Base it on the type of goods or services you are purchasing. If you are purchasing baked beans it is a low–risk, low–value purchase. The important thing is that they meet the specification and are delivered to time, quantity and price. There is no need to have complex terms concerning intellectual property, export etcetera.
However, if, you are contracting for a complex outsourcing of your IT or a business processing outcome then of course the contract is more complex.
The first type of contract is managed simply by a set of key performance indicators showing compliance with delivery quality and price. A simple dashboard showing the time it takes from requirement to delivery and the percentage of orders fulfilled first time with no returns will evidence the systems are working well. You should expect to see a very high set of numbers, typically above 90%. Replacement of suppliers is relatively simple and quick to do.
The second type of contract is complex because of the nature of goods or services to be provided. Describing the work done by a department can be complex and time consuming; the TUPE of staff is also complex and time-consuming as well as very emotive; the induction of such staff into a new organisation and, not least, the transformation between the present and future states. It is in this area that the greatest loss for an organisation occurs.
The World Commercial and Contracting Association (WCC) formally the IACCM (International Association of Commercial and Contract Management) has produced research that says an averagely performing organisation loses 9.2% of the value of contracts through poor process.
How do you save that 9.2%?
The problems start with the actual length of the contracts: some are 250 to 500 pages long. As such,they are almost impossible for an individual to manage.
Contracts can be big and intimidating as well. So, what should we do?
- Start by identifying all the obligations in a contract.
- Allocate each obligation to an individual, be that in your or the other party’s organisation. (Bite–size pieces)
- Those allocated an obligation should be asked by a system to confirm compliance with that obligation on a set frequency. (Crowd–sourcing)
- The system should provide dashboards showing compliance and exceptions. (Governance)
This frees the commercial teams from both parties to focus on resolving the exceptions. The elephant has been reduced to bite size pieces,everyone is managing their fair share and that is being monitored automatically. The Board is provided with an interactive dashboard that shows the compliance (or otherwise) of all their complex agreements and that they are being dealt. No surprises.
In addition to ensuring the obligations are being met, you can manage all the change controls going through the organisation thus alerting Finance and others to the impact on budgets and revenues;the disputes and claims that have been experienced by the parties and of course the goodwill that each party is providing for the other.
Now you have control.
With all the information being shared by both parties, you benefit from a more relational–based form of contracting: you are setting up systems that make the parties talk to each other. Asproblems arise, you will no longer be surprised by the issue as it is flagged early on. You have a method to embrace incomplete parts of the contract and raise clarifications in the Q&A section or change controls if necessary.
The contract should include shared goals and objectives, guiding principles, and the system should present you with robust relationship-management processes which will guide you through issues as they arise.
The guiding principles of the contract should set out that you will treat each other with honesty and in an equitable fashion to avoid short-term opportunism. The contract is not something the parties simply put in a drawer and forget, rather it is an active, real-time presence guiding them through issues in a fair and flexible manner.
Uncertainty is the only thing we can be sure of in the future therefore we should take special care to avoid antagonising the members of our ecosystems. Contract Toolkit is a means of introducing the efficiencies of automation together with the benefits of relational contracts, which can turn paper mountains and adversarial relationships into mutually beneficial partnerships that ultimately willsave real cash.
Author: Graeme Sloan