When business deals or relationships fail to deliver expected results, how often is the contract at fault?
A relatively high proportion of business deals or relationships fail to deliver expected results. This proportion increases in situations where there is a high degree of negotiation. For example, it is often suggested that 60 – 70% of outsourcing contracts underperform. So to what extent are contracts themselves at fault? Or alternatively, if we had better contracts, would success rates improve?
Building and managing a contract is rather like building and managing a house. Success depends on the effective coordination of a team of experts, working to a common design or plan. That design or plan must be based on a clear sense of purpose or goals. It also requires a responsible ‘owner’ at each point of its life, providing guidance and instruction and taking responsibility for ensuring the right outcomes.
In the context of a house, the property developer engages experts – architects, engineers, a builder – who in turn coordinate relevant professionals – electricians, plumbers, bricklayers, landscape gardeners. On completion, the property may be turned over to a new owner, who then assumes responsibility for ongoing repair, maintenance and improvement – once again engaging experts as needed to perform these tasks.
Things go wrong if the developer fails to ensure clarity of purpose, or if the architect fails to design for that purpose or to communicate clear instructions to the builder, or if the builder fails to coordinate and oversee the contractors ….. The list of possible problems goes on and each of them contributes to potential delays, cost overruns and disputes.
I think the analogy to a contract is clear. At the first level, the contract should be the design drawing that represents the vision of what the developer wants; it is then the model to which experts contribute their ideas and explain their limitations – areas such as finance and pricing, intellectual property, tax and intercompany, operations and project management. Failure to coordinate or reconcile these areas will cause problems – delays, overruns, disputes.
What makes contracts incrementally complicated is the fact that there is usually a stark contrast between the ‘design’ stage (contract drafting, negotiation) and the ‘build’ stage (performance after signature). It is often the case that the people charged with performance had little involvement with the design. Indeed, they are rarely even given the opportunity to review the signed agreement and confirm their readiness or ability to perform against it. And those who undertook design are rarely held to account for whether their work supported a successful outcome.
In situations which use a standard form of contract to undertake a regular set of tasks, problems are of course rare. The issues arise when the activities being committed are not standard, or are customized. Then, the contracting process becomes fundamental in determining the value of the outcome because it provides the discipline that ensures clarity of purpose, stakeholder engagement, reconciliation of differences or variations and a tool for guiding and overseeing performance. The absence of that discipline is rather like constructing a house with only vague concepts of what purpose it is to serve and without structured drawings or plans.
So poor contracts do lie at the root of many underperforming deals and relationships. However, the poor contract is a direct result of failure to ensure a robust contracting process, with clear ownership and accountability for defining requirements and producing agreements that deliver desired results.