By Olga Mack
On any normal day, the first priority of the general counsel is to take care of the company. Even during a monumental crisis – such as the failures of Silicon Valley Bank (SVB) and Signature Bank (with potentially more banks to follow) – the GC’s role doesn’t change. What does and must change are their priorities and time to action. In mid- to large-size organizations, the effectiveness of response depends on having a clear understanding of operational data, risk allocation data and organizational data, as well as having access to technology that allows GCs to speedily analyze their contracts and customer/supplier relationships, understand their level of exposure, and rapidly deliver quality decisions – all while under pressure.
Most organizations will already have a company-specific crisis plan in place, which should form the basis of the GC’s action plan. The SVB event is without doubt one that would trigger the plan, or at least a meeting to determine the potential effect on operational realities. The most crucial question, however, is how a crisis like SVB’s failure might affect cash flow. This is the oxygen by which the organization lives or dies. GCs will need to examine any contracts or obligations with direct ties to cash flow, and work with the CFO and other internal and external colleagues to take care of the company by systematically addressing these issues.
In general, in the cashflow crunch you have two priorities—to increase accounts receivable and reduce accounts payable. How GCs react and prioritize the activities they recommend during a crisis should be based on their understanding of the larger context of the company in relation to customers, suppliers and partners. Much of that information is in contracts or systems connected to contracts. For example, what type of relationship do we have with a customer or supplier? Is there the ability to do late payment or pre-payment with a discount? Are there any MFN, exclusivity, restraint, licensing, or other provisions that could be implicated if we triage? And are there triggering events for reporting or other obligations?
In the SVB crisis, affected companies that have immediate cash flow problems or can’t access their assets could see instant effects such as losing top talent or disappearing suppliers. They might also find themselves stranded if a key supplier is badly impacted by the failure or has areas of high risk or exposure that could trigger a security, regulatory or class-action lawsuit. In situations like these, there’s no winner – but GCs can discern a great deal about the potential impact by examining the organization’s contracts. Contracts are digital assets that give you ways to figure out how to add oxygen to your firm.
By studying those contracts in collaboration with the CFO, GCs can gain insights into the firm’s various accounting systems and help identify what’s needed to address immediate cash flow issues. There are many ways that contracts tell a story and reveal potential alternative sources of finance. They can identify who hasn’t paid, help you understand the history of customers’ or suppliers’ dealings with you to see where leeway might exist, indicate whether a customer might be willing to pay earlier to help the organization stay afloat, or even highlight the possibility of negotiating no-interest, short-term loans.
In a crisis, and particularly when a bank failure like SVB could drain the lifeblood from a company in the blink of an eye, this analysis and decision-making must be done quickly and accurately. In nature, quick and accurate is normally inversely related. That is to say, the faster you go the more likely you are to make mistakes. So, how do you make high quality decision under pressure? Answer: systems. To achieve the necessary speed and accuracy, integration of contract lifecycle management (CLM) with various business systems such as sales databases like Salesforce, ERP systems for supply chain management, accounting systems and enterprise legal management (ELM) are critical.
Your CLM can help identify your major clients, vendors and partners so you can zero in further on your relationships. Who or why did a customer get a discount? Can we negotiate pricing, discounts or terms with our vendors? Your ELM connects to all matters with a party to give a more holistic view of the relationship – including past co-promotions, points of contention, or even the likelihood of litigation. When integrated with ELM, CLM connects transactional contracts data and provides insights into how each relationship works. The technology pairing provides a quick data bridge that’s especially valuable during time-sensitive moments like the SVB response.
As integrated systems, CLM and ELM can become a deeper part of the company’s fabric. When that data is linked to broader business systems, GCs can perform even more in-depth due diligence on vendors. When GCs have information ranging from the type of relationship they have, their locations, their subsidiaries, countries of operation, trade embargoes and more, a clear picture of the strength (or weakness) of third-party relationships can emerge. In a crisis, connected systems give GCs many more data points, plus additional insights that otherwise they’d have to spend hours talking to people to understand the nuances. For example: Is there a history of helping each other out? Are they reasonable and understanding and will work with revised contract terms for payment? Do they care if your organization can withstand the storm? Getting this information quickly allows the GC to point their efforts as quickly as possible toward the most effective course of action.
These recommended steps can help you make more accurate and rapid decisions while mitigating risk to your company:
Build trusted relationships
It’s our job to provide sound guidance; the basis of that guidance is trust. As a GC, whenever you negotiate a contract, you’re also forming relationships and building trust with the other side. This is critical for you when your organization runs into crisis. If you can lean on trust and good partnership experiences from the past, you will have a capability that could be vital to your business. If your counterparts – regulator, finance house, customer or supplier – feel that you and your organization acted like the bad guys during negotiations, your chances of successfully getting help (even when based on your data and relationships) are slim. Be a partner as soon as the relationship begins. Trust is a vital part of averting a potential crisis.
Be a strategic partner
Know what’s in your contracts. As GC, you’re responsible for providing sound counsel to the organization, regardless of whether you are in a crisis or in day-to-day operations. Your ability to analyze and understand the risks associated with the organizational and operational data, and provide recommendations that provide a path forward will be crucial for your organization to manage the crisis and grow. Leveraging technology alongside your legal advice will go a long way to preserving your company’s assets.
As GC, you need to extend the company’s life. This means get more cash in and reduce cash from leaving in a crisis. Otherwise, chances are you’ll run out of time and won’t have the opportunity to solve a problem. Relying on a good CLM system that is integrated with business systems and ELM can help you keep track of the information you need to do that and be a better partner for the CFO. It can tell you exactly which payment obligations can be stopped with less risk and fewer consequences, which contracts aren’t material to the business, which can be suspended because of permissive clauses or relationships, and which are at-will or can be terminated at any time.
Think through mission-critical integrations
ELM and CLM integration is critical to managing cash flow issues. If contracts systems are well integrated, the GC and CFO can better react to secure a positive outcome and help avert preventable disasters. Just as many scuba diving fatalities happen despite a full tank of oxygen because the victim couldn’t quickly find or adjust the equipment, don’t let an avoidable disaster happen because you didn’t know where to quickly find the contacts – regulators, partners, customers – who care enough about your organization to help you.
No one, not even competitors, benefits from disruption or collapse. Despite the doom and gloom associated with SVB’s failure, there are also many stories of stepping up and helping each other out. While you might want to revisit your crisis plan and run a stress-test to determine whether a cash flow crisis could threaten the existence of the company in the future, the most important role you can play in your company’s health is to ensure you are a valuable partner to the CFO.
Olga Mack is a former general counsel and now VP at LexisNexis and CEO of CLM system Parley Pro, which was acquired by LexisNexis in May 2022.
We don’t charge for editorial content – it’s here because we think you’ll find it useful or interesting or hopefully both. If you want to contribute please contact firstname.lastname@example.org