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So you think you are good at contracting …

July 7, 2014

For thousands of years, humans believed that their fate lay in the hands of the gods. Health, justice, social position – all were determined by the will of whatever deity they happened to espouse.

Yet steadily, individuals started to question this fatalistic view of life. Initially, the fields of law and medicine were seen as closely linked to religion, as were other areas of expertise such as architecture or engineering. But over time these developed as distinct branches of study and practice, setting the framework for professionalism.

Professionals ask questions because they believe in continuous improvement. They build knowledge; they challenge accepted wisdom; they reject ignorance. So when it comes to expertise in contract and commercial management, how well are we doing? There are many questions we can pose, but I selected these six for a presentation at the recent IACCM Europe conference because they reflect recent conversations with senior managers and politicians.

  • What percentage of our contracts under-perform – and why?
  • What is the economic impact of different contract models or terms?
  • What are the relative probabilities of the risks we seek to mitigate through our contracts?
  • To what extent can high failure rates in major projects be reduced through improved contracting practices?
  • What are the best models for performance-based contracts?
  • How does contracting performance at your organization compare with competitors?

One response to these questions is to say that the answer lies in the hands of the gods. Another, more common, is to say that it is someone else’s responsibility (and therefore, by implication, suggest that contract and commercial management are simply short-term administrative tasks, generated by the errors or ignorance of others). A growing number – and I put myself among these – are determined to find answers, publish them and build the body of knowledge that elevates the discipline of contract and commercial management.

So how well do you score on the questions above; and what would you add to the list of things that we should know?

  1. Eugene P. Grace permalink

    The ancients thought they lived in a world of random events, subject to the whim of their respective deities. Randomness continues to be among man’s greatest fears. Over the centuries, man has attempted to assert control over seemingly random occurrences. Similarly, contracting should be approached as an attempt to reduce or eliminate random outcomes. One of the goals of contracting is to remove surprises and to assure greater predictability of results. This can be achieved by requiring a clear description of the service and/or product which is the subject of the contract. Multiple levels of acceptance with sign-offs should be required depending on the complexity of the subject matter. Payments should follow the acceptance testing regime with significant amounts remaining for final acceptance. During any project, there should be frequent calls with the vendor (with minutes) to assure that no misunderstanding arises between the parties. Well-defined warranties and maintenance requirements will have the effect of continuing the predictability of results following initial implementation. To avoid unexpected (random) results, a strong sense of process and discipline throughout the term of the contract is extremely helpful in assuring predictability of results.

    • Eugene
      This is a great point you make regarding the ancient view of ‘random events’. It is indeed very much the way we tend to look at contracts and their management today.

  2. Alan Roach permalink

    I agree with Eugene. For me contracting is the whole approach to reducing, limiting or mitigating risks whether they are real or perceived. I find in many companies the person that directly negotiates the contract may have no stake or part in watching how that finalized contract operate or whether it’s a success or not. The process of handing off to corporate legal or corporate contracting personnel that are not later tied to the contracts performance may lead to a lack of knowing what good really is.

    • Eugene P. Grace permalink

      We utilized a team approach to contract negotiating including legal, risk management (insurance), tax, financial control and the specific corporate unit on whose behalf the negotiation was undertaken. The legal resource was typically the lead member of the team. (By the way, the entire team did not engage in the actual negotiation; they were used as a support team.) The attorney was typically assigned to one or more corporate divisions and was intimately familiar with the operations of their assigned division(s). The attorney was a member of the legal department but tended to identify heavily with their assigned division(s). The assigned divisions were charged for the services of that attorney through inter-company charges. Attorneys were rotated from division to division after three years or so to assure continuing independence. The legal staff had “evergreen” memoranda that detailed the operations of each division. Newly assigned lawyers were encouraged to spend a week or so in the physical space of the assigned divisions to really understand their mission, policies, procedures and personnel. The goal of this structure was to retain the negotiating activity under the control of a negotiating team which negotiated on a more regular basis and with a legal resource that was heavily identified with the operating group for which the negotiation was undertaken. The results were consistently superior.

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