The Purpose Of A Contract
Today I attended a presentation on ‘quality by design’, delivered by Rebecca Vangenechten of Siemens Life Sciences.
The session got me thinking about how we would embed quality by design principles into contracting. And I realized that there is no consensus on what ‘quality’ means in terms of a contract. Is it to do with design and layout? Completeness? Legibility and clarity? Its effectiveness in protecting the drafter? The extent to which it generates successful results? And without knowing quite why we are doing it, how can we be sure that what we are doing is of real value and quality?
So I have a challenge for you. Without any sense of what is ‘good’, we cannot determine whether a contract – or the contracting process – is ‘fit for purpose’. And that seems to me a serious omission. It also explains why we struggle to demonstrate and describe the value of the contracting process. I need your help in fixing this problem.
It is time for the contracts community – contract managers. lawyers, sourcing professionals – to define what ‘quality by design’ means when it is applied to contracts. To get us started, I posed the following question to some of IACCM’s senior members:
“I am listening to a presentation on quality by design and it strikes me that it would be very helpful to apply that concept to contracts.
However, to do so we must define what we mean by ‘quality’ in the context of a contract. In most cases, quality is determined in the context of outcomes or outputs. What do you think these are in respect of a contract; for example, the avoidance of unpleasant consequences? The enablement of a successful trading relationship? …..
If we can agree quality indicators, we will be able to determine appropriate measurements that in turn could drive benchmarks and improvement.
So what are the quality indicators for a contract, in your mind?”
I received a couple of answers and they illustrate why this should be a key issue for us. I share these inputs with you – but please add your comments so that we can consolidate the thoughts of our community and develop an answer to the very important question ‘What is the purpose of a contract?’
“Quality contracting results in no surprises for either party. The customer requirements and vendor commitments are fully aligned and both parties have one and same expectation of what contract compliance or fulfillment looks like. The outcomes or deliverables for the contract (flowing both ways) are objective and measurable. There is no gray area or white space to be debated at a later time. New players coming into the engagement mid-stream can read the contract and understand clearly what the obligations and expectations of the parties were at signing and are going forward.
Well over 80% of the disputes and disconnects I see are due to poor scope language. And that is not just referring to the SOW, for scope requirements can be in any number of documents. The standard I use is a six sigma concept (at least that is where I was introduced to it) of goals or deliverables being SMART. SMART stands for deliverables that are
- Specific criteria for success or compliance — not vague, but focused and clear
- Measurable — measures that result in any 3rd party, not familiar or close to the deal, can determine objectively whether a requirement has been met or not
- Aggressive but achievable
- Relevant to the strategy or goal
- Time-bounded (there is a due date)
Certainly, most contracts have these characteristics imbedded. The biggest issues, in my experience, are around S and M of the acronym. “
And a member in Italy suggested that: “Thought it is really difficult and it is even down to how we do measure the success of a negotiation.
I’ve been pondering what could be an objective criteria of a good quality, though I couldn’t find any applicable world-wide. For instance, let’s consider the number of disputes once a contract has been signed. I’ve been engaged to negotiate a 3-yrs agreement of ca 7$75M USD ending up with terrible Ts&Cs (anyone on earth would have considered of poor quality) though we didn’t have any issue w/ the customer for more than 5 yrs. At the other extent we had a smaller value agreement (ca 25M over 2 years) that was almost including standard T&C for my ex-company: after few months we were close to go to court. In fact the attitude to use contract and to be litigious it really varies from culture to culture….
So if anyone has some bright ideas, I will be happy to implement them in my team.”
Please add your thoughts. And thanks, Rebecca, for inspiring the question!