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Contract Integrity On The Line

October 26, 2010

Far too many service and solution contracts have performance problems, making them low margin and / or a source of dispute. As businesses increasingly move from product-based to  service-based offerings, ‘Contract execution is critical’.

This was the view expressed during a roundtable discussion at this week’s Corporate Counsel Exchange in The Hague. There was wide consensus across an international group of senior attorneys that the challenges and the needs of contracting have changed. The big issues are most frequently about execution and performance, and there is an evident disconnect between the sales / acquisition process and post-award implementation and management. They characterized this in three ways:

  1. Businesses have moved increasingly from the sale or acquisition of products to the sale or acquisition of services, but many top managers have not understood the implications of this.
  2. Communicating the terms and the implications of the contract to those who must either agree or implement and manage has become challenging.
  3. There are specific issues created by mismatched incentives / measurements – in particular Sales compensation and Procurement savings.

Most lawyers feel that they – or professional contracts staff – are often involved too late to influence the statement of requirements or definition of scope – yet increasingly these have become the major source of dispute. As a result, the roundtable participants felt that most agreements are ‘fit for purpose’ from a purely legal perspective, but are much less confident that they meet the commercial needs or interests of the parties. One sign of this is frequent disappointment with outcomes (buyers) and with profitability (sellers).

One attorney highlighted a recent change in his business, where sales commissions are now withheld for 100 days after contract signature and only released if implementation is progressing smoothly.  But he also described the difficulties there have been in persuading top management of the need for change in the business. Executive decisions continue to be driven by short-term considerations, such as quarterly numbers, which do not fit well with the needs of long term, service-based contracts.

The session mirrored a number of the themes that have been highlighted in this blog and from research by IACCM. It also confirmed that progress in addressing the issues on which contracting integrity depends is painfully slow. But there are signs of movement, with examples including changes in commission schemes and a shift in the role and measurements of Procurement. But perhaps most encouraging is the growing interest by senior lawyers and their understanding that contract management is very significant to business performance. In the words of one Assistant General Counsel from a major oil firm: “Contract management is an area of great opportunity for Legal”. Perhaps their championing of the cause will at last provide the break-through in senior management understanding that contracts and the contracting process really do matter.

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