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Why do we use the wrong contracts?

May 23, 2018

Earlier this week I cited a report which observed that outsourcing contracts are failing to keep pace with the nature of the market. Smaller, more flexible agreements which focus on outcomes and use new pricing models are not compatible with the onerous terms and conditions and sheer size of the contracts in use today.

This mismatch between market reality and the quality of commercial assessment and oversight has also been evident in the audits and reviews of public sector outsourcing and franchising. It emerges time and again when construction and capital projects experience time and cost overruns. An IACCM assessment with one major organization found that over half their contracts were using the wrong template, resulting in higher prices and poor supply relationships.

The list goes on …. and with each wrong contract, each agreement that fails to match the terms with the commercial or pricing model, value is lost for both parties.

Why is this happening?

The issue can be framed in several ways, but ultimately it comes down to organizational ignorance and inertia. We do what we do because that is the way we do it. Ensuring that contracts and terms and conditions are matched to the goals or realities of the business is simply no one’s job. Or perhaps it is everyone’s job. Whichever, the result is that no one takes responsibility – or anyone who attempts to be responsible meets resistance.

Good contracting is very much a team sport. Multiple stakeholders have an interest in the content of a contract and multiple functions or departments rightly wish to exert influence. But this implies time and effort and, as we all know, everyone is too busy to focus on coordinating those efforts. So the pressures of getting business closed mean that it is easier to stick with standards and precedents.

Organizations are built around functional contention systems. That often works well so long as there is a clear point of ownership and accountability for delivering results or outcomes. In the case of contracts, it is generally the case that no such point exists. Legal groups may say they own contracts, but once you start talking about their oerpational performance, they soon back away. They may produce templates, but lawyers do not guarantee those templates are actually fit for purpose and they also point to the fact that many of the transactional documents are produced elsewhere.

What to do

Given the scale of evidence, it ought to be easy to gain executive support for reforming the way contracts are designed and managed. In another recent blog, I pointed out that when most people describe ‘the contracting lifecycle’, it is purely transactional. CLOC (an organization for Legal Operations staff) is among the latest to publish a high-level process overview – which fails completely to address the question: “Where do contracts and contract terms actually come from?” In my blog, I highlighted the need for someone to have responsibility for overseeing the following strategic / operational aspects of contracting:

  • Define – oversee development and define responsibilities and authorities within the contracting process
  • Develop – establish standard clauses / options and templates based on policies, practices and market strategies / requirements
  • Maintain – monitor issues, undertake research, propose improvements, update process or standards for shifts in internal or external conditions
  • Equip – ensure suitable tools, training for those performing activities within process
  • Analyze – undertake regular reporting on effectiveness of process in supporting business goals and priorities

The existence of such a role would eliminate many of today’s problems. It really is not complicated.  At IACCM, we can make the case and promote the answer – but at an organizational level someone needs to step forward or to be appointed to make it happen. Until then, ‘wrong contracts’ will continue to proliferate.

One Comment
  1. Owen Davies permalink

    Tim, similar theme to my post on LinkedIn, Concluding the wrong deal!

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