Contracts: An Inconvenient Truth

In previous blogs, I have referred to the opinion of Lou Gerstner, former Chairman and CEO of IBM, that ‘contracts are about brand image’.

Gertner’s point – which I consider very insightful – was that organizations must achieve alignment between the ‘marketing promise’ and ‘the contractual commitment’. Far too often, this is not the case. The implied values and promises that are delivered via the marketing and sales channel are then compromised or overturned by the small print of the contract. Gerstner grasped this point at a key transitional stage in IBM’s history, perhaps because of his consumer-oriented background. The corporation faced a dramatic surge in competition. It had customers demanding integration, inter-operability, global consistency and capability. IBM was seeking to respond, offering ‘solutions for a small planet’. But for the customer, those enticing words rapidly proved to have little substance.

First, the contract denied inter-operability. The customer took responsibility for operational performance via a ‘selection and use clause’. As for consistency, each country defended its autonomy by insisting that their market was different and therefore the range of features, functions, support services had mushroomed out of control; no one had any idea what could or could not safely be committed in terms of product or service availability. And that was just the start of the customer nightmare, because each country also made local contract variations; Finance wanted to exploit international price differences; and local operations and IT groups felt the necessity to develop local systems and support that allowed no central visibility. ‘Solutions for a small planet’ was actually more an indication of everything that was wrong with IBM, rather than a description of value and capability. A great concept, but not a reflection of reality.

You might think that groups such as Marketing, Sales or senior management would have rapidly grasped this point. But instead they saw ‘commitment reform’ as far too difficult. Sales were taught to tell the customer ‘Don’t worry about what the contract says, it’s what we do that matters’. And management invested in Special Bid teams and expert flying squads of negotiators who were similarly disempowered in practice. Those who ‘owned’ contracts (the lawyers and Business Practices staff) saw themselves as custodians of the status quo, not change agents. Indeed, the customer was seen as ‘trying to game us’ (in the words of one senior executive in Finance). Only with Gerstner’s backing did fundamental change prove possible, using an analysis of customer commitment requirements to drive reform of policies and practices across the business. Until that moment, contracts were indeed ‘an inconvenient truth’ – focused only on reflecting the business reality, rather than being used as a tool to drive a response to validated market need.

This seems to me to be true of so many corporations even today. The failure by Marketing to grasp the fundamental connection between their efforts and the role of the contract means that often companies generate an aura of dishonesty. Far from engendering confidence and trust, contracts tell the unfortunate truth.

As a post-script, it should be noted that IBM’s re-engineering efforts proved highly effective and restored its market position. It rapidly turned its international presence from a source of problems into the source of competitive advantage that it needed to become. The development of a strategic view of contracting – and creation of global capability in contract management – was a significant contributor to that success.