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Contract Flexibility: Are We Entering A New Era?

March 2, 2010

An IACCM member wrote to me today to say “I am looking at contractual flexibility/agility and am keen to understand whether it is an area where the IACCM has undertaken much research?  Customers increasingly (push for) long term partnering, combined with the ability to (make fundamental changes) at short notice.  If there is any research in this area I would be keen to understand more”.

There is no question that this has become an important issue in many negotiations. In part because of experiences in the recession, and in part due to the overall increase in the speed of change, more and more companies want to have their cake and eat it; they want the benefits that come with committed relationships, but they want the flexibility associated with more casual encounters.

Clearly, suppliers who can offer greater flexibility will be at an advantage. Yet since most successful relationships require investment, how can this be offered without damaging profitability?

On one level, the question is of course simply a risk assessment. In reality, how much flexibility will customers actually require? And taken across a portfolio of customers, might the gain in competitiveness (and hence customers retained or won) outweigh the costs associated with greater flexibility?

At another level, while many sectors are experiencing growing pressure for more flexibility in contracts, the precise sources of pressure vary and that means the specific terms under pressure are also variable. Among the most frequent that I am observing are: 

  • IP rights
  • Termination
  • Revision of services
  • Revision of service levels
  • Options for additional services
  • Volume adjustments
  • Right to deal direct with sub-contractors
  • Price renegotiation and benchmarking
  • Delivery / shipment
  • Delay / suspension
  • Contract review
  • Escalation procedures

Approaches that I am observing to handle this uncertain environment include the creation of shorter and more specific contracts; the use of milestones to trigger formal contract review / renegotiation; the use of ‘buy out’ clauses to enable investment recovery in the event of reductions or termination; and more specific understandings regarding IP rights, the management of confidential information and the exploitation of innovation etc.

There is a  big dividing line between contracts for commodities, where buyers want to have flexibility on volumes, shipping, market pricing etc., versus higher value relationships where the goals may be directed more at innovation or collaboration over time, yet need to similarly recognize either that market conditions may change, or business goals may alter. Another factor influencing this is the relative size and power of the firms involved.

IACCM will most likely conduct some more formal research in this important area and is already interviewing a few major corporations about their experiences, but in the meantime it would be great to hear your thoughts and experiences.

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