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The Core Value Of Contracting

September 19, 2011

In late October, IACCM will hold its Global Forum for Contacts & Commercial Excellence. I typically write a briefing for speakers, to ensure consistency in the theme of the event. This time, I focused on a number of the key principles that we have been promoting to our members over recent years, to assist organizations to reach ‘best practice’ standards in their contract and commercial capabilities and practices.

I thought that readers of this blog might find this summary of interest – and may wish to add their comments: 

What do we mean by contracting?

First, we see contracts as instruments of economic value, in which legal considerations are of fundamental importance, but not their primary purpose. Contracts represent an economic arrangement and should be designed to maximize the probability of a successful outcome.

Second, we see contracting as a life-cycle activity. Businesses must have a contracting strategy (contracts, terms, policies and practices that support the goals and needs of the organization). These are then applied and adjusted during the opportunity or needs evaluation, negotiation and post-award environments. Contracting brings cohesion across these phases of activity and provides a framework for clarity over requirements and goals, roles and responsibilities and on-going relationship governance.

Third, because of this scope, contracting has many stakeholders. Legal, Finance, Operations, Project Management, Sales, Procurement – each has areas of policy or resource interests which make them sensitive to changes. Recent research by IACCM concluded that ‘many negotiations are driven to protect functional positions, sometimes at the expense of business interests’. Good contracting ensures reconciliation of these conflicts and results in creative (as opposed to destructive) contention.

 There is soaring interest in contracting.

We believe that contracting is one of ‘the next big things’ in the world of business. That is because the wider view of contracting outlined above is a critical contributor to the management of complexity. Economic conditions are pushing organizations towards new sources of savings; into new and emerging markets; to dealing with unfamiliar cultures and business practices; the growth of Asia is shifting the power of businesses to impose their way of working; companies are dealing with increasingly complex interdependent systems. CEOs are struggling with how to understand, make sense of, and manage ‘interconnections and interdependencies’. The analytical and disciplined approaches that contracting brings are fundamental to supporting this, plus they then provide a firm platform for the management of change (which today is inevitable during the lifetime of every relationship).

 Contracting contributes to the organization’s agenda.

In today’s environment, business must become better at managing risk. This is not about risk allocation. It is about building contracts and relationships that are better at reducing the probability of risks occurring, or of managing them to a successful conclusion so that contract outcomes are achieved. Business must become better at eliminating bureaucracy and unnecessary rules. Those in Legal, Procurement and Contract Management have extensive visibility into many of those rules because they are managed through contracts. So instead of protecting and sustaining them, they must increasingly challenge and change. Business must become better at forming and managing relationships. Being a customer or supplier of choice, innovating through collaboration, combining resources to tackle major risks and opportunities, will be key to survival and growth. Bad contracting – unfair or unbalanced terms – will undermine those capabilities and result in adversarial or defensive relationships. Contracts must provide a framework for harmonious relationships that are dedicated to mutual success.

The IACCM conference will illustrate these core values and inspire delegates to return to their organizations as purveyors of ‘best practice’ and as ambassadors of change.  These, after all, are the fundamental attributes that underpin the entire concept of being ‘a professional’.

One Comment
  1. Ronan Lavelle permalink

    Tim – Excellent post.

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