Coping With Uncertainty

Yesterday I moderated a discussion among a senior group of contract and commercial experts from IACCM’s Alliances & Teaming community of interest.  Our core topic was to discuss what might be learnt from alliance forms of contract and whether such approaches should be used more generally in contracting today.

Overall, the group recognized the tendency in most corporations for specialist groups to form silos and how these become an obstacle to shared knowledge and experience. “Visibility and transparency in contracts is not good,” commented one participant.

This failure to share and discuss contracting options and lessons learned is a source of weakness and has negative consequences. Among these, participants identified the inability of most contracts or commercial groups to demonstrate value or describe the merits of different contract types. “” We are trying to overcome this by mapping contracts to the financial budget,” explained one Commercial Director, who went on to describe how this meant a need for much more transparency and the ability to evaluate relative performance of different contract types.

However, the issue that most felt should be the biggest driver for sharing of experience is the challenge of managing uncertainty. “It’s the propensity of the business climate to change. It is increasingly rapid and unpredictable; we have to have the ability and flexibility in our contracts and organizations to change targets and goals. We must learn from what works and what doesn’t work.”

The group felt that factors like these are driving new thinking about the priorities within contracting and negotiation; they agreed with the findings of the 2009 IACCM study of ‘most frequently negotiated terms’ and the shift this anticuipates towards ‘governance’ terms, rather than the traditional risk areas. As one participant put it: “Negotiation focus has been on eliminating uncertainty in litigation; today it must shift to ensuring a shared understanding of what the parties want.”

This shift in focus was felt to favor the types of provisions and principles that underlie alliance agreements – although it is unclear whether there are good models to follow. “Often the term alliance seems to be used to describe rather vague arrangements, covered by long and wordy contracts that lack any real substance,” observed one lawyer. A Procurement Director explained that in his company a start has been made by categorizing suppliers into Strategic, Core, Managed and Transactional relationship ‘buckets’. These are reflected by variations in contract type and negotiation approach – although he admitted there was probably some way to go in refining these models.

The issue of ensuring mutual understanding is perhaps key. Many ‘collaborative’ agreements today still fail to reflect the perspectives of both sides. Frequently, the contract model and the negotiation are driven by one side’s view of value and the relationship, paying little attention to how they are in fact perceived by the other side. “The key (to improved relationships) is that they must be founded on aligned strategies,” observed a senior manager from a major technology company. “We need to spend time on creating framework agreements that then enable transactions and we need to build relationships that understand alignments and misalignments between the organizations.”

The challenge of achieving collaboration was highlighted when Jason Anderman, of WhichDraft.com, observed the failure in many organizations to build internal trust. “Is there benefit in cooperating?” he asked. In a comparison to Game Theory, Jason commented that many internal groups understand that in theory they (and the business) would benefit from cooperation, but each is entrenched in its negative views of the ways that the other behaves. In order to make a break-through in external partnering, internal barriers have to be addressed. Incentives and disincentives must be changed.

The discussion concluded with overall agreement that collaborative structures such as those used in alliances would benefit business outcomes and in particular assist in managing the uncertainties that are intrinsic to today’s more complex and more volatile trading environment. However, if we are to move from occasional successes to a more embedded approach to collaboration, changes will be needed in several areas:

• Measurements and incentives must be aligned internally and externally to encourage  collaborative, outcome-based relationships
• Internal responsibilities must be clearer and there must be a planned development of the competencies needed for collaborative contracting
• People with the required skills must be developed and placed in positions to enable collaborative agreements
• Model agreements, ‘best practice’ terms should be developed and promoted

Work on these items will continue. As a first step, IACCM will approach members of the Alliances / Teaming Community of Interest to seek examples of contracts or of specific terms and conditions that represent good practice and encourage positive and collaborative relationships.