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Tackling the barriers to change

August 6, 2013

Yesterday I wrote about using the contracting process to drive alignment with business goals. I highlighted how contracts are often seen as an impediment to getting business done, but in truth that is because of mismatches within the organization.

An example of this is the attitude to risk, especially within the Finance community. Over the years, I have encountered many situations where Finance imposes rules that directly inhibit the business and resists the need for change. Examples range from topics such as tax and inter-company to approaches to pricing and discounting. Within Finance, the aversion to losses can often prevent the realization of gains.

A recent example of this is the dislike of the Finance community for contracts that are not clear about allocations of risk. They have a strong preference for contracts that either impose risk on the supplier (when they are buying) or place responsibility for performance on the buyer (when they are selling). They see any ‘shared risk’ approach as inherently risky, even though there is no data to support this view.  Apparently this attitude has been a key factor in undermining the use of more collaborative contracting models.

In my earlier article, I highlighted the choice that faces the contracts function or experts. They can of course sustain this view by Finance and simply impose this preference for risk allocation. Alternatively, they can take the view that it is their responsibility to understand the impacts that different contract and risk models have on performance and to educate Finance accordingly. There is extensive evidence that the approach preferred by Finance regularly damages financial results, in terms of both costs and profits, yet their position is rarely challenged.

This example illustrates the way that problems with contracts and the contracting process are symptoms of deeper capability issues and that analysis of those symptoms can lead us to tackle root causes – in this case, the need for commercial experts to educate functional specialists who will otherwise stand in the way of change.
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