are well established in other industries, they are still new concepts in the practice of law.

Related Posts:
Alternatives to the billable hour...revisited
Bye-bye billable hour
Innovate, commoditize or retire?

How to gain competitive advantage from your sales contracting process

Sales contracting is an example of a cross-functional business process; one that involves multiple departments, often in different business units with conflicting agendas (and separate budgets). Sales will do whatever it takes to close the deal by the end of the quarter. Pricing's sole focus is on profit margin. And Legal needs to avoid risk. Meanwhile, no one's responsible for the end-t0-end process.

Because it cuts across functions, sales contracting causes pain for a lot of people in the organization. The corollary is it provides sustained competitive advantage for the few organizations that are able to fix the process.

So, how then can you turn sales contracting from a pain in the neck into a source of value?

1. Focus on a larger, overriding mutual objective

The first step is to identify a shared goal to get the various stakeholders pulling in the same direction. Consultant, Bob Henry, describes his approach in his article A Mission Statement for Sales Contracting: Close Contracts Quicker!:

"So, my challenge was to determine how I could meet the needs of the CEO, Sales, and Business Division leaders (and other stakeholders-Legal, Finance, Engineering, etc.). The first step was to create a mission statement for the CM [Contract Management] Team which was “to close contracts on a timely basis while at the same time caring for the interests of the company”. In order to achieve our mission we had to identify process improvements that could reduce the contract cycle time, while “not giving away the store."

This doesn't mean abandoning departmental priorities. Rather, the aim is for everyone to view them in the context of the overall corporate objective.

2. Get strong executive support

This is critical. And it's often hard. According to the IACCM Contracts as a Source of Value report (accessible at the end of a blog post on the issue by Tim Cummins), most executives feel that contracting "is a necessary evil." However, the report also provides a good counterpoint:

Lou Gerstner, former Chairman and CEO at IBM, was one of very few top executives who have seen contracts as fundamentally linked to brand image. He believed that good contracting – especially in a solutions and services world – confers competitive advantage. His support led to extensive re-engineering of the contracting process at IBM and is reflected today [in] the company’s leadership in both negotiation and contract management.

More than anything else, the level of (real) executive sponsorship will determine the success or failure of the initiative.

3. Start small

You need to start by working with a small group of people who share the vision. Your first phase should focus on a small, well-defined sub-process (such as a particular type of sales contract).

You will need to make decisions about approved contract wording, fall-back positions, risk weightings and approval processes. This is the key to accelerating cycle times without increasing risk. Once these are bedded down, you can use document assembly systems like Exari to automate and further reinforce the process.

4. Iterate

Now it's time to 'rinse and repeat'. Showcase the results of the first phase to get broader buy-in for subsequent phases.

Fixing your contracting process involves change. Don't underestimate people's resistance. You need to invest time and effort to reduce that resistance to a minimal, manageable level. It takes time for people to adjust to new situations. There are no shortcuts.

Results

According to the IACCM Contracts as a Source of Value report, companies that have taken a strategic approach to contracting have enabled greater efficiency and effectiveness in their contracting process:

They offer terms that are appropriate to the desired relationship. This does not mean that negotiation frequency has increased – in fact, the opposite is true. These organizations are selective about when they want to negotiate and then ensure that the topics for negotiation are productive. For agreements where there is no negotiation, they ensure that standard terms are appropriate to the desired outcome.

Isn't it time you improved your contracting process?

Sales Contracting Webinar

Download our free webinar to learn how Dow Jones and DLA Piper have reduced time and expense by automating their sales contracting.