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Getting the organization to care about contracts

April 3, 2012

Last week, I wrote on the topic ‘If contracts are so important, why do so few people care?

Although my focus was on outsourcing deals, the comment could equally well apply to contracts as a whole. Essentially, my point was that although there is wide acceptance within organizations that a contract is necessary, there is limited consensus over its exact purpose and few considerations over its broader business impact.  This general lack of interest is reflected in IACCM’s 2011 research finding that only 8% of organizations see themselves as having a strategy for contracting.

In my previous article, I observed that one of the consequences of this situation is that contracts (and those who are charged with their creation and management) are viewed by many in a relatively negative light.  They are seen primarily as instruments for risk allocation, often indulging in lengthy and apparently obtuse points of law and the apportionment of pain when things go wrong. This attitude tends to have rather self-fulfilling consequences; in particular, contracts and legal personnel are often not involved sufficiently early in the process and the resultant contracts may be poorly structured, hastily negotiated or incomplete.

As a brief case-study, I am currently involved in a contract worth some $4 billion. IACCM has been asked to run a ‘relational contracting workshop’ to assist the parties in establishing a governance and management framework that generates more collaborative behaviors. I spoke recently with the project owner to discuss objectives and approach. During the conversation, he warned me that one challenge – perhaps the biggest – would be to overcome the opposition of many stakeholders, who believe that the contract and its management should be all about ‘wielding a stick’. He went on to explain that his reason for asking IACCM to conduct the workshop is because he believes we are the only people with the ‘compelling research and examples’ that can help him overcome these attitudes.

The point behind this story is that it is not of course the contract that is causing contention. It is the people within the organization who see suppliers (and often customers) as ‘the enemy’ and then seek to use the contract and the contracting process as a weapon. Their dismissal of the idea that collaboration is necessary and their refusal to consider contract terms and structures that focus on value delivery and positive incentives ultimately condemns us to many deals and projects that either fail or yield disappointing results.

Of course, the nice thing with that disappointment is that it confirms the cynicism that was actually its cause and adds to the resistance to change.

So what should be done? In my opinion, senior management from around the business must start to revisit the question ‘what is the purpose of contracts?’ and from there, they need to consider a strategy for contracting that aligns with their wider business goals. Without this, contracts will continue to undermine business opportunities and deliver less than optimal results.

  1. As long as senior managment takes the position that contracts are merely written for the drawer; i.e. once signed, no one cares moving forward, negotiators will spend as little time possible in the actual negotiation and no one in the company will be willing to spend any time in having the contract properly implemented, managed and followed through. At the same time, customers increasingly want complex business matters squeezed on a one pager; i.e. they have little patience going through comprehensive paperwork. Lastly: too many contracting parties take the “its-my-way-or-the-high-way” approach, which is dissatisfactory at best and undermines any sense of partnership or the development of same. All of this going back to “what is the purpose of a contract?” What is needed is educating stakeholders why collaboration matters and what collaboration can ultimately accomplish.

  2. Ian Heptinstall permalink

    Hi Tim. The comment by your project owner, rings many bell with me too – I can picture several senior executives saying similar things. It highlights one of our core dilemas – that there is s strong view that you cant have both carrot and stick in a business relationship. The majority of cases that I have seen reflect this – contrats either focus on the stick (off-loading risk, damages, etc), or the carrot (often with a separate non-contratual alliance or partnering agreement).

    Each point of view has a strong case, and the entrenched views are often grounded in a real business need (to prevent harm if the deal fails…v… to get each party aligned to the overall goals). to give the naysayers their due, they have often had experience where so-called partnerships have failed and/or exploited the client. And there is substantiated research that we humans are more strongly motivated to avoid harm than to acheive some added benefit.

    I think the key to bringing round the resisters is no so much just re-explaining the arguments for collaboration, but lies in helping them realise that a true collaborative relationships and contract does not ignore the downside, it does address what would happed if things go wrong. They dont have to increase the risk of being exploited.

    Your final point is crucial. I dont know how to facilitate the preparation of any non-trivial contract unless you know what the buyer wants to get from it…as you say “aligns with their wider business goals”. Contracting shouldnt be done in isolation whichever approach it taken. In collaboration it is doubly key – you have at least 2 parties goals to consider

  3. The misunderstanding of the importance of appropriate contracts relates to a much larger misunderstanding of what a contract is. Many folks in management seem to view a contract that must be negotiated if the parties are going to get the deal, i.e. as a piece of paper that is merely a gating device. In other words, the “deal” is something that exists between the parties and the “contract” is a tool for managing it. Not so fast.

    One of the greatest pieces of wisdom I gained in law school at the University of Texas was something I learned in the first class on the first day: A “contract” is nothing more than a meeting of the minds. In other words, the “contract” is not the piece of paper. The contract is, at its essence, that mutual understanding of the parties that happens to be written down for posteriority…or at least the project managers and accountants who must implement it. Therefore, it is essential that the piece of paper match the real mutual understanding of the parties.

    Too often it simply does not. Too often the parties have not thought through all the important components of the deal. Subject matter managers approve terms without really understanding them, thinking that the relationship between the parties will help to ameliorate any disputes.

    Viewed from a greater distance, it becomes clear that the “relationship” strategy is viewed by many as no less, and sometimes more, effective than a thorough contract strategy. That is the concept that we should seek to change.

    • Hi Edward, great comment. Agreed that in an ideal world, that is what a contract should be: a meeting of the minds. If only everyone working on a deal had this attitude. How often have we heard the recommendation that legal should get involved in the negotiation process much earlier than this is actually the case? In my practice I observe increasing compartmentalization of the negotiation process; i.e. the sales people go first, who, I’m afraid I have to say, often have very little regard for the legal matters in a contract. The service delivery people go next. Then the document goes to a few other experts in their field and somewhere in there legal will have its turn. By then, the meeting of all these minds seems to be far in the distance. What is on the contract partner’s mind by then is hear-say at best since legal most often never gets to meet the contract partner in real life, and the clock is ticking since time is money. By the time the contract is ready for execution one can only guess whether it somewhat is a reflection of the deal which the minds had in mind.

      All of this taking us back to why so many negotiators don’t really care and what needs to be done to getting to better contracts.

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  1. Carrots, Sticks & Contracts « Commitment Matters

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