How Too Many Legal Contracts Are Costing Business

What do work-for-hire contracts, email disclaimers and spam have in common? They are all getting ubiquitous, annoying—and ineffective.

Here’s what I mean.

Trend #1: Business is moving from a vertical management model to a horizontal purchasing model. Consider benefits administration: once a department reporting to the VP HR, now a purchased service, linked to the company by a commercial contract for services.

The Result: more contracts.

Trend #2: Communications and media—like books, records, movies and letters—have been fragmented, even atomized. In their place: email, twitter, web sites, links, sampling, and digitization. Far more opportunities for claims of intellectual property rights.

The Result: more contracts.

Contracts and Costs

Think of contracts as transaction costs. Unlike production costs, contracts add zero value. They are a tax on productivity—necessary for orderliness in a complex society, but a form of overhead nonetheless.

Here’s the problem. Costs of production go down with scale. Transaction costs, however, go up. Often exponentially.

The more commercial contracts, the more detailed the lawyers will want to make those contracts. The more fragmented the bits of sample music are, the more detailed must the IP contracts become to cover all eventualities.

The old response to risk was to create tighter contracts. But as the world becomes more complex, the ever-fertile legal mind will find more and more risk to be mitigated—and will unfortunately default to the only thing it knows—more and more complex contracts.

When quantity of contracts demanded is multiplied by some exponential complexity factor, you’ve got a serious economic issue. It’s hard to nail down the macro-economic costs of complexity, but they are very real. See, for example, Steven Covey’s Speed of Trust or Collaboration Rules by Philip Evans and Bob Wolf.

Still, you can get a visceral example of it by looking at email disclaimers. Spudart offers a tour of 50-plus samples—Great Moments in Email Disclaimers, so to speak—for your reading pleasure.

Or harken back to BusinessWeek’s legal advice to small business owners to use the fine print on sales receipts to protect companies from their customers.

And the Law Offices of Ernest Sasso gives you the downward spiral of logic that leads lawyers to attach such disclaimers to their own email; you can see the slippery slope by which every email by everyone to anyone should—in theory—have disclaimers attached.

It is, of course, ironic that disclaimers usually say "don’t read this if it wasn’t meant for you." Too bad they come at the end, after you’ve read the email.

More significant are increasing clauses in commercial contracts. Five years ago, I wasn’t being asked to certify that my subcontractors on a $50,000 consulting job had automobile insurance. I don’t recall being asked to indemnify huge clients against potential suits by third parties for theft of intellectual property. I don’t recall the ubiquity of IP suits I’m hearing about now.

Only Luddites object to increasing complexity. But only troglodytes insist on pushing the same old tools in changed circumstances, not noticing that the tools are making things worse, rather than better.

Interestingly, parties to contracts are beginning to push back in their own way—through the use of constructive hypocrisy. “Sorry about this, the lawyers are requiring it…you know, this won’t ever really come up…it’s just a technicality, if we ever need to address it we’ve always worked it out before…come on, this doesn’t really have to change things…”

Constructive hypocrisy is often quite preferable to actually trying to live by this contractual spam. Unfortunately, many people insist on actually meaning it. And enforcing it, if only for power plays. And it doesn’t take too many to force the rest to live by it.

Is there an alternative? You betcha. It’s called more trust.

If you think that’s fluffy, read about how one buyer bought an $800 million business in 20 minutes in this Wall Street Journal article.

The buyer? Warren Buffett.


3 replies
  1. Shaula Evans
    Shaula Evans says:

    The creeping legalism of the already litigious American business climate absolutely boggles me, Charlie.

    No one has yet managed to explain to me how treating your employees, business partners, and customers like criminals is a sustainable or profitable business model.  (Of course, cutting edge legal scholars might consider me a troglodyte for that remark.)

    I was coincidentally reading an article this morning by Bruce "Tog" Tognazzini about how lawyers are destroying the usability of American products — that goes back to 2001.  (So much for this trend being new.)

    His twofold argument is essentially that businesses need to start trusting their customers and stop treating them like idiots; and that designers need to stand up to lawyers who try to sabotage their products.  It’s quite the call to arms.

    Which leads to my question: to whom would you like to issue /your/ call to arms?  Lawyers, executives, managers?

    Tog places a lot of responsiblity, and power, with designers.  Who do you see as the people in the professional services world who could really draw a line in the sand and make a difference with legal spam?

  2. Charlie (Green)
    Charlie (Green) says:

    Great stuff, Shaula.  Thanks for that spirited diatribe and thanks for Tog’s rant; written 7 years ago, it sounds as fresh as today.

    I don’t think there’s any one silver bullet, but there are a number of pressure points.

    1. Business schools need to get off the 1980s paradigm and recognize that the new C word is collaboration, not competition.

    2. Managerial consultants, exec ed programs and systems consultancies need to stop hyping the "break it into little pieces, measure it, outsource it, and incent it" mentality which is destroying any chance of a holistic view of business and replacing it with a drone-like dependence on individual monetarily-incented selfishness–drenched in internal and external contracts alike.  A little more values-based management, please.

    3. Lawyers in general need to acknowledge that technology has put a huge dent in the viability of the old concept of intellectual property.  Nobody has the answers, least of all me, but it’s a safe bet that the future will look very different from the past, and attempts to complexify the past models to confront the future make Ptolemaic contortions to avoid Galileo’s theory look positively enlightened.

    4. I have personally seen two CEOs–one of a Big 4 accountancy, and one of a global major consulting firm–square off against the attempt to drive business by aligning incentives against tighter and tighter measurements with clients and internal staff alike.

    In each case, when asked a question by a partner about how the organization would align incentives to a set of  stated goals, the CEO got visibly agitated–mad, actually.

    In a nutshell, each said, "for crying out loud, we don’t pay you as partners to be mindless Pavlovian dogs; if there’s something wrong with our incentive structures, then we’ll fix them.  But first–do the right thing.  Your job is to do the right thing in spite of the incentive system, not to be driven passively by it.  I don’t want to hear any wasted talk about shifting W-2 form impacts within the firm with no external result–enough navel-gazing, get out and go do some good for this firm!"

    So there’s at least two CEOs who totally get it.  Warren Buffet lives it every day.  If there’s anyone to blame, it’s the world of managers themselves who put up with this stuff, then passively say "it’s the lawyers, it’s the system, it’s the incentive system, it’s my boss."  Enough.  It doesn’t have to be that way.  It’s you and me.  Like Tog says, get out and fight it.


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