IN-HOUSE

LEGAL TEAM’S
PLAYBOOK FOR RECESSION

How Legal Teams Can Help Their Companies Stay Afloat in Bad Times
 Table of Contents

Recession is Looming – Setting the context

SRB – A framework for legal teams to get the best value out of their
contracts during an economic downturn

In-house Legal Team’s Recession Playbook – A 6 Step actionable guide

to incorporating SRB framework

Stop, Take Stock

1. Heighten vigilance: minutely track every single important contract KPI.

2. Plug any value leakage

Re-calibrate and Re-negotiate

3. Reallocate resources
4. Re-evaluate current contractual relationships

Build Provisions for the Future

5. Code flexibility into your contracts

a. Safeguard against supply chain turbulence
b. Safeguard against price fluctuations
c. Brace against change in demand
d. Protect liquidity of the company
6. Mergers and Acquisitions - Looking Ahead

Conclusion
A Recession is Looming

Latest projections from leading industry bodies speak of a drop in global economic growth. It
is predicted that growth will have dropped sharply by the end of 2022 and will fall further still in
2023.

There are warnings of a recession by mid-2023. Most organizations are responding by

treading cautiously and cutting down on costs by postponing large spending, budget cuts,
and even lay-offs.

Economic downturns and volatility are of course, nothing new, and there are instances from
the past that can be looked at for reference.

In KPMG’s analysis of the ‘Great Recession’ for instance, they found that ‘select companies
were able to maintain profits and even managed to grow revenues and margins, despite
falling demand. By acting early, they managed to sustain nearly all their shareholders’
value, while the shareholder returns of the worst performers fell by more than 23%.’

This clarifies two things, quick and preventative action can save against huge losses, and that
it is possible to remain profitable and even grow during a time of crisis. In this whitepaper we
will explore how legal teams can help contribute to mitigating the upcoming economic crisis.

Contracts form the backbone of all economic activity, and as the team that is primarily in
charge of these contracts, legal has a unique opportunity of helping their companies stay
afloat during these difficult times.

As per Harvard Business Review, “poor contract management leads to a 5-40% loss of value
on any given deal.”

As uncertainty mounts, contracts will become even more vulnerable to risk, value leakage, and
even termination. Buy side contracts will be vulnerable to supply chain disruptions, force
majeure, regulatory and compliance risk, raw material shortages, price fluctuations, etc. And
sell-side contracts will be vulnerable to demand changes, budget cuts, price fluctuations, etc.

This is the time for legal teams to pause, recalibrate and redistribute their efforts and focus on
ensuring they get the best value out of their contracts. Finding saving opportunities and
lurking risks in the company’s existing contracts is one of the best services legal teams can
provide.
SRB Framework

Here is a simple framework with the help of which legal teams can help protect and grow their
businesses in this time of crisis

Stop and Take Stock: Many companies believe that their

signed contracts are fixed costs or gains. This is not true,
p and Take Stoc
based on how a contract was drafted, the continued St o k
an d Re-n
validity of all parties involved, the opportunity for ate eg
renegotiation, etc. – value from contracts can vary il br ot
a io ns for t
is he
ov

-c
significantly.

ia
Re

te
Pr

Fu
Build
Re-calibrate and Re-negotiate: Renegotiation

ture
contracts, reallocating resources and vendor
consolidation have been identified as the 3 main
Contracts
‘go-to’ tactics or levers to optimize spend and risk
during economic uncertainty.

Build Provisions for the Future: New contract models,

flexible payment terms, shorter lock-ins, protection
against price, supply and demand fluctuations. Now is
the time to get creative and build provisions for the
escalation of economic turmoil in the coming months.
Here are 6 actionable steps via which you
can action on the SRB framework and help
recession-proof your business:

Stop, Take Stock

1. Heighten vigilance: minutely track every single important
contract KPI.
2. Plug any value leakage

Re-calibrate and Re-negotiate

3. Reallocate resources
4. Re-evaluate current contractual relationships & obligations

Build Provisions for the Future

5. Code flexibility into your contracts

a. Safeguard against supply chain turbulence

b. Safeguard against price fluctuations

c. Brace against change in demand

d. Protect liquidity of the company

6. Mergers and Acquisitions - Looking Ahead

Stop, Take Stock S
Heighten Vigilance: minutely track every single
Actionable No. 1
important contract KPI

As recession continues to mount, the more important it is to pinpoint financial risks and
obligations — particularly in contracts. Therefore, it is important now more than ever to minutely
track every single important contract KPI. KPIs aren’t just ways to track how your contracts are
performing but also alarm bells for anything that may go wrong.

Looking at desired outcomes you want for your contract management is the first step towards
setting and tracking meaningful contract management KPIs.

During economic turbulence, when time is of the essence, legal teams need to be quick in terms
of tracking the right information:

The ideal scenario: All your contracts are in a single, accessible, digital repository that lets you
extract critical information from contract meta-data and flags high risk
clauses/sections/contracts in no time.

The not-so ideal scenario: All contracts warrant vigilance during economic crisis, but if you are
really pressed for time, the 80/20 rule can be the way out. Which are 20% of your most high
value contracts? Which are the non-standard contracts? These 20% are the ones that need the
highest vigilance and ones that can have the highest impact in terms of savings (or
minimization of losses).
The 5 most important KPIs you must keep track of during a
recession are:

1.Legal and Sales Operation Costs: Costs can mount when inflation is rising. Tighten
the rope around labor costs both for in-house and outsourced counsel

2.Contractual Obligations Fulfillment: Compare between promised and delivered

values in real-time comparisons and enforce penalty clauses to address variances.
Spot underperforming contracts early. Configure alerts for major milestones to
make sure your timelines are not deviating from what was agreed upon.

3.Business Risk Score: Tackle financial, regulatory, transactional, operational and

engagement risks by making such documentation mandatory for evaluating
long-term business partnerships.

4.Compliance Rates: Look through certifications, maintenance & insurance track

records, past client reference checks, etc. during onboarding and renewals, to
gauge the contracting partner’s focus on compliance, especially in turbulent times.

5.Actual Project Value & Initial Project Value Comparisons: Runaway project
lifecycles result in unanticipated cost and revenue variations. This is expected to
increase during a recession. Benchmark actual project earnings with initially
approved project value and set soft vs hard limits of how much of a deviation you
can handle. In case of too much variance, take action to renegotiate, modify or
terminate the contract

Frequency of tracking KPIs:

The cadence at which you want to monitor your KPIs depends on your type of business. Some
industries are more volatile than others. A good way to stay on top of your contracting
performance is to leverage technology to get access to real-time error-free analytics.

S
Actionable No. 2 Plug Any Value Leakage

Crisis is a time to go back to your repository and scrutinize each of your agreements to make
sure all obligations are being met. Economic fluctuations can cause a lot of situational
changes and may affect key contract milestones, volume, quality commitments, etc.
Suppliers, partners and customers may even be rendered unable to fulfill their contractual
duties.

The first step here is to get a hold of all your contracts, and then keenly scrutinize obligation
clauses. This needs to be done quickly, so that corrective action can be taken for contracts that
are non-compliant or forecasted to head into non-compliance.

It is advisable to extract key information like the service-level agreements, current contract
utilization, overpayments, delivery of entitlements, penalties and other supplier metrics such
as insurance, and to monitor them closely with reports and alerts to keep the risk related to
milestone obligations under check.

Once all your existing obligation-related clauses are in front of you, you can take an informed
call about any re-negotiations, penalties, terminations, etc.

For example: Adding clauses that create provisions for volatility, Exception clauses like ‘rebus
sic stantibus’ (a change of circumstance clause), well-defined crisis termination clauses, etc.
can help mitigate major losses from non-compliance.

Tracking obligations for large companies is tricky and risk-laden if done manually, and it may
take up too much critical time. A digitized repository can be your best bet, one that extracts
from contract meta-data and presents you with a comprehensive view of clause level
information for obligations.

Best-in-class CLM solutions like Zycus’ iContract can help expedite this task with the help of AI.
A robust repository helps you locate contracts, clauses or phrases within contracts easily with
advanced free text /metadata search capabilities. This information is available in real-time via
user-configurable reports and dashboards that users can make based on their needs.

S
Re-calibrate and Re-negotiate R
Actionable No. 3 Reallocate Resources

Managing a contract through its entire lifecycle is a very labor-intensive undertaking. It is

important to evaluate if your costly and skilled resources are working on valuable, high-impact
items.

This 20% becomes even more critical in times of

crises. If legal teams are busy locating contracts
from various scattered locations, or busy

According to Gartner scanning clause upon clause to find information,

they will lose out on critical time and leave the
20% of legal department business unprotected against serious contract
time spent on unplanned, risk.
high-urgency work is
Given current directives to cut costs, having your
wasted because of
teams work on tasks that are low-impact, or
picking up non-value below their skill levels is a waste of valuable
adding tasks that come resources, and during a recession this simply will
in ad-hoc. not be an option.

Outsourcing to law firms and outside counsel is one way to ease pressure on internal resources.
As per Gartner, 50% of in-house lawyers use their usual outside counsel 70% or more of the time,
irrespective of costs. But this may not be the most effective in terms of handling volumes
quickly, because human resources are costly.

A more cost-effective way to handle huge volumes of contracts quickly is to rely on digital
solutions. Especially for basic tasks like searching, scanning through clauses, highlighting
problem areas etc. AI can help reduce the bulk of time and effort spent on these activities,
giving your teams a head-start on proofing against possible risks.

In fact, most of the tasks and processes undertaken by the legal department no longer need to
be, and ideally shouldn’t be, handled manually. Especially when time is of the essence.

And if you haven’t already this may be an especially critical time for you to get on the CLM
technology bandwagon.
 Investing in technology when companies are cutting
costs may seem counterproductive but being able
to execute vital initiatives that improve your overall
49% of respondents were chances of weathering the recession is an indicator

mostly confident that of strategic and smart reallocation of resources.

their companies will be

PwC’s 2022 Pulse Survey found that despite the
able to execute overall bleak outlook of the economy, a majority of
business transformation executives remain ‘mostly confident’ in their

initiatives. company’s ability to execute important strategic

activities on their roadmaps.

Executives remain confident despite economic uncertainty

Execute on overall business

transformation initiatives 49% 33%

Achieve near-term
growth goals 44% 33%

Confirm change initiatives

deliver expected results 47% 30%

Exit low performers 40% 37%

Free up working capital 46% 30%

Make an acquisition 38% 37%

Mostly Confident Completely Confident

Source: PwC Pulse Survey, November 2, 2022: base of 657

R
 Re-evaluate Current Contractual Relationships &
Actionable No. 4
Obligations
Contracts that are already signed and on the back burner, such as evergreen contracts, and
auto-renewed contracts need to be brought back to the drawing board to re-evaluate the
relationships, terms listed in them and their validity in current times.

For each of the critical categories, legal teams should identify contracts that are being
renewed in the next 90 days to judge if there is any wiggle room to renegotiate more favorable
terms. Successful contract re-negotiation requires quick access to contract terms, renewal
dates, spend data, and good relationships with the key budget owners.

For business-critical systems, you can try to renegotiate the price if there are features inside a
product that your stakeholders aren’t using. For products that aren’t that critical, reconsider if
you even need them, before renewal cycles, ask the stakeholders and users of the product
about its usage and the workflows dependent upon it. The main priority currently is to remain
profitable and to continue to enable your revenue engine, anything that does not contribute to
these items is dispensable.

CLM software can help configure alerts & reminders and notify stakeholders of upcoming
milestones/renewals so that contracts don’t slip through cracks and can be timely
re-evaluated or re-negotiated before any fresh commitment is made.

New contracts with long lock-ins are a no-no for volatile times. When times are tough
everything needs to remain flexible so that you can pull out if needed.

In fact, it may even be time to rethink contract models to suit the unpredictable economy. For
instance: Short-term (or on-demand) rate contracts have already become the norm in the
shipping industry, because they’re highly responsive and scalable to market volatility.

R
Build Provisions for the Future B
Actionable No. 5 Code Flexibility into Your Contracts

Code flexibility into your contracts to encourage more deals, facilitate easy exits, and more
protection from regulatory and supply-chain risks.

Safeguard against supply chain turbulences:

Economic downturns have a huge impact on the supply chain, slowing flows of cash, raw
materials and final products. As per a study by Accenture, 94% of Fortune 1000 companies faced
supply chain disruptions as a result of Covid-19. (Accenture)

It is essential to look at suppliers, their continued capacity to

fulfill obligations, their cashflows, raw material availability,
prices, etc.

Legal and compliance teams must be quick in analyzing how exposed their contracts are to risk.
All supplier regulatory data, insurance certifications, financial health information etc. should be
readily available to scan through very quickly.

Here are some levers you can toggle with:

Vendor Consolidation & Finding Back-ups: Companies choose to let go of multiple

suppliers, and aggregate within fewer partners to enjoy volume discounts; whereas
some protect against raw material availability by arranging for alternatives.

Altering payment terms: For your long-term vendor contracts, you can try to get on
monthly payment terms instead of getting into long-term payment commitments
where possible in order to save cash.

It is essential to make these decisions and changes quickly, based on in-depth analysis of the
level of supplier risk exposure to the company.

To put out these and countless other fires, you must be able to identify the risk first— and quickly.
Access to data is essential, because it’s all about the speed at which action can be taken. Clause
level information including the specific language you’ve agreed to, key supplier metrics etc. can
help make business critical decisions. Easy and timely access to this data is possible by
leveraging the right tools. Getting all your executed contracts centralized in one single, digital
repository is the first step towards any of this analysis.

For an efficient solution to risk assessment, it is worth looking into CLM tools on the market. Zycus’
Merlin Insta Review helps identify risk associated with suppliers along with suggestions to
mitigate these risks. This can help you take proactive measures for suppliers facing bankruptcy
(financial) risk, operational risk, catastrophic risk, reputational risk etc.

Safeguard against price fluctuations

During recession, pricing can change at highly frequent intervals, even on a weekly basis. And
due to manual or slow processes, legal teams can often miss out on evaluating contractual
levers associated with duration/term, indexing, and price increments. This can put a significant
dent on the company’s bottom line.

There are special clauses that cater to the volatility of markets in recession. One such example
is the price adjustment clause.

A price adjustment clause is a legal provision that requires prices or other monetary amounts
to be adjusted periodically based on the relative change in value of one or more established
and agreed upon price indices. This is especially useful if you are engaging in longer-term
contracts, and it can protect the interests of all parties involved.

B
 Brace against change in demand:

Demand fluctuates just as much as price and supply in an economic crisis. And demand
fluctuation, if not protected against can directly impact revenue. Here are a few ways you can
brace against this volatility in different types of contracts

Sales Contracts

Most customers react quickly to safeguard their own interests and pockets. They may stop
buying, cancel existing orders, delay accepting deliveries, seek discounts, reduce order
quantities, or may opt for lower spec/quality products and stretch out purchase orders and
payments.

Steps you can take:

Risk Assessment & Mitigation: Identify which customers are more vulnerable to recession and
may go back on commitments. For customers that are forecasted to pull out of agreements,
try incentivizing them with preemptive renewals for cash discounts.

Offer flexible payment terms: In order to encourage customers to keep buying and to sign new
deals, it is important to stay flexible in terms of your acceptable payment terms. For example,
giving away the NET-90, NET-45 payments for options like semi-annual or quarterly payments.

Employment Contracts

With reduced demand and cost-cutting directives, difficult calls may need to be made about
your workforce. It is essential to protect the rights of employees and at the same time to work
within the confines of smaller budgets and lesser projects/deals. As per Paycor, labor comprises
as much as 70% of total business costs in the US, it is essential to be attentive to the impacts of
rising inflation.

Steps you can take:

Flexible Staffing In the recent economic downturn due to the pandemic, 76% of HR leaders
admitted to using flexible staffing solutions. Flexible staffing is the use of temporary, contingent
workers to fill specific needs in a company. This way you can meet variable demand, ensuring
productivity and output are consistently high. Some ways employers go about this are
onboarding contract workers, workforce as a service, etc.

Regulatory Checks: Build flexibility in your employment contracts, keeping in mind the
region-specific legal obligations of an employer. It is essential to protect the employer and
the employed from legal liability by laying down fair terms in the event of necessary layoffs.
Procurement Contracts

It is important to keep your vendors on the same page and discuss changes in your requirements
because of altered demand. Expectation setting and renegotiating can protect your firm from
inventory bulge, liquidity concerns etc.

Steps you can take:

Manage expectations and commitments with suppliers: If your business volumes are forecast
to be low for the short-to-medium term, you should review volume commitments to suppliers
under longer-term agreements and proactively discuss and change them.

Explore new modes of payment to suppliers: In uncertain times when accurate forecasts are
not possible, you can also explore the possibility of profit sharing. Initiate discussions with
important vendors and partners to share risks and rewards.

Protect liquidity of the company:

To recession proof your contracts it is necessary to put in clauses to cover volatility related risks
like delayed payments, force majeures, early termination, revised SLAs etc.

Force Majeure:

Depending on the negotiated terms, and what is deemed to be ‘force majeure’, parties obliged
to you may not have to fulfill their obligations towards you, either temporarily or permanently.
This can cut off your cash flow and disrupt operations.

On the other hand, you may also be able to avoid making payments or providing services
during this crisis if the language in your contracts offers you the right protection.

It is essential to lay down fair terms for all parties involved. This may take some scenario
planning, to ensure you build in the right protection for the future.

Zycus AI-engine Merlin helps legal teams identify contracts that are covered under the Force
Majeure clause, the extension period in the case of Force Majeure, and if termination is
applicable under Force Majeure. By identifying the Force Majeure clause(s) in thousands of
contracts, Merlin AI-engine can mitigate risk right at the contract level.

B
Inventory Bulge:

If a company’s customers stop buying from them but their suppliers keep shipping parts or raw
materials, they will experience an “inventory bulge,” or a “working capital bulge.” This traps all
the company’s cash in the wrong form - inventory. And unable to quit their contracts,
companies can be forced to keep buying inventory. Renegotiating contracts with suppliers,
profit sharing models etc. Can help protect against inventory bulge.

Profit Squeeze:

A similar phenomenon occurs if customers stop buying and delay paying for existing ordered,
but you continue paying your suppliers on time, Organizations can face “profit squeeze” where
cash inflow is disrupted, and the business is not able to afford its expenditures.

To ensure all parties are protected, you must:

Ensure your contracts have flexibility to renegotiate.

Include explicit termination clauses with detailed provisions that allow cancellation only
under specific circumstances, not at will, simply for convenience. Specify terms of
terminations and minimum notice before termination as well as prorated fees before exit

B
Actionable No. 6 Mergers and Acquisitions – Looking Ahead

In their analysis of the “Great Recession” KPMG stated that “The winners back then took cost
actions to preserve margins when sales slowed, but they also used the downturn “to plot new
growth strategies— investing in technology, snapping up new assets and shedding businesses
that no longer had sufficient growth potential, “

Use the downturn to plot new growth strategies— invest in

technology, snap up new assets and shed businesses that
no longer have sufficient growth potential.

A downturn is a great time to prune your portfolio—and to pick up assets that can deliver new
sources of growth.

PwC analysis of the dot-com bubble recession has found that companies that made
acquisitions during the downturn saw great benefits. The median shareholder returns of these
companies that made acquisitions outpaced their respective industries, rising as high as 7%
a year post when the transaction was announced. In several sectors – including insurance,
consumer durables, healthcare, media, and entertainment – the annual median returns for
acquirers were significantly higher than the overall sector.

Recession can offer great buyout opportunities as often; even fundamentally strong businesses
may be available at deep discounts. However, instead of buying white elephant companies,
you can focus on buying mono-product companies which are up for sale at steep discounts
due to the recession. Such companies are leaner, the value is preserved in the product IP and
brand, and don't have the overheads of larger companies.

B
CONCLUSION
Any business is exposed to different vulnerabilities be it owing to internal reasons such as
bankruptcy, lack of funds or external reasons such as inflation or recession. And that’s when
the legal team comes to the rescue by mitigating risk. Here’s what legal teams should keep in
mind when a recession is looming on the horizon.

People: During times of crises, the in-house legal team should step up in navigating the
company against troubled waters. Volatile situations are a good opportunity for legal heads
to get a seat at the table and offer legal guidance to management. The General Counsel
/Chief Legal Officer should directly work with the management and ensure there’s a robust
roadmap plan to counter recession and adopt different contingency measures. The legal
work should be delegated strategically such that enough time is spent on critical items
instead of low-value tasks.

Process: Make sure the legal processes are agile enough to factor in the loopholes of
clauses and terms and conditions. Legal teams should have:

1. Control: By having a centralized repository of contracts, you can control tasks, workflows
and the legal language used for each contract

2. Visibility: Constantly measure the performance of your contracts by tracking metrics,

risk exposure and benchmarking. By identifying underperforming areas, you can
proactively course correct.

3. Agility: Adopt an agile process to identify and counter recession in a timely manner
by lowering cycle times and improving collaboration.

Technology: CLM software is a need, not a want, for companies wanting to protect
themselves from recession. Artificial Intelligence-enabled CLM software helps recession
proofing your business by:

1. Identifying risky clauses in your contracts

2. Setting up reminders to not miss out on obligation milestones and expiry dates

3. Suggesting right clauses for the right scenarios by learning from similar historic contracts

4. Monitoring contract utilization across suppliers to track if maximum spend is spent on

preferred suppliers
 Zycus is the pioneer in Cognitive Contracting
software and has been a trusted partner of
choice for large global enterprises for two
decades. Zycus has been consistently recognized
by Gartner, Forrester, and other analysts for its
Source to Pay integrated suite.

Zycus powers its S2P software with the

revolutionary Merlin AI Suite. Merlin AI takes over
the tactical tasks and empowers procurement
and AP officers to focus on strategic projects;
offers data-driven actionable insights for quicker
and smarter decisions, and its conversational AI
offers a B2C type user-experience to the end-
users.

Zycus helps enterprises drive real savings, reduce

risks, and boost compliance, and its seamless,
intuitive, and easy-to-use user interface ensures
high adoption and value across the organization.

Start your #CognitiveContracting journey with

us, as you are #MeantforMore.

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