Managing risk in the supply chain

How does the GC manage risk in the supply chain affected by Covid 19?

The current pandemic brings with it a host of new challenges for the GC, not least the impact on your organisation’s procurement teams and supply chain.

 

This article looks at what those challenges are likely to be and some of the strategies the GC can adopt to meet them.

What’s the problem?

You are likely to have your procurement managers and directors beating a path to your (virtual) door with a variety of different problems, from suppliers demanding revised payment terms and threatening to withhold deliveries to upfront requests for financial help and potential or actual supplier insolvency. But it’s not all one-way - your own organisation might be struggling financially and may well be relying on you to help identify the immediate priorities to see it through the current crisis.

The technical challenge

While this article is not intended as a guide to the law, it’s the contract and commercial members of the legal team who will be most affected. Challenges will include interpretation of force majeure clauses, questions on whether the contract has been frustrated, as well as the need to consider options such as termination and re-negotiation. You may also have to think about the impact of competition law (for example relaxation of competition rules to allow co-operation in the retail, grocery supply and pharmaceutical industries) and others such as execution of contracts in a period of remote working.

Marshall your resources - internal

The demands on the legal team are immediate and demanding. The key is flexibility - carefully crafted legal structures may well have to be dismantled and rearranged at short notice. The team’s response will of course be geared to the demand. Options might include:

  • Setting up a team managed by a senior lawyer to triage matters as they arrive, categorising them by reference to the resource needed: minor queries that can be dealt with by junior members including paralegals; urgent questions that need input and response from a more senior member of the team; and immediate problems that have the serious capacity to affect your organisation that may require external counsel input (including potential dispute resolution (see “Marshall your resources - external” below) which should probably be handled at GC level;
  • Shifting members of other teams to help with the response having provided “first aid” training on the likely queries;
  • Dealing with immediate priorities, accepting that less important matters may have to take a back seat for now (see “Communication” below). But beware: this will have to be carefully thought through as in a time of crisis, it’s often business as usual that suffers and careful juggling of resources will be key.

Marshall your resources - external

The objective of most in-house legal teams should be to do as much of the organisation’s legal work internally as it can. It’s likely that you will have criteria you use to decide when work should be put out to law firms or other external legal resources. You should be prepared to rip up and re-write those rules to deal with the spike in demand for immediate advice on supply chain/procurement matters.

Things to think about might include:

  • What do you need the external legal resource to do? It may be that you would try to restrict (on cost grounds) instructing law firms to advise on those more routine matters where and do in-house, using their services further down the line in any event, particularly if the matter(s) becomes litigious;
  • On the other hand, if you decide you need additional external help at the triage stage because of the sheer numbers of queries, you may want to think about other options including using a managed service provided by paralegals working remotely by non law firm providers;
  • If your shortage of resource is at the more experienced lawyer level, look at use of consultant lawyers on short term contracts to help you over the peak (see budget implications under “Cost” below);
  • Which law firms to use? You may feel restricted to using your existing panel (whether formal or informal) but consider whether, depending on what you want your external lawyers to do, you need to instruct new firms who may be delighted to be instructed. Law firms will be receiving a large number of requests for advice on supply chain matters so you may need to check on their capacity to respond to you at the fee-earner level and in the timescale that you need;
  • Think about how you approach your law firms (whether panel members or new). A carefully thought out strategy discussed and agreed with the firm is likely to serve you, the legal team and your organisation better than a phone call demanding an instant response;

Communication

Think about ways that you can manage the incoming demand for advice at source. The key is to give your stakeholders confidence in the way you are handling the crisis. That might include:

  • A short, punchy, handy guide that you can draft for the procurement management team to email to their team members. While procurement managers are unlikely to appreciate an in-depth guide to the law of frustration, they will value a practical guide to the likely challenges that they are facing and a list of do’s and dont’s, top of which may be: if in doubt, contact the legal team; 
  • As part of the same communication strategy, explain how the legal team is dealing with queries, including any triage processes you have put in place and likely response times;
  • Think about the degree to which you need to keep your senior managers/Board directors informed. Again, they will have enough on their plate without a 10 page guide to the law, but a half-page executive summary of the main issues and how the legal team is responding will probably be appreciated;
  • GCs who are also company secretaries will need to think about how they keep non-executive directors informed as well as liaising with directors, the CEO and the Chairman more directly. The Board will probably want a report at the next Board/relevant Board Committee meeting on how your organisation is dealing with the most serious and immediate threats;
  • If the company secretary is not a lawyer, GCs/senior legal team members will need to ensure that the CoSec is advised along the lines set out above.

Cost

It’s likely that the increase in activity is going to result in a major dent in the legal budget. The worst thing to do at this stage is to ignore the problem and hope it sorts itself out over time. Your Financial Director  will probably already be dealing with the challenges of reducing cost at a time of declining income and a nasty surprise at the next budget review (whenever that may be) is the last thing that he/she will need.

You will need to liaise closely with your organisation’s finance team. One option might be a short summary:

  • identifying any extra budget required
  • giving reasons and objectives - focus on the immediate threat to your organisation’s interests 
  • explaining cost mitigation steps you have taken
  • including short term and possible longer term implications, particularly if you anticipate litigation.

 Again, communication is essential. You will want to impress on your stakeholders the controlled cost strategy you adopting, as opposed to a blanket demand for additional help from your external law firms.

Conclusion

These are exceptional times. The demands imposed on the legal team may be on a scale never seen before. But a carefully thought out strategy using the internal and external resources available to you will give confidence to your stakeholders, team members and the Board that will serve you well in the future.