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What does a good contracting strategy look like?

February 23, 2010

Phil Pavitt, CIO at the UK’s Revenue & Customs, wants to ‘kill’ big IT contracts, according to an article on Silicon.com. He apparently believes the mega-deals that were so in vogue a few years ago are unmanageable and should be divided into contracts worth a maximum of £100m each.

Phil is not alone. The last year has seen a growing wave of questions, especially from the IT community, about the way that relationships are structured and managed. Many CIOs today feel that they should take direct control of more relationships (for example, with sub-contractors) – and that they must build contract and commercial skills within their own team in order to manage them.

This trend flies in the face of sourcing strategies adopted just a few years ago, when common wisdom was that the number of relationships must be reduced, often through the creation of prime contractors. This strategy was of course accompanied by the emergence of more rigorous supplier segmentation, resulting in highly differentiated levels of investment in supplier relationships – an approach that is also proving contentious in many places (those non-strategic relationships have a nasty habit of being the ones that bite you).

Relationships are complicated. To work well, they require some investment of time and effort. It is wrong to assume that the closest relationships always offer the best results. For example, recent research in the networked world has revealed that “the more distant members of people’s networks are often the best source of new job leads”. The global networked economy has made things so much more difficult – it dangles the prospect of infinite relationships, each apparently better than the last, yet no established mechanisms to evaluate or manage them.

This is why so much academic work is starting to focus on relationship management – the difference it makes to results, the hidden costs, the factors that make it fail or succeed. But at present, beyond general observations that it is important, there are no firm guidelines on how best to evaluate or develop successful relationships. IACCM has been focusing on the role that contracts play in this – for example, ensuring contract structure and terms are appropriate to the nature of the required relationship; understanding the impact of specific terms on the way that organizations behave; designing contracts to provide a framework for superior relationship governance.

It is clear that the quality of trading relationships has a big impact on organizational performance. It is also clear that the traditional localized model for partner selection has broken down (though in places it may start to re-emerge). But it is not clear what the next model will  look like – how many relationships, how they should be managed, how close they should be, whether they should be local, regional, global …. And should relationship strategy drive contracting strategy, or should the experience with contracts be driving relationship strategy?

These are among the biggest questions for today’s business leaders. Our community of contracts, sourcing and legal experts must become more active in exploring and delivering answers.

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