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Developing New Contract Offerings

September 7, 2011

Yesterday I spent a couple of hours with the head of contracts and the CEO of a services company. We were reviewing their business strategy and in particular the impact on their contracting methods and forms.

The company is in process of making a significant shift in the risk it takes on when working with customers. They had undertaken analysis of many of the bad things that could happen to them – the incremental liabilities, the liquidated damages, the risks of termination etc. Extensive work had been undertaken to assess the potential to insure against these risks. And as a result, they were focusing on questions such as ‘How can we persuade customers to reduce the risks they place on us?’ and ‘How can we get our sub-contractors and suppliers to accept back-to-back liability?’

As is so often the case, there had been no broader assessment of the issues that are most likely to cause failure to occur and which, through their mitigation, would reduce the probability of things going wrong. All the focus had been on consequence and how that might be reduced (which, with powerful customers and relatively small suppliers, it probably cannot).

So while we talked about a couple of innovative terms, we mostly talked about reducing probabilities. For example, we explored commercial awareness training and techniques for client teams and project managers. We discussed the governance and relational aspects of the contract which could help mitigate or avoid performance issues: what data or access, what frequency of reviews, what interfaces and interactions with user groups, what escalation procedures, what post-award resource and skill commitments might assist? We also reviewed the way that requirements are analyzed and the quality of opportunity and change management. The focus, in other words, switched from fears about non-performance to safeguarding of performance.

Our next step is to visit a law firm and to work together on the new model agreements. It is a firm I respect for their forward-thinking, collaborative forms of agreement and I am sure we will develop a good model. It will need to be supplemented by some internal training and far more sophisticated risk lists and analysis. But it was great to have this conversation and to confirm that CEOs really are interested in contracting when they hear about practical solutions to their strategic needs, rather than a litany of the problems and the risks that their direction entails.

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