A contract is for everyone, not just the lawyers

One Response to “A contract is for everyone, not just the lawyers”

1. 

   Haydn Jones
   

   March 10th, 2008 at 17:47

   This piece of work was undertaken to highlight the issues associated with the conventional approach for negotiating and agreeing contracts to provide goods or services to an organisation.
   It was based on a series of discussions and workshops that took place over the course of 12 months amongst a group of interested parties including representatives from A.T. Kearney, Dresdner Kleinwort, The Global Business Partnership Alliance, Mischon de Reya, Laing O’Rourke, Origen (part of the AEGON Group) and Patni Computer Systems Ltd.
   The sessions focused on the fundamental purpose of the contract, (i.e. defining what needs to be delivered or undertaken, identifying risks incurred by parties to the contract and managing the relationship after the contract has been signed); the frustrations of the contracting process, (i.e. legalese, multiple versions of impenetrable wordy documents, legal costs etc.); the dangers associated with an ineffective contracting process, (i.e. poor supplier/client relationship from day one) and potential solutions, namely a risk based approach to developing contracts.
   During the sessions, input was provided by buyers and sellers of goods and services alike, describing their own experiences of developing contracts, underlining their dissatisfaction with a process where only the lawyers seemed to win.
   The underlying drivers were explored, identifying two major causes. Firstly, having a clear idea of what the contract was meant to describe in the first place was essential before engaging the lawyers; obvious but not necessarily easy given the many stakeholders usually involved, all enthusiastically sharing with everyone their own version of what’s required. Secondly, the traditional approach of developing contracts through the use of templates, with little in the way of flexibility for broader forms of mutual value creation, inhibits contract effectiveness post signature. This second point is critical; if important, so called, strategic relationships are treated purely as transactions governed by standard off-the-shelf contracts, there is limited scope and incentive to build deeper levels of trust from which higher forms of value creating behaviour can flow such as partnering or innovation.
   It was a consistent theme throughout the discussions that the conventional contracting approach – the battle of wills – does little to encourage these higher forms of value creating behaviour, both during and after contract execution. This is of great concern given the importance of building strong relationships with supply networks to drive all important innovation strategies organisations need; the danger is relationships are permanently damaged by the adrenaline of the negotiations process, leaving little in the way of dialogue between client and supplier. And unfortunately, it would appear not even the basics are in place; conventional contracts provide nothing of a pragmatic framework describing how the supplier relationship management process should work after the contract has been signed. Whether directly related, or not, some evidence of this is hinted at in studies undertaken by A.T. Kearney showing the SRM dimension consistently scoring lowest.
   As an output, the group developed a new approach to developing, structuring, simplifying and understanding contracts based upon evaluating the risks the parties to the contract will be exposed to throughout its term. The focus on risk is based on the premise that better quantification of exposure to change, (risk), means underlying insurance policies are better priced, helping to determine a more accurate price for goods or services delivered. And when known and unknown risks are quantified, and risk management plans agreed, attention is turned to higher forms of value creation i.e. developing innovation and collaboration strategies. Fundamentally, a contract is a risk management tool between two or more parties – recognise and treat it as such.
   Now before we all completely turn our backs on the decision in ‘Carlill v. Carbolic Smoke Ball Company’ {1893} 1 QB 256, the point is whether the existing contracting process provides a framework for developing and managing relationships with suppliers to create value, above and beyond the simple delivery of goods and services on time and in accordance with the specification. Suppliers know a lot more about their clients, and they can support them in generating value on both sides – what’s needed is a pragmatic framework that allows that to happen.

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