Are Complex Contracts Doomed To Fail?

Adrian Ringrose recently called on the UK government to outsource more public services (Financial Times, October 19th 2009). Adrian chairs the Confederation of British Industry’s public sector strategy board and he believes that government should set ‘the rules of the game, the standards of acceptability’, but does not need to be in charge of service delivery. Interestingly, he cites the US military as an example of the potential scope for outsourcing.

Mr. Ringrose does imply one dependency – he admits that such relationships ‘must be properly structured’.

And it is here that we find the core of a problem. The structuring of relationships that deliver successful outcomes is proving extremely difficult. Organizations – both client and provider – appear to lack the necessary structures to handle complex, long-term relationships. Traditional management and measurement systems frequently get in the way. For example, it seems extremely hard to build consensus over the goals of a relationship; then it is hard to reconcile the differing views of risk; and of course different internal groups may have diametrically opposed views of the desirability of reaching agreement – some may be welcoming, others threatened.

The Economist recently highlighted this issue in an article that reported on insourcing and the return of ‘big business’. Oliver Williamson, this year’s winner of the Nobel prize for Economics, also recognizes the issue in his work on transaction cost. At the core is the challenge of building consensus that an external relationship is desirable, then finding a good and compatible partner, and then maintaining that partnership over time. These dependencies are not readily enabled by current organizational models and skill sets. And this is the reason why the US government – especially in defense – is reported to be wary of future ourtsourcing and considering reversal of some existing contracts.

One way that organizations often seek to safeguard their more complex and strategic relationships is by the creation of specialist internal groups – ranging from the traditional empowered ‘account team’, through to specialists in areas like outsourcing or alliances. Today we see the growth of ‘commissioning managers’ and Supplier Relationship Managers.  These groups may offer special skills, but often they are also powerful and well-connected advocates charged with overcoming internal resistance. Results show this is often a thankless task.

Another approach – consistently highlighted as a key dependency in surveys – is to appoint a powerful executive sponsor, whose sustained involvement is needed if key relationships are to succeed.Yet of course executives cannot be involved on a daily basis in every important relationship and creating specialist teams is both inefficient and contentious. And that is why – if complex contracts are to succeed – the total contracting process must be overhauled and the management of complexity must become a core organizational capability. We need to understand that investments in standardization and compliance were not end points, but that they represent a firm base from which uncertainty, change and variation can be measured and managed. We must not become constrained by the standards we have created; we made that investment so that we can free resources to manage exceptions in an intelligent and standardized way.

The reason that contracting is so important (according to Professor Leslie Willcocks, it is one of the three core competencies required by any successful 21st century business) is that it has become an instrument of relationship segmentation and quality control. It is also the basis for the management of change in a controlled and harmonious way. Neither party to a contract has an innate interest in disputes, yet without the right instruments for on-going dialogue, without the right balance of risk, without the mechanisms to manage the inevitability of change, then dissatisfaction is almost inevitable.

Key to success is on-going communication. But of course not just any communication. Because these are business, not personal, relationships, communication must have structure. Much of it may be virtual, through inter-connected systems (especially with the advent of cloud computing). One thing that is certain is the need for the right skills and people with the right incentives and measurements – and the right governance tools, established and maintained through the contract.

Mr. Ringrose is absolutely right to call for more outsourcing because, in principle, it can deliver far better service at lower cost to the taxpayer. But unfortunately, when it comes to ‘proper sstructure’, we are struggling. As a result, there are some dependencies that must first be met because failed contracts cost money and damage reputations. Failure is not inevitable; but consistent success requires new thinking about the way that contracts and relationships are inter-connected and inter-dependent. And that, of course, takes us back to the core mission and agenda of IACCM …..