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Governance in contracts: does anyone care?

October 1, 2020

When it comes to the most negotiated terms, ‘governance’, along with communications and reporting, does not even make it into the top 30.  Why is that, and does it matter?

The quality of governance is widely understood to have critical importance for business performance. Indeed, many organizations have gone overboard in their implementation of governance boards, sometimes to the point that they are almost operationally disabled. But of course that overkill does not represent quality. Nor does relegating it to a contractual after-thought.

Some thoughts and ideas

There is no doubt in my mind that good contracting depends on coherent forms of governance and that contracts should reflect and support that governance in both form and purpose. Their effectiveness in doing this depends on multiple factors, but among the most critical are:

  • the governance provisions must be universally understood and accepted within each contracting party. Today, often, they are not – they are just words.
  • contracts must be structured and then disseminated in a form that renders them a useful and usable operational framework. Today, in general, they are not – and hence a tendency for many governance provisions to sit outside the contract as guides, manuals or charters, which may then be viewed as optional.
  • building from this point, it may only be when embedded in contract that there is a concern and effort to ensure compatibility between the core terms of contract and those of governance – e.g. in areas such as an appropriate allocation of risk and reward to incentivise the cooperation implicit to good governance.
  • a recognition that relationships operate across a spectrum of dependency and value and this implies a similar spectrum of appropriate governance. There is a steady graduation in the formulation of governance provisions from imposition to mutuality. We must recognise that while mutuality is optimal for theoretical value, in practice it is very hard to develop and sustain because it implies exceptions to standard operating procedures for both parties. That’s why things like industry codes are emerging and may prove to be the way forward.

There is a lively and growing debate over governance and performance management, further accelerated by the experiences of COVID-19. The depth of dependency on contract relationships, the challenges of limited transparency, the need for increased cooperation – these are just some of the factors requiring improved definition of day-to-day operational procedures and practices.

Improvement is challenging

Behind all this there are pressure points that can help or stand in the way. For example, as this year’s Most negotiated Terms report will show, procurement and legal continue in many cases to drive a preventist approach to contracting. Without direct intervention from the CFO, it is proving hard to make the switch from judgments of value at point of input to a more holistic measure of lifetime cost and value. It is also complicated to start thinking about relationships more holistically, for example basing approaches to cooperation across networks or ecosystems rather than apply them one relationship at a time.

Governance matters and people do care. But the journey to better governance is going to require sustained effort and focus from across the organization.

 

It seems to me that our real challenge is to formulate a governance design model that operates across the full spectrum of a business’s external relationships. In this time of major change and uncertainty, there is an added urgency for us to deliver some practical ideas.

One Comment
  1. Owen James Davies permalink

    I have often encountered especially in contracts for business process services where governance mechanisms are established requiring obligations that do not reflect the scope of the contract or, indeed, the provisions set out in, what can be a lengthy governance schedule. This is usually based upon what the client is used to.

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