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Complex Contracts: What To Do Differently

March 7, 2012

In yesterday’s blog, I touched on a series of meetings that illustrated the growing importance of contracting and commercial skills. One of these referenced a presentation by Ross McKean and David Halliday from law firm Baker & McKenzie and today I will expand on that.

Drawing on the IACCM research of ‘the most negotiated terms’, Ross and David led a study with Baker & McKenzie clients to confirm whether negotiations for outsourcing contracts tend to follow this same pattern and use the limited time and resources for negotiation to focus on the wrong topics.

Their findings reinforced the IACCM results. The top five issues that emerged were:

  1. incomplete service definitions
  2. poorly constructed service levels
  3. failure by customer organization to implement required internal change
  4. allowing an adversarial relationship to emerge, rather than collaborative partnering
  5. failure to consult internal stakeholders adequately during the RFP process

In combination, these issues point to the primary sources of claim and dispute captured by IACCM’s studies – that is, disagreement over scope, disagreement over changes and disagreement over price / charges.

The customer organizations were then asked what they would do differently. Here are the answers:

  1. spend more time defining scope and goals – and make sure the contract is built around those goals
  2. allow more and better structured time for the procurement process
  3. be more rigorous in eliminating ‘nice to haves’ from the requirements
  4. keep the bid process competitive as long as possible (in the sense of learning, not in order to further drive down price)
  5. set up a win-win contract that locks in common interest, trust and value
  6. negotiate value for money price, not cheapest price

Each of these points led to expanded discussion with important lessons to learn. To a significant extent, a core problem is the absence of clear ownership for contracting and negotiation, and a failure to recognize the end-to-end process linkages – goals, requirements, measurements, contract design, negotiation plan and style, implementation, governance, change. When these are disconnected, performance is inevitably impacted.

One final point related to the use of third party advisors. Most survey participants felt that their involvement ‘tends to create an antagonistic procurement process’. Of course, if this is happening, it remains the responsibility of the customer organization to give proper direction and exercise control. But it is also encouraging that a leading advisor such as Baker & McKenzie has itself explored such issues so that they are in a better position to guide their clients to put together successful deals.

One Comment
  1. Tim, The only thing I would add is if there were internal disconnects between business units that existed, outsourcing one function isn’t going to solve that problem. It’s going to magnify the problem because those disconnects now become costs and claims.
    Jack

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