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‘Agility’ Is The Next Big Issue

January 18, 2011

Whether you call it agility or flexibility, the volatility of today’s market conditions is exposing the inadequcy of tradtional control systems. And that includes the way we negotiate and manage contracts.

Most contracts today are negotiated on the assumption of a fairly predictable set of trade-off principles. Essentially, the  buyer is ready to commit to a certain volume or level of spend in return for the seller’s commitment to a price or discount and to invest in the resources required to meet its obligations. This trading model is then supplemented by a negotiation over the allocation of risk in the event of failure.

But trading conditions today are undermining these principles. Long-term commitments are becoming too risky. Needs change, markets change, competition changes, prices are volatile, new technologies emerge …. so buyers increasingly seek levels of flexibility that make their ‘long-term’ commitments of little value. They want guarantees of future innovation, or future price reductions; they want termination options; they want flexibility to make changes to volumes of spend levels. In the end, they want the benefits associated with making a commitment, but without actually committing anything of substance.

Their position is understandable, but of course it cannot be sustained. Sellers cannot  plan their business based on such high levels of uncertainty. They definitely cannot afford to offer deep discounts or low start-up prices when their potential to recover costs is so uncertain.

So today’s agility demands new approaches to the way we contract. ‘Agile contracts’ also demand agile budgets and agile costing systems. Relationships become more important, to enable joint planning and operational oversight and perhaps to provide some security of supply. Underlying contracts become even more transactional and shorter-term in nature.

A consequence of this is that input prices will rise. However, operational costs should fall. That is because organizations and trading relationships must adjust to support agility – that is, speed and ease of change. Today’s inflexible systems and relationships require massive amounts of resource; the agile model will be far more collaborative and therefore far more efficient. Essentially, we need to design a control system for a speedboat instead of an aircraft carrier.

These changes are evident in the extent of contract renegotiation that we see today. It is clear that the underlying principles of many contracts simply do not work. This is true whether we are looking at long-term product supply (we are already seeing the demise of commodity price commitments) or at services agreements (such as outsourcing or managed services). Yet many contracts groups continue to use the old models and the old assumptions at a time when they should be showing leadership and creativity in designing new approaches to the formation and management of trading relationships and transactions.

One Comment
  1. LaDona Herrera permalink

    I agree that most companies are still of the mindset to enfoce penalities for missed SLAs or missed turnaround times, but in reality they may never be enposed due to lack of ownership by a designated contract manager. Does anyone have a template or example of what might be deemed as “agility” in contracting?

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