Coping with complexity

The issues created by complexity are at the forefront for most contracts and procurement professionals. The reasons for this are made evident in a recent article in Strategy+Business, which outlines three distinct levels of complexity and describes each in terms of the extent of interconnections and interdependencies. It highlights the third tier is reached when interactions become unknown or unpredictable – in other words, our ability to predict or build effective controls are limited.

This topic is very interesting because there is no doubt that contracts sit at the nexus of complexity and are tools which try to make sense of it. In fact, the three designations of complexity type listed in this article could be a very effective way to do contract and contract management modelling. In the realm of simplicity, standard templates can work. But attempts to impose the same standards in more complex situations will inevitably create problems. So contract design and associated management systems must be attuned to the complexity model.

When I led contracts re-engineering work at IBM almost 20 years ago, we actually stumbled onto this thinking. We categorized contracts into three ‘bucket’ – ‘commodity’, ‘integrated solution’ and ‘custom / first of a kind’. The first was a simple and independent product or service sale or acquisition; the second was a combination of products or services, which created interdependencies and more complicated commitments, but which had been done before and therefore risks were known and manageable. It was the third category that represented true ‘complexity’ because it involved levels of innovation and customization that took us into the realms of the unknown.

By thinking this way, we were able to identify the portfolios of contract terms needed for differing situations and to design contract models that would adjust to the nature of the transaction. Systems support and required skill levels could also be attuned to the varying levels of complexity and therefore directly linked to the management of risk.

A further benefit of this approach was that it provided a simple explanation to senior management about the role and purpose of contracts and the contract management function. They could quickly grasp the relevance of both in assisting management of the business. This thinking has continued to influence our work at IACCM, as we look at best practices in process, organization and contract template design.