How the Finance and Legal Department Can Collaborate to Reduce Risk

Cross-functional alignment between finance and legal is crucial to a business’s success. Many of the decisions for which the finance team is ultimately responsible – mergers, acquisitions, disclosures, and offerings – all require input from the legal team. These high-risk dealings require effective collaboration between legal and finance to achieve desired business outcomes. Indeed, legal and finance are together the company’s best insurance against costly disaster, and therefore need to see each other as allies.

It is important for the legal and finance departments to have a strong relationship for many reasons, not least of which is the daily influx of new contracts. Inevitably, finance will need their eyes on all new contracts that come across legal’s desk to measure the deal against the client’s size, unforeseen needs, credit rating, and the nature of the products and/or services offered.

Here are 6 ways finance and legal departments can collaborate with each other:

Legal is often considered a cost center, and in businesses that have higher risk for litigation, those costs can put the business as a whole at risk. For this reason, it is important for finance and legal to be on the same page when it comes to spending.

Together, legal and finance can use predictive analytics and scenario modeling to measure key metrics such as actual spend, types of legal matters, and budget on a year-to-year basis. This allows for data-based budget creation, which allots legal the money it needs to operate efficiently while proving the return to the overall business. Legal and finance can work together to form and analyze budgets, and use this model for various analyses across the organization.

While legal often outsources work from outside counsel to help with their workload, they do not always track key performance metrics like work completed, time allotted, and hourly rate. They are therefore unaware if they’re optimally using external resources. 

In order to make data-based vendor-sourcing decisions, legal and finance departments should align on a vendor management program to ensure quality outside counsel support under optimal fee arrangements. This will empower both departments to hold regular business reviews, negotiate fee agreements, and drive governance of billing guidelines.

Time is one of a business’s most valuable resources, and legal counsel’s time comes with a high price tag. Legal and finance have the opportunity to collaborate and find ways to create efficiencies through standardization. 

By working together to determine standard terms across contracts and outlining which terms can or must be personalized per transaction, they can eliminate unnecessary time spent reviewing standard terms. Rather than reviewing each and every finance-related clause in a contract, finance only needs to review personalized sections in the agreement.

Pair in-house counsel with someone in finance so each has direct points of communication within departments. Having an assigned go-to person in another department can help expedite business as well as build rapport between team members who would not have otherwise worked together.

This can also help to evenly distribute requests among team members and alleviate bottlenecks.

Finance will need insight and access into executed contracts to ensure revenue recognition. This is why it will be imperative that they also play a role in the company’s shift toward digital transformation. The finance team will likely need to know certain financial terms within the contract to run reports, create contract reminders for key compliance terms, and ensure that the milestones are reached and billed.

There has been a big shift in companies hiring vendor management companies with accompanying fees, adding another layer to both the payment and compliance aspects of contracts.

Legal departments are expected to add value to the business and operate strategically to achieve company goals. Yet, they are often provided a limited budget, which prevents them from hiring outside counsel and bringing innovation to the legal department.

Expanding legal’s budget empowers them to consider and purchase software that optimizes business’ processes and outcomes, including comprehensive contracting solutions – which can often only be considered a sales resource. It also allows them opportunities for continued professional development, trainings, and off-site meetings, a practice with long-term benefits for the company at large.

With an established and stable relationship between the finance and legal departments, finance will be able to review contracts in a more timely manner, and legal will receive comments in time to make their own assessments. Indeed, many things have to be accounted for, such as warranty periods, termination clauses, and the increasingly common “Most Favored Customer” clause, and alignment between the two departments is key to ensuring nothing falls between the cracks. Obtaining the finance department’s comments on contracts can be very beneficial to ascertaining the “big picture” of risk for the company.