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If contracts are so important, why do so few people care about them?

March 29, 2012

In the most recent SSON newsletter, Barbara Hodge comments on ‘the contention’ that ‘afflicts so many outsourcing deals and observes: “We think it’s because the contracts are based on traditional, two-party thinking; bogged down by rules, regulations, and Statements of Work.”

I welcome Barbara’s observation, but I would suggest we need to take these ideas somewhat further. While I agree that contracts are as component of the problem, I believe they are more a symptom than a cause.

Contracts reflect a complex mix of organizational policies, procedures, functional interests, culture and business goals. Often these elements can become out of balance, or the process by which they are managed may lack the flexibility needed to adjust to changed circumstances or new business requirements. In my opinion, outsourcing is a classic example of these issues. It is relatively new and therefore few people in most organizations have extensive experience of how it should be handled. It is by its very nature disruptive to the traditional organization, which means it generates conflicts with existing rules, systems or procedures. It creates mixed emotions – some stakeholders will be adversely affected and may have limited interest in making it work. And the contract is where all these possibilities and conflicts converge – so no wonder it is a source for contention, both internal and with the potential providers.

To my mind, the real issue is that those who are the advocates and owners of outsourcing take little notice of the vehicle through which it should be transacted and enabled. Rather than grasping the contracting process and recognizing its role in delivering success, they choose largely to ignore it. It is seen as a nuiscance, as something to outsource to advisers or law firms, as bureaucratic, unwieldy, boring …. and of almost no practical benefit. So they let it happen, while they get on with the important stuff.

I say this from experience. For several years, IACCM has participated at SSON events and throughout that time, although the audience from our own members has been good, there have been few connections with the wider outsourcing community. Yet if Barbara is right that a new approach to contracting is a prerequisite for more successful outsourcing, then the leaders and project teams responsible for this activity really should be paying attention. In fact, it is in large part because of their lack of interest that things don’t change and so many outsourcing deals remain constrained by contention.

I will expand on this blog next week with a case study for a $4 billion deal that is facing precisely this hurdle – the inability of the organization to challenge its traditional cynicism towards the way that relationships can be structured and managed.

  1. Tim – excellent points you raise. I see some truth to both aspects — certainly the buy-side audiences at our big SSON events are all too familiar with some of the frustrations I referred to in my editorial. I’ll be interested to read the case study — and to follow up with any other comments on this subject. The more light we shed on this – the better!
    Barbara Hodge

  2. In my opinion, both Barbara and Tim are making a valid point. Contracting is indeed an issue but it is also the tip of a pretty big iceberg …
    It is doubtful that legal and purchasing imperatives can actually produce a contract relevant for both internal clients and external service providers. The underlying issue is simply that contracts do not cope well with changing needs.
    In other words, the requirements set forth by a fast evolving business environment do not convert well into contractual terms and covenants. No more than, client changing needs do not fit well with “industrialized” outsourced services.

    • Stephanie, you are absolutely right that current contract design and the focus of current terms and conditions do not deal well with change. But this suggests one of three options:
      – we slow down the pace of change
      – we accept that contracts are not any longer an efficient vehicle for managing business relationships and we find an alternative
      – we accept that contracts and the contracting process also need to change in order to become ‘fit for purpose’

      What I do think is unacceptable is if we just accept ‘it isn’t working’ and then turn our backs on the problem.

  3. chrishughesuk permalink

    There is a danger of combining two different things here, in my opinion.

    Contracts can be unwieldy of that there is no doubt. By the same token, Vested Outsourcing contracts (that are suggested to help solve the adversarial nature of run of the mill arrangements within the context of this discussion), whilst rested in more mutually binding and beneficial commercials, are still likely to have strong two-way ties. Indeed, given the nature of such contracts and the imperative for the supplier to invest in the relationship financially, it could be argued that they are even more onerous in certain places.

    Where Vested Outsourcing comes into its own within this discussion is the clear starting point of sitting on the same side of the table before contract negotiation and appreciating mutual expertise. This allows the contractual relationship to recognise everybody’s value drivers and to establish a contractual framework that is open to each party’s genuine needs. For example, it changes the discussion from “supplier will achieve 10% productivity by year x” (a classic pain point, whether it be sandbagging or margin eroding) to “supplier will achieve as much productivity as possible as soon as possible and we will share the rewards”.

    Outsourcing as a disciple in still pretty young. As experienced leaders better understand the genuine commercial and business as usual implications of certain contractual arrangements before putting pen to paper, hopefully better contracts will emerge. In the meantime, I would genuinely be surprised if it is the quality or nature of contract construction that sits at the heart of people’s grievances. I’d suggest that it is more likely to be the commercial commitments that everybody happily agreed to at the start – and that the contract seeks to uphold.

  4. chrishughesuk permalink

    There is a danger of combining two different things here.

    Vested Outsourcing contracts (that are positioned as being less ‘two-party’ in the context of this discussion) can be as onerous as your run-of-the-mill contract, if not more so. VO encourages mutual investment early on to enable mutual benefit realisation in the future. Such imperatives demand and bear out contractual security.

    Where the reference to VO comes into its own in this discussion is the commitment to quickly getting on the same side of the table before anybody gets the legal dictionary out to genuinely understand a clients needs, to recognise mutual value drivers and to appreciate each party’s expertise. This creates a commercial platform grounded in pragmatism – for example, it moves the discussion from the classic ‘delivery of x% productivity by x date to bring costs down’ (a classic pain point that incentives sandbagging) to ‘delivery of productivity at the earliest possible opportunity and we will share the rewards’.

    Outsourcing as a discipline is still pretty young. As more experienced leaders start to recognise the genuine commercial and business as usual implications of contractual commitments before putting pen to paper, better contracts will emerge. In the meantime, I would suggest that it is not the quality or construction of contracts that serve to create contention in outsourcing relationships; it is the commercial commitments that each party happily made and (crucially) constructed a deal around at the start – and which the contract was implemented to uphold.

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