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But who is the expert?

May 16, 2012

Contract terms can generate value, or they can destroy value.

I can cite many examples where a failure to appreciate the impact of term selection has had a heavy cost – the loss of business: the loss of innovation: the failure of major projects. On the counter side, companies with a more balanced approach have snatched business they were not expected to win, or have attracted innovative partners, or achieve a higher success rate.

In other blogs I have described specific examples, ranging from large companies such as GM, Toyota, AT&T, BP, Walmart, as well as creative approaches by small and generally unknown businesses. There have also been studies based on industries, such as construction or public sector, and how their contracting practices impact costs and performance.

Overall, I can be confident that contracting policies and practices make a substantial difference to organizational performance. So now the issue becomes one of knowledge and expertise. Specifically, whose job is it to ensure that an organization is optimizing its contracts?

And here we find that the answer in most companies is no-one. There is no accepted point of responsibility for ensuring that contracting practice, policy and strategy deliver value (or even that they prevent loss of value). Different functional power groups tend to dictate elements of the contract, frequently without understanding the business impacts of their approach.

Some organizations try to build in greater sensitivity through empowered negotiation teams, but these typically operate without the benefit of true insight to the statistical, operational or psychological impact of individual terms and conditions or commercial approaches. They are also limited in the extent to which they can ‘fix’ core policies or processes to accommodate the needs of a specific deal. What is really needed is far greater market and business intelligence about the policies and practices themselves, so that different deal types are structured appropriately. For example, if a goal is innovation, here is the best form of contract and related terms. If this is a relatively complex project, here are the key terms to consider, etc.

What is see in many organizations is an environment that stifles and prevents the growth of this expertise. Powerful groups claim an ownership of contracts and related terms, often in the name of compliance and risk avoidance, with no accompanying measurements or accountability for the actual impact they are having. Alternatively, they may not actually claim ownership, but they take steps to oppose anyone else stepping into the role.

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