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The ‘dysfunction tax’ of modern contracting

March 10, 2020

“For every dollar of revenue that your company brings in, figure out how many cents are being frittered away to cover the cost of dysfunction — the self-inflicted wounds of bad strategy, poor execution, and ineffective communication, among other things, within your organization. The hard part, of course, is knowing how to value the impact.”

This call to action, published recently in Strategy+Business, strongly resonates when it comes to contracting. Not just the agreements themselves, or the time it takes to get them agreed and in place, but the entire life-cycle. IACCM research continues to reveal massive opportunities to reduce the ‘dysfunction tax’ and at times like this, with markets in disarray, action that rapidly cuts costs and improves cash flow is clearly urgent.

1. Align commercial practices and contracts with corporate strategy and goals. The IACCM capability assessment and benchmark provides a quick and low cost method to review process performance and create alignment.

2. Streamline contract review and production. Once it’s clear what portfolio of agreements is needed to support strategy, it’s time to develop the overall set of terms and clauses that will populate those agreements, either as templates or within a more flexible clause library.

3. Implement a scoring model. Just having the right agreements or templates doesn’t help if people don’t know when to use them. Implement a tool like the IACCM VCU Framework to support selection of the optimum contract and risk model for the transaction or project being undertaken.

4. Simplify contracts. The dividend that comes from contract simplification is remarkable. Improved design and wording cut cycle times and costs, as well as supporting improved levels of compliance and performance.

These four steps create the basis for a coherent, aligned approach to contracting. Depending on the nature of the agreements that form your portfolio, it’s then necessary to develop appropriate governance and performance mechanisms – the mix of people and systems needed to ensure value delivery. Again, this is indicated by a sophisticated planning tool, such as the VCU Framework mentioned above.

The Capability Assessment is the place to start since it is rapid to complete, it offers a thorough gap analysis and identifies the overall improvements required as well as immediate ‘next steps’.

And what is that tax – or the opportunity for tax reduction? Research shows that it’s typically between 5% and 15% of the revenue or spend under contract. Surely a dysfunction that’s worth fixing.

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