Contracting Ownership Remains A Core Problem

In a recent post, I posed a question asked by an IACCM member, regarding why it takes so long to conclude many contract negotiations. One answer came from Colin Jacobs, and I have reproduced it below because I think that Colin offers not only an answer to the original question, but also relates it to another very lively dialogue related to ‘the purpose of a contract’.

I agree with Colin’s observation that many contracts take a long time to conclude because there is so little agreement or understanding about what ‘the contract’ really is. We still have a school of opinion that the contract goes into the drawer. This school tends to see attachments, statements of work, service level agreements, schedules etc. as somehow independent of what they deem ‘the contract’. For this group, the business terms and the legal terms are separate.

As Colin comments, few organizations approach contracting in any holistic way. There is a tendency to have relatively independent teams, with little contract knowledge or experience, preparing a series of documents that may or may not fit together.  Eventually someone has to try to make sense of these and hopefully may have time to do so before signature.

“As an IT negotiation professional, I’ve found that executives of mid-sized organisations are generally receptive to advice about the time it really takes to construct and negotiate a commercially and legally robust outsourcing contract. Too often in larger organisations, time to agree the contract is perceived as being of the essence and getting the stakeholders focussed in a contract-related task that many do not enjoy (or feel confident in their abilities to perform) are both very real issues.

In complex outsourcing transactions, there may be misguided executive belief that lawyers are miracle workers and that putting more of them on the case is the solution to aggressive time limits. In outsourcing and other complex transactions, the legalese is a ‘common framework’ that can be applied to any number of different transactions. Schedules appended to the legalese define in great detail the particular transaction that is being contracted for; because they are unique to each transaction, and that’s the biggest single reason why such contracts take more than a little time to develop and negotiate. They are authored within the business rather than by lawyers and may well comprise >90% of the final contract documentation.

Most schedule authors, I suggest, lack adequate understanding of the legal framework to which their schedule is subject, often working in isolation from others who are concurrently drafting related schedules. So, in order to produce contractually robust schedules, the original author’s drafting usually needs substantial rework by specialists within the procurement team. Much can be done to educate the schedule drafters before they commence their task; there will still be rework but, likely, not as much.

In IT, outsourcers often bid low initially in the belief that they will later be able to improve margins by exploiting the contract’s or customer’s deficiencies. The obvious point to make is that once the contract is signed, it’s set in stone unless both parties agree its variation. So, if contract development or negotiation is rushed, it’s guaranteed that many unpleasant and costly issues will arise after the paperwork has been signed.

Robust contracts simply take time and commitment to develop and agree; there are no short-cuts, but starting early with an informed team, good planning and effective project management sure helps! Perhaps the answer to Andrew’s question vests in the sales adage “Tell them what you’re going to tell them; tell them; tell them what you’ve just told them” as a reminder to those executives that ultimately, it is they who will shoulder the burden of a rushed contract.”

Almost all of the observations we have made and received confirm a core problem – that in most organizations, no one has ownership of contracting. As a result, there is no consensus within the organization over the role or importance of the contract and the right (or appropriately trained) resources are not involved at the right time. This means that there is insufficient oversight of the two key characteristics that make for quality contracts: 1) that they have integrity (complete, consistent, understandable); and 2) that they support business goals and are likely to lead to a successful outcome.