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Contracting as a source of business integrity

January 8, 2014

Expectations of business integrity are increasing. Society is becoming more aware of the costs associated with dishonest or immoral behavior. This goes beyond overt corruption; it relates to the much broader issues of honesty and sustainability in the commitments we make.

We all understand how bribery can distort the public interest. It affects quality, value and the underlying fabric of trust. But business integrity is about much more than this. It recognizes the very real cost that accompanies deliberate over-statements of capability, or failure to properly validate supplier competence. It translates into goods or services that simply are not fit for purpose; it results in cost overruns, or major delays. The social cost of these ‘over-optimistic commitments’ (or misrepresentations, some might say) is enormous.

Increased transparency is making this endemic behavior more and more evident. The media is highlighting many of these ‘contract failures’, especially those in the public sector. Senates, Parliaments and audit bodies are demanding improved controls, better skills.

Most of those in the world of contract negotiation or procurement view this with a certain amount of cynicism. We all know that senior management tends to be over-optimistic. We all know that business decisions frequently lack rigor. We all know that business measurements and incentive systems (especially sales commissions) encourage corner-cutting, exaggeration, poor judgment. And we do our best to mitigate the risks through traditional contracts that apply ‘penalties’ in the event of extreme failure.

Is this any longer enough? As social expectations change, as regulation tightens and as reputation risk continues to grow, how will the role of the contracts, procurement and legal communities alter? Already we see some signs of fundamental change. One may be a shift in internal measurement and reward systems. Another is in the executive interest in raising commercial and contract awareness across their organization. A third is the extent to which demonstrable contract management competence is becoming a source of competitive edge – indeed, in some cases it is an absolute requirement for winning business.

As we enter a new year, I believe this is an area of fundamental importance for the contracting community to consider and it is an area of focus for IACCM. How will your business adapt to the shifting business environment and to what extent will you facilitate and influence that debate?

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