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An Opportunity For Leadership

June 9, 2010

 As  technology drives us to master ever greater complexity, our contracting and commercial frameworks often struggle to keep pace.

 Economic growth depends on success in world trade. Both depend upon the ability of people and organizations to work together creatively and collaboratively. Progress depends upon systems where competition is channeled into creative, rather than destructive, contention.

This is evident in so many areas right now. Of course, the continuing saga in the Gulf of Mexico is top of the list, with BP’s Chief Executive, Tony Hayward, highlighting the critical need for new commercial structures that offer better oversight and coordination between supply partners. Of course, many will dismiss this as another case of a beleaguered company calling for a change in the rules. But I think his appeals are worth attention, because they represent a much broader problem that we must address.

In an article in the Wall Street Journal, Hayward comments: “the industry should carefully evaluate its business model. For decades, exploration and production companies have relied on outsourcing work to specialized contractors. There’s much that makes sense about this kind of structure, and lots of talented people and well-run companies are a part of it. But the question after the Deepwater Horizon accident is how all involved parties—including exploration and production companies and drilling contractors—can work even more closely together to better understand and significantly reduce the various risks associated with drilling operations”.

The BP situation is understandably generating worldwide attention – but in truth it is not an isolated incident. Indeed, the US Government offers many examples of failed projects and weak oversight and control. Many times, we enter into relationships in which the vision exceeds the capability, or where the underlying systems simply fail to meet requirements. In these situations, we can either blame others, or look to learn together and fix the problem.

I do not know specifically what aspects of ‘the business model’ Mr Hayward would seek to fix. Perhaps over time he will tell us. But I like to believe that he has grasped the issue of the dysfunctional behavior generated by today’s measurement systems – the race for growth, the political pressures that come from knee-jerk policies, the dishonesty and narrow-mindedness that come from Sales commissions and Procurement savings. And of course, out of these disingenuous metrics, we end up with contracts and agreements filled with negative incentives – a belief that somehow we are protected if we have onerous liability and damages clauses.

BP is just one of many large corporations that has relied upon this penalty-based approach to contracting. Most large organizations believe that they can force their suppliers to take responsibility for outcomes. To a degree, they are right. But as this incident shows – and as the persistent failure in many other complex projects confirms – real success depends on a structure where people know what is expected of them, where change management is disciplined, where communications and reporting are fundamental to performance – and ultimately, where the parties have positive incentives to work together

Our contracting and relationship management processes must be updated. IACCM has been calling for change for almost 10 years and today, we are seeing Governments and major corporations turning to us for help in building the necessary skills and organizational models. Progress may be slow, but it is coming – and those in the world of contracts, legal and procurement have the chance to lead it.

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