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Why contracts fail

July 14, 2017

In the past, relatively high failure rates were an accepted part of any production activity. The quality movement successfully challenged this acceptance and, at least in manufacturing, drove performance to new heights.

This was achieved by understanding the overall process of production, looking holistically to ensure integrity not only within each phase, but across phases. If activities are disjointed, quality suffers.

Contracting should be seen as a process. It is the activity that aligns commitment needs with capabilities, policies and practices, then oversees compliance and manages any necessary adjustment. Organizations perform this activity on a regular basis – and most tolerate a relatively low level of quality. Indeed, just like historic manufacturing processes, some level of failure or under-performance is accepted as inevitable. Most organizations don’t even know what that level is – though IACCM research has shown that 10-15% is probably ‘normal’ and certain industries or contract types experience levels of 30%+.

Contracts fail because the activities involved in their production are disjointed. Efforts at automation illustrate this only too clearly, with systems struggling to gain user adoption and failing to generate the sort of data that would enable a meaningful return on investment.

Typically, no one has responsibility for identifying, monitoring or maintaining quality of contracting. Numerous stakeholders claim rights over different elements, though none takes responsibility for the outcome that is achieved (for example, input comes from multiple groups within Legal and Finance, supplemented by Engineering, Project Management, Operations, Sales, Procurement …). And that’s before the counter-party gets its hands on the contract and seeks to impose its views into the mix. Whether or not these positions are compatible, or consistent with the results or relationship being sought, is often a matter of luck. As one law firm observed in a recent law suit ‘Contracts are often a case of too many cooks …..’.

The contracting process can and should be a quality process in its own right. When performed well, it acts as a method to ‘ensure integrity not only within each phase, but across phases’. When not viewed this way, it becomes an irritant, a source of confusion or delay, an activity that at best contains the level and consequence of under-performance, but does not control it.

New technologies and analysis are steadily revealing the scale of opportunity to drive improved performance through high quality contracting. Many are struggling to realise those benefits because of traditional attitudes towards ownership and continued assumptions that contracts are simply an output from other processes.

It is because of those attitudes and assumptions that contracts fail.

 

 

 

 

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