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Contracting: the core of business competence

March 10, 2015

Winning contracts, placing contracts with suppliers, executing on contracts – the ability to undertake these activities successfully lies at the heart of any sustainable organization. Shifting business models are making capabilities in these areas ever more critical.

Yet for the majority of organizations, contracting remains one of the few undefined business processes and probably the least automated.

For most businesses, the ability to win contracts with customers has always been important. The significance of contracting with suppliers continues to grow, as a higher proportion of revenue is spent on external supply (in some industries, as much as 80%). But this is only part of the story because steadily, the role and importance of contracts has increased and the complexity of performance has also grown.

In the past, executive surveys revealed that most CEOs saw little importance in contracts except for their symbolic value in winning business. The exception to this was if they perceived significant risk or uncertainty. Today, risks and uncertainties abound – ranging from a myriad of regulations, through increasing internationalism in trade, into contracts that often commit to long-term outputs or outcomes. For many, gone are the days of simple commodity supply; the contracting process has become critical to addressing a wide array of business risks – financial, legal, regulatory and performance.

Yet old habits die hard and many organizations continue to operate with highly fragmented commitment processes, with ‘the contract’ viewed as a legal or administrative output. As a result, relationships often suffer from the wrong form of agreement, inappropriate terms and conditions and poor management of performance and governance standards. As IACCM research demonstrates, good contracts offer a framework for successful relationships and provide structure for subsequent performance.

There has been almost endless investment in defining and automating internal business processes and structures. In many cases, this has actually been at the expense of the external relationships on which organizations rely. It is time for executive management to shift focus from internal operations onto external effectiveness and the integration with trading partners. The contracting process offers the route to this integration, through insights to market needs and value as well as actual performance standards and capabilities.

One Comment
  1. Alan Roach permalink

    Tim’s comments are valid but I believe they’re driven by the larger lack of educational importance for contracting, contracting terms and risk management. Most college business grads have no more than a single 3 credit hour course in Business Legal which barely covers the topics of offer and acceptance. How can we expect managers and CEO’s to understand if schools put no emphasis on the topic.

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