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Imperatives for change in contract and commercial management

April 17, 2012

Yesterday I caught up with Tyrone Pitsis, who is Director of the MBA program at Newcastle University in the UK and an international expert on organization and collaboration.

It has been several years since Tyrone and I last spoke and in that time we have each added substantially to our range of experience and research. Inevitably, our conversation focused on topics related to contracting and trading relationships, with much of it centered on decision-making and adaptation.

A topic of particular interest to Tyrone has been improvisation – an ability that has arguably become of increasing importance in a world of ever-increasing complexity and speed of change and which of course depends on some level of organization and collaboration for its success. He explained that improvisation is sometimes confused with concepts such as ‘gut feel’, in that both may be a response to situations in which there is a high level of uncertainty (often linked to a need for speed). Yet he emphasized that both in fact draw on a base of relevant experience and that improvisation frequently depends on highly experienced practitioners who are equipped to improvise because of their knowledge (e.g. Jazz musicians).

These comparisons reminded me of many business situations where there is often a feeling that executives make decisions based on ‘gut feel’, leaving contracts and commercial experts to ‘improvise’ in creating an appropriate framework. Tyrone highlighted how the need for improvisation has grown (heightened levels of uncertainty), yet is being undertaken in an environment that has become more complex (a greater number of stakeholders need to be considered). He described this stakeholder issue in terms of the growing numbers of people who ‘have a voice’. Specifically, the advent of social media, of Twitter, Facebook and the rest has meant that almost everyone today can express an opinion. And it is this, he suggests, that has made contracting especially complex.

As any good commercial specialist knows, stakeholder analysis is key to good contracting. And top practitioners are not just thinking about views and attitudes at the moment of negotiation or signature, but are trying to understand how these might shift over time. They want their agreement to prove sustainable, to operate with sufficient flexibility and to be adaptive to shifting circumstances. Tyrone expressed this in the following way: “A contract is about a type of business relational experience. To work well, you need to understand not only what you want that relational experience to be at the outset, but also what you may want it to become.”

In some instances, this need for greater adaptability has led to increased questioning over the use of formal contracts, since they are seen as too constraining. In addition, their negotiation simply takes too long, not least because of all the ‘what ifs’ they tend to take into account. In cases where there is no contract, organizations depend on their abilities to set common goals and targets and to improvise in achieving them. Their agreements are informal and depend on collaborative expert teams for execution.

It is clear that such loosely-bound, adaptive frameworks are unlikely to become the norm for trading relationships, in part because they depend on very clear goals and also because they demand sustained focus by senior management. However, those of us who deem ourselves ‘experts’ at contracting and commercial management should take this trend seriously. First, we need to understand that it is an acceptable alternative to a formal contract and we must consider it part of the ‘relational portfolio’ of commercial arrangements. Second, we must learn from these approaches to ensure that other types of agreement incorporate some of the adaptive, flexible characteristics demanded by today’s business environment. And third, we must ensure that our professional community develops the skills and techniques to anticipate widening stakeholder involvement and to improvise in the face of continuous change and uncertainty in business conditions. Without these shifts, we place our own relevance in peril.

One Comment
  1. Bob Spence permalink

    Hi Tim – a timely question, but one that applies to ALL disciplines a company would need to operate. The trade-off between speed and accuracy bedevils people’s desire to just get on with things. My experience tells me though, that most business relationships outlast the people who established them. The people charged with maintaining these relationships change even more frequently and in any case were rarely party to the process the created the relationship in the first place. If organisations are to do away with the contracting process, what guides and boundaries would be put in place to ensure that the “founders” intentions were preserved over the life of the relationship?

    To be honest, I get nervous when I see people questioning the value of formal agreements in business, not only because it risks removing the relationship from a recognised legal context (which offers protection to both parties), but also because the question implies that personal relationships will be sufficient to support a commercial relationship over time. One only has to look at divorce statistics in the western world to see how reliable that model is.

    Having said that, do current contracting processes need to be challenged? Absolutely. Can they be simplified and expedited? Potentially. As long as parties focus on worst-case scenarios, will this happen? Probably not, but we’ll continue to fight the good fight.

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