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Poor Contracting Costs Money – A Lot Of Money

February 23, 2011

The UK Government has released a highly critical report on defense procurement – and it followed up by endorsing many of the fundamental lessons that IACCM and its community have learnt and promoted in recent years.

The report found evidence of extensive waste resulting from poor contracting analysis and management. The investigated situations had generated losses of more that $12bn over recent years, and came in spite of the extensive investments Government has made in traditional procurement and project management training. These findings will come as no surprise to many who have engaged with IACCM, studied its research, or undertaken its training programs. And they will be familiar with the immediate analysis offered by the UK’s Minister of Defence in response to the report.

The Minister has highlighted the importance of more integrated relationships with suppliers. This does not mean relaxing the rigors of procurement, but it does mean questioning the secretive and adversarial behaviors that are core to many of today’s procurement practices. He highlighted the ‘culture of optimism’ that has generated unrealistic budgets and unrealistic timescales for major projects, leaving them consistently under-funded and past schedule.

An open question arising from the report is the extent to which fundamental change will occur, both in the UK Ministry of Defence and elsewhere. Key to this is whether there will be sustained focus on the skills, measurements and methods needed for positive contract outcomes. Success depends on new approaches to the management of risk, in particular a focus on reducing the probability of negative outcomes through mutual commitments to continuous improvement. It also demands fresh approaches to the way that contracts are scoped, budgeted and structured, enabling more considered and properly evaluated responses to change.  There is no question that this requires a shift in the way that customer / supplier relationships are defined and the way that mutual performance is managed.

The issue of change was a fundamental theme running through this report. The Ministry was not well equipped to deal with shifting needs and priorities – and its politial masters also  failed to grasp the implications of an increasingly volatile, interconnected world.  In today’s fast-moving global economy, the challenge of managing change permeates every organization. It is a challenge that has ramped up the visibility and importance of contract and relationship competence – and has made this competence a very real source of business performance and reputation management. At this time, many organizations have yet to make the investments needed to safeguard their performance. On a lesser scale, the Ministry of Defence story is reflective of many of today’s project procurements;  the ‘culture of optimism’ is alive and well in executive offices around the world.

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