Skip to content

Agility: Why It matters

February 3, 2011

Agility matters because of the need to innovate. And innovation comes not only from our own ability to innovate, but also the ability to take advantage of the innovations generated by our business partners.

This matters to those in the world of contracting because contracts and the way we define and allocate risks has fundamental effect on the extent to which innovation occurs. If we allocate risks – rather than creating relationships that seek to manage them – then we stifle innovation – because the innovation itself becomes a source of risk.

So ‘good contracting’ focuses on mechanisms to manage change, on concepts such as shared risk registers; on terms and performance metrics that encourage open and honest conversations.

Today’s contracts are not agile; they tend to stifle agility and flexibility, because we try to create precision in situations where there is great uncertainty.  Contracts must first be vehicles for mutual understanding and communication, a record of our expectations, promises and responsibilities, and an understanding of what happens when circumstances change and how we will deal with those changes.

Today, the one thing about which we can be certain is that change will occur and that trading relationships will need to adapt. In any agreement that lasts more than a few months, the greatest certainty is that whatever we think we want will not in fact be what we actually want.

We must therefore focus on designing contract terms that support agility.

 

 

8 Comments
  1. You wrote “Contracts must first be vehicles for mutual understanding and communication, a record of our expectations, promises and responsibilities, and an understanding of what happens when circumstances change and how we will deal with those changes.”

    This is brilliant and should be on every contract negotiators wall. Too many people see a contract primarily as a vehicle to bring a powerful third party into a dispute. Of course there are cases where such an attitude is important but not all contracts fall into this category.

    There are some cultures that take your comments one step further and believe that it’s a responsibility of both parties to take reasonable care of the other party’s interests if something unexpected happens. If those cultures even the “how do we deal with the unexpected?” issue doesn’t need great elaboration.

    • Dick, thanks for your comment and in particular your observation about cultures that see a mutual responsibility to take care of the interests of the other. I think this is very relevant and typically aligns with high-trust cultures. In this context, the annual studies of ‘trust’ make disappointing reading, since it would appear that the long term trend is downward and of course the US specifically saw a substantial drop in 2010. Given the influence that the US has on contracting practices, this doesn’t represent good news for those of us who seek more collaborative approaches to trading relationships.

      • There are big implications to “first be vehicles for mutual understanding and communication.” I suggest everyone review documents with that purpose in mind. Ask whether the document helps or hinders communication. This is especially important when trying to communicate across language and cultural barriers.

        Here’s a good handbook on how to make documents in English that communicate well:

        http://sec.gov/pdf/handbook.pdf

        And here’s a good op-ed about Rhode Island requiring health insurance policies to be written at the eighth grade level or below. It mentions Flesch-Kincaid readability scores. That facility is built into most word processing programs and is a good test. http://tinyurl.com/6x2prpj

        But the most important method is to minimize the amount of your contract that lawyers write. On the purchasing side, most training programs teach professionals how to write their own contracts. I believe that a good purchasing professional should be able to write nearly all of a contract without lawyers.

  2. “We must therefore focus on designing contract terms that support agility.”

    I’ve been thinking about what the factors are that inhibit agility…

    One is the “complete agreement” clause that is in so many common law contracts. It’s often not true even on the date the contract is signed.All it really does is limit the scope of an agreement that is court-enforceable.

    Second is an idea I see advocated here that a “contracts” group is a different department than the people on the front lines making things work. I think that will slow things down.

    There needs to be flexibility on the front lines of both companies to make and document changes within the scope of their authorities. If they can be made part of the original contract quicklythat will work. However, companies with integrity will honor the commitments made by their people and not hide behind unenforceability to get out of their obligations.

    Anyone want to contribute other inhibitors to agility?

    • Dick, excellent comment. Among those that we observe that constrain agility are:
      – one-sided performance metrics and reviews
      – barriers to communication (eg procurement rules that prevent or constrain supplier / user conversation, or Sales behavior that limits involvement of business functions)
      – unbalanced risk allocations
      – penalty clauses
      – focus on price versus value

      There are more, but hopefully this is good starting list. Hope you can join us for an IACCM Expert interview next week when we review a new model ‘agile contract’

  3. Dave, thanks for your comment. I will pick up on your point regarding relative volatility in a separate blog, because I think you raise an important question regarding perception versus reality.

Trackbacks & Pingbacks

  1. Contracts for agility and innovation « It's more fun than a TPS report…
  2. Achieving Agility through the Vested Model | Vested Outsourcing

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: