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No contracts needed here

June 13, 2013

Yesterday I presented at a meeting of supplier relationship managers. My theme was ‘Driving Contract Performance Through The Fear Of Failure Just Doesn’t Work…’ and it focused on the need to understand how contracting practices influence behavior and outcomes.

I started by raising questions over the importance of contracts and one co-presenter was quick to raise her hand and tell me ‘We don’t have contracts with our key suppliers’.  We had a brief discussion about the implications of ‘no contract’ and it later emerged that while this company has no traditional agreements, it does have a disciplined approach to defining the relationship and how it will be managed. Not surprisingly, there are also documents that sound very similar to Service Level Agreements and Statements of Work.

So in the end, there are essentially ‘contracts’, even if the organization chooses to call them something else. And if they feel this in some way contributes to better relationships with their suppliers, I think that is fine.

The real point here is that contracts matter far less than the contracting process. A good contracting process evaluates how best to structure and manage an organization’s assets – and those assets include their trading relationships. So if you can manage risks and achieve better results through non-traditional forms of agreement, then that is the right decision.

A problem at most organizations is that they tend to have a standardized approach to contracts which rarely allows for discussion of commercial alternatives. As a result, anyone deviating from the system often does so without having adequately explored the implications or alternatives.

  1. And the contracts and contracting process matter far less than the supplier selection and supplier selection process.

    • I’m really Dick Locke. WordPress seems to have picked up a name I use for another site.

    • Dani Snyder permalink

      Absolutely agree on the point about importance of supplier selection. This is key and often companies are quick to select the “lowest bidder or price”.

  2. Organizations that care about the outcome from their trading relationships recognize that the contracting process is integral to ensuring that the right supplier is selected. Those that fail to make this connection have a far higher incidence of poor results. In addition, even with the right supplier, the wrong contract will often undermine performance.

  3. I thought you sounded like Dick Locke! Thanks for commenting – I hope you are keeping well!

  4. I don’t disagree with what you said whatsoever. However, if the sourcing process is really badly done, the best contract in the world won’t help much. With a reasonably proficient sourcing process, a good contract definitely helps. And definitely, contracting should be integral with sourcing and not an add on step.


  5. Owen Davies permalink

    Tim, I’d be really interested in how they get insurance and manage their disputes? Owen

  6. Owen, it is actually an insurance company – so I guess they self-insure! And the idea is that you don’t do ‘disputes’ with strategic partners. But to the point I make in my blog, if you have disciplined communication and documentation, it probably doesn’t matter much whether you call something a contract. In essence, it is a contract. And if you did ever litigate, there are clear principles under which resolution would occur.

  7. Tim’s article and the comments tie in with Steve Weatherley’s “Pathclearer” article from a few years back, about using short letter agreements and the general law — (Steve and PLC were kind enough to give me permission to post it on my Web site).

    • DC
      You are right about this. We feature the Pathclearer approach in our Member Library; it is a great pity that it has not commanded greater adoption.

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