Spot the Difference - Legal vs. Commercial
As someone who was a partner in a law firm and then Head of Commercial in an advanced engineering business, I am occasionally asked what the difference is between “legal” and “commercial”.
This question matters more than you might think.
Without a proper understanding of both legal and commercial – and how they fit together – the risk organisations run is that, at best, results won’t be as big or robust as you want and, at worst, you will end up doing something fundamentally wrong and damaging.
On the other hand, with that proper understanding, organisations can gain a real edge (and avoid some pretty nasty pitfalls).
In this article I’m going to try to shed some light on this issue – an issue which is all too often shrouded in unhelpful waffle.
In a nutshell, I would define the fields of “legal” and “commercial” in the context of what an organisation does as follows:
Legal – applying knowledge of the law to achieve a desired result or avoid an unwanted one.
Commercial – applying knowledge of an organisation, sector or wider operating environment to know what the actual desired or unwanted event is.
Put another way, commercial is about knowing where you want to end up, and legal is about helping to get you there.
What that means in practice is that legal advice without commercial knowledge of what really matters is a great way to be really successful at achieving the wrong things. For example: yes, you completely beat the other guy up in those contract negotiations and you now have a super-robust contract to show for it. On the other hand, they’re never going to do business with you again, which is a shame because they’re the best at what they do and you’ve just blown the chance to build a strong collaboration and deny their services to your competitors.
It also means that commercial decisions without proper legal input lead to:
false assumptions about what really matters;
being undermined by unseen pitfalls; and
missing chances to do things better.
Four practical examples might help to illustrate these points.
Back in the day, I used this example to help me tell whether or not my trainee solicitors were commercially-minded. Imagine that there are two websites – one, plasticsurgeon.com, advertises the services of a top Harley Street cosmetic surgeon; the other, plasticsurgeon.co.uk touts the skills of a national plumbing company specialising in plastic piping.
One day, the Harley Street surgeon receives a nasty letter from the plumbing company, saying that they acquired the plasticsurgeon.co.uk domain before he acquired his, and threatening him with all sorts of legal consequences if he doesn’t take down his website.
I then used to ask my trainees to think about what they would advise the Harley Street surgeon to do and come back to me. I would often be given meticulously researched and completely correct notes explaining all sorts of clever ways of countering the legal arguments made by the plumbing company. (I often learned some law as a result – these trainees were bright and thorough.) A feisty and probably expensive legal argument would almost certainly have ensued.
What I really wanted, though, was a commercially-minded solution. Something like: respond to the plumbing company by pointing out that the two types of services involved were not in competition with each other and that the potential confusion could be dealt with by having a pop-up on the surgeon’s homepage explaining that top-notch plumbers specialising in plastic piping could be found at plasticsurgeon.co.uk, with a reciprocal pop-up on the plumbing company’s homepage.
Expensive legal battle avoided, customer confusion solved, and it might even drive a little more traffic for both websites.
Legal insight, no matter how technically accurate, can become a time-consuming or even self-defeating thing without the proper commercial perspective.
I once acted for a company which lost a major bid for a public sector contract. Many hopes had been pinned on this contract and losing it was a major commercial blow.
I was asked to look at whether or not there were legal grounds to challenge the outcome. There were. No massive smoking guns like one sometimes sees, but the public sector had definitely breached procurement law and this had definitely disadvantaged my client. What was less clear was whether or not my client would have won if those breaches hadn’t happened – they were a fair bit more expensive than the winning bid.
My client was chomping at the bit to launch a challenge. I advised them not to. In my view, the legal arguments were pretty finely balanced – it was far from a slam-dunk case – but, more importantly, there were other big opportunities coming up with the same public body and, even more crucially, there seemed a very good chance that the winning bidder had so massively under-priced that they would either go bust or be forced to give up the contract within a year or two at most.
All these factors together meant that the wider commercial objective of winning further work from this public body – including picking up the contract they’d just lost when that inevitably came back up for grabs – outweighed any shorter-term gain of possibly making a successful procurement challenge.
(I should add that I don’t believe in running scared of challenging public bodies – but the potential harm of rocking the boat you’re trying to board should always be borne in mind.)
It’s worth noting that we did, however, use informal communications to let the public body know that we were onto their procurement law breaches – just to help keep things proper for future bids and send a signal that my client wasn’t a complete pushover. I can’t say whether or not that worked, but my client did win the next bid and did also end up picking up the contract it had initially lost, after the original winner abandoned it.
Again, a black-and-white application of the legal side of things would have led us one way, but the better commercial outcome lay in a different direction.
I once worked with a national charity that was heavily involved in bidding for contracts. One contract it was going for was broken down into geographical lots.
The charity had previously had some early talks with another organisation about collaborating on a bid. In the end, they decided not to, but agreed that they stood a better chance of winning if each of them concentrated on just one of the lots.
From there, it was a short step to agree which lot the charity would go for and which the other organisation would target.
This approach made perfect commercial sense – each bidder knew exactly where to target their efforts and resources (bidding, as most readers will know, can be an expensive business). It was also better for the people on the receiving end of the services which the bidders were competing to provide (each bidder had particular unique strengths) and arguably better for the customer running the procurement (because one of the reasons they had split the opportunity into lots was to reduce the risk of the service provider going bust by taking on too much).
The trouble is, it was also completely illegal. This type of market-sharing arrangement (no matter how informal) is almost always a breach of competition law. It also breached anti-collusion rules which apply to public procurements.
Fortunately, we were just about able to get things back onto a sounder legal footing before things went too far, but for a while there it looked like both bidders would have to pull out of the procurement entirely, which would have been a major setback to both of them and a catastrophe for the customer and the service users.
Blissful ignorance of the legal side of things very nearly had disastrous commercial consequences.
This one doesn’t have a happy ending.
A company developed a clever piece of technology which had real benefits in their own, narrow sector, but also potential applications across a whole load of other sectors.
Someone at that company was very commercially astute and spotted the wider market for the technology. They also, quite rightly, identified that their company would struggle to exploit that wider market without any knowledge of or name-recognition in any sectors beyond their own niche.
Sensibly, they started talking to a trusted partner who was a big player in one of the largest and most obvious wider markets for the technology. By agreement, that partner sounded out a few possible customers, to get a feel for likely demand (and help calibrate pricing). The feedback came in – it was all looking extremely promising. The only slight fly in the ointment was that one supplier in that wider market was notorious for developing competing products and then undercutting its rivals. Patenting the technology was the obvious step – this would protect against copycats and give a good window in which to establish the new technology in the market.
Patent attorneys were duly instructed – but it wasn’t long before they were delivering bad news. Because the company’s discussions with its trusted partner – and, even worse, the partner’s sounding-out of possible customers – were not covered by a confidentiality agreement, the technology had been “disclosed” – meaning it couldn’t be patented.
With good (belated) legal advice the company was able to still put in place some (less robust) protections for its invention, but it made far less money than it ought to have done – the protection that a patent gives means that a company with a patent can usually command a higher market price (because there are no competing products) and a higher fee or profit share when licensing the technology to other organisations in order to exploit wider markets.
Again, ignorance of the legal side before charging ahead with (otherwise perfectly sensible) commercial decisions ended up costing a lot of money and undermining the commercial aims.
The list of examples is endless, but hopefully the ones above give a good idea of what I mean by “legal” and “commercial” and, more importantly, how they relate to each other.
Every commercial organisation (and I include public sector bodies and social benefit organisations within that) needs both commercial and legal expertise – and it needs them to be speaking the same (preferably clear and plain) language.
When it comes to legal and commercial, there is a difference but there shouldn’t be a division.
Focusing on only one is like having a bike with one wheel – and only clowns ride unicycles.
© 2018 Candid Commercial Limited