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Contract & Relationship Management: Their Future

May 9, 2010

Leslie Willcocks, author and London School of Economics professor, recently suggested that contract management and relationship management will steadily integrate into a single competency.  I discussed this idea with Dalip Raheja, CEO of The MPower Group, in an IACCM ‘Ask The Expert’ interview (see recording in the IACCM Member Library).

Dalip opened by observing that today’s contracts are used to allocate risks between the parties and ensuring rewards are set accordingly. Relationship management is typically viewed as a separate activity.

However, we agreed that ‘contracting’ should be a wider discipline, offering a strategic view of the best relationship to achieve desired results. ‘The contract’ is an output – and contracting strategy may conclude that the best approach in some circumstances is in fact to have no formal contract. This simply represents an extension of the decision on how to allocate risks.

Organizations must distinguish between the contract and the contracting process and strategy, ensuring that the form of contract reflects the nature of the required relationship. In other words, relationship definition comes first. And in the event that the relationship changes, then the contract must also be adjusted. Also, for longer term and more complex deals, the risk focus should be more on how they will be managed than on how they will be allocated.

Good contracting starts with defining the best form of relationship to achieve the desired business results. Since ‘the relationship’ will often continue well beyond contract signature, it is essential that the parties include governance principles. Dalip suggested that negotiators should think in three phases – first, relationship models; second, contracting models; and third, communication models.

Traditional Procurement and sourcing processes focus on price, rather than value. They are built on assumptions that ‘suppliers take advantage of us’. Many suppliers, on the other hand, feel that customers are ‘confused about what they really want’. This stand-off frequently results in poorly established relationships and a failure to focus on ‘value extraction’.

Our conversation confirmed Professor Willcocks’ view that contract and relationship management must integrate in order to deal with the growing complexity of today’s trading relationships, but also recognized some obstacles to this transition. One is the need for different skills among procurement and contracts staff; another is a shift in measurements; and a third is to address the challenge of organizational models and perceptions – in particular, on the sell-side, to resolve the relationship between account management and contract / commercial management.

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