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Contracts As Commitments

December 9, 2009

“A business is a network that allows us to make offers”, according to Fernando Flores, entrepreneur, politician and innovator.

Mr Flores has led a fascinating life, including at the age of 27 a brief period as Finance Minister in the government of Savador Allende. Following several years of imprisonment by the Chilean military junta, he was able to start a new life in the United States, where he quickly started to apply his fascination with computers to innovative business process and management systems. Today he is once more a politician and Senator in his homeland of Chile.

Out of these interests and experiences, he developed ideas that are highly relevant to all those involved in contracting and business relationships. This quote, taken from a recent edition of Strategy+Business, illustrates my point:

“Spend any time with Fernando Flores and he will assess you. He may make an offer, which you are free to accept or decline. If you accept, he will make a commitment to fulfill his promise. These simple words, or “speech acts,” form the vocabulary of a set of practices that he has deployed across three continents. Their purpose is to help organizations realize improvements in productivity, coordination, and culture — by codifying and making effective the directives and agreements at the core of business conversation.”

One of the terms that Mr. Flores uses to describe his philosophy is ‘commitment-based management’. At its core is the principle that words are cheap; generalizations are easy; value is introduced when commitments are specific and measurable. “Most communication between individuals consists not of pure information, but of prompts for action”, he observes. But of course we have a choice as to how we respond to that prompt – for example, do we say we will ‘make best efforts’ or do we promise that functionality will be delivered? Do we say that delivery will be ‘as soon as possible’ or that we will have the project complete by Friday?

Underlying this work is the point that organizations exist to produce value, but that value is undermined if the organization cannot make and honor commitments. It is through commitments that we bgenerate trust and loyalty.

Turning to the world of contracts and negotiatiosn, we can immediately see how they influence these critical characteristics.

  1. Through the initial phases of the contracting process (the selling / supplier selection phase), we should be generating the discussions that are required to establish needs, their alignment (or misalignment) with capabilities, and the sort of commitments required (by both organizations) to support success. A key danger here is that the parties exaggerate their capabilities and create expectations that cannot be met.
  2. During the contract formation and negotiation process, we should be documenting the results of this first phase and turning generalized offers into specific commitments. Where things often start to go wrong are that either the commitments are left vague, or that the negotiators actually seek to limit the implied commitments that were offered. This may be because the promises made in the bidding process simply were not true, or because the standard practices, policies and risk appetite of contractrs staff are not aligned with those of their colleagues in Sales or the business unit.
  3. Assuming that a contract is established, the critical test is whether commitments are then met. In the post-award phase, we have not only the challenge of meeting what was offered, but also of managing changes to business conditions, capabilities or requirements. IN the real world, nothing remains static, so organizations must have the ability to reassess and re-open their commitments. The critical issue – fi we are to retain trust and cooperation – is to do this overtly and to avoid surprises.

Emphasizing this point about managing change, Flores believes that individuals and organizations are never fully trapped in any situation, even one as drastic as imprisonment — if they remain willing to change the way they think and talk about it. “We human beings are linguistic, social, emotional animals that co-invent a world through language,” he says. “That means that reality is not formed by objects. That opens a different world of possibilities.”

Flores argues that the obligations people create for themselves are stronger and more psychologically binding than the directions they are given by someone else. Hence we can assume that contracts, by capturing and recording ‘speech acts’ and embodying commitments, fulfil a critical purpose in binding organizations together. For those who question whether contracts have value, Flores’ work has led to an interesting statisitc. When companies assess the percentage of the time that promises are met:  “In the best companies in the world, they say about 60 percent will be fulfilled. In normal companies, it’s around 30 percent”. So just imagine if we improved the process of ‘commitment management’ to a point where, as a matter of course, all those involved with delivery felt bound by their promise. And in that world, a contract would become the charter of commitments, rather than a charter of aspirations, surrounded by caveats and exclusion clauses.

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