The Purpose Of Contracts
What is the purpose of a contract? Can you describe why we have them? If you can, then ask those around you and see what views they have. I can guarantee that ideas will vary widely. And that is a problem because contracts are a product, in the same way as marketing materials, installation handbooks, procedural guides, training manuals and many other business outputs. So if we have differing views of the purpose of a contract, we can never establish the criteria that make them 'fit for purpose'. And without this understanding, there can be few measurements of quality or value - for the contract itself, or for those involved with its production.
Tim Cummins, CEO, IACCM
I was at a conference recently and there was a presentation on quality by design. The presenter was rightly pointing out that design processes must seek to eliminate the potential for faults and problems - that is the way to reduce costs and increase competitiveness.
This got me thinking because contracts are a product, in the same way as marketing materials, installation handbooks, procedural guides, training manuals and many other business outputs. But when it came to describing 'quality' in the context of a contract, I found myself struggling. And I realized a key part of the problem is that we do not even have consensus about the purpose of a contract. So if we have differing views of this, we can never establish the criteria that make the contract 'fit for purpose'. And without this understanding, there can be few measurements of quality.
This should concern us. As contracts experts and professionals, surely we should have a consistent view of the characteristics and qualities that make a contract 'good'. I am sure there would be some areas of broad agreement - for example, I guess we all think it should be legible, understandable and accessible. Yet even here, the standards vary. Some consider small print to be quite alright; some call for simple expression and language, while others continue to prefer 'legally acceptable' terminology; and most agree with the notion of electronic repositories, but then disagree strongly over who should be allowed access.
These are just the simple issues. Opinions diverge much further when we start to ask more fundamental questions over the role of contracts. For example, is a 'good' contract one in which the balance of risk has been transferred to the other party? Or one that proves watertight in court? Alternatively, might a good contract be one that achieves balance between the parties and encourages open dialogue and collaborative behaviors?
These points may appear esoteric, but they are not. They go to the heart of the contract's purpose and influence not just how it is expressed or presented, but much more fundamentally to determine what outcomes it should be influencing. in a sense, this is at the core of the disagreement between those who say 'the contract should just go in the drawer' versus those who believe it is a living, breathing expression of commitments and obligations requiring day-to-day oversight and management.
So as we design and develop our contracts, how should we build in quality in order to eliminate faults and problems? How many 'faults and problems' are in fact created or influenced by the choices we make in our contracts? Academic research is starting to reveal far more than we previously thought. Increasingly we find that contract terms and structures have significant impact on the behavior of the parties, the extent to which they influence collaboration, innovation, cost-cutting .....
Since the purpose of almost all contracts is to support the parties in generating mutual economic value, you might think that there would be some indicators around their effectiveness in achieving this. But there are not. Anecdotally, we believe that things like clarity of requirements and change procedures probably impact the outcome of any transaction - but we are not really sure and we have no documented control process. In fact, even my statement that contracts exist to support economic value is most likely contentious.
I have written about this topic in my blog. As we continue down a path of global business, where communication and understanding is key to successful trading relationships, it is time for us to visit this question of the contract's role and purpose and to establish universal standards of quality and performance. Please contribute to the discussion.
To facilitate input, I have also written a brief blog article where you can add your comments (and see those of others). It is at http://tcummins.wordpress.com/2009/11/18/the-purpose-of-a-contract/
A Mission Statement for Sales Contracting: Close Contracts Quicker!
How many of us in Contract Management (CM) have asked how we can become strategically positioned? And how often has the response been that the Contracts group needs to “add more value”? Bob Henry, Principal at Landon Consulting and a former Director of Sales and Vice-President of Contract Management shares his ideas and experiences.
Bob Henry, Landon Consulting
How many of us in Contract Management (CM) have asked how we can become strategically positioned? And how often has the response been that the Contracts group needs to “add more value”? In order to earn a seat at the table we need to step back to understand the reality of what “adding value” means in our organization. When I was first named VP-Contracts at a large telecom company I asked the CEO for a short meeting to understand what he expected from me in the new role. His response was “it’s simple; make me money-no meeting needed”. I asked the same question of many of the Sales and Business Division leaders; not surprisingly, Sales wanted contracts closed on a more timely basis while the owners of the P&L were also concerned about product commitments and the profitability of the project.
So, my challenge was to determine how I could meet the needs of the CEO, Sales, and Business Division leaders (and other stakeholders-Legal, Finance, Engineering, etc.). The first step was to create a mission statement for the CM Team which was “to close contracts on a timely basis while at the same time caring for the interests of the company”. In order to achieve our mission we had to identify process improvements that could reduce the contract cycle time, while “not giving away the store”. As a side note, the skeptics often times interpreted the mission statement as sacrificing the company’s interest in return for closing contracts in a shorter period of time. The challenge is to strike the right balance between contract cycle time and business risks.
As a side note, prior to my Contract role, I spent my entire career in Sales and Marketing, and I often said that it took longer to negotiate the contract then making the “sale”. These delays are costly; the contracting team (sales, CM, engineering, business development, legal, finance, etc) can spend hours on conference calls, meetings, etc., discussing the same issues repeatedly. The CM group was viewed as a “black hole” that lacked a sense of urgency. Often times our dysfunctional processes left us with a dissatisfied customer. In fact, I recall a case where the customer “had enough” and awarded the business to our competitor. This is a high cost of poor quality.
As contracting professionals we must consider timely closure as a critical element of “quality contracting”. So, now the question is how do we meet that challenge. Let’s first understand that contracting is a business process which starts at the time a bid is submitted and ends when the product/project is finally accepted by the Customer. Before we can make improvements we have to document the current contracting process. Looking at this from a quality improvement standpoint forces us to identify specific steps toward meeting our goal; which is Customer Satisfaction (both internal and external). Finally, in order to implement process improvements CM must find ways to take a leadership position. The mission cannot be met if we wait to get involved until it’s time for a contract to be written. We must get involved early and not wait to be asked to join the “party”. This will require that the leader of the group “sell” the “new and improved” role of CM to the key stakeholders. Now, it’s time to demonstrate your value. If you are successful you will become an integral part of the team on future deals.
Shown below are just a few examples of how CM can add value to the process and reduce cycle time.
Process Step 1-Bid Submission
Become part of the bid team and add value by helping to design the business terms with the final contract in mind. Caring for issues such as these up-front will save a lot of time at the back-end.
o Acceptance and Payment Terms
o Revenue Recognition
o Contract Terms and Conditions
o Inclusion of a clearly written Product Specification and/or SOW as the basis for the bid. The bid spec/SOW must be subject to a formal change control process.
o Customer and Supplier incentives for exceeding their contractual obligations coupled with consequences for not meeting them.
o Opportunities for Collaboration
o Pricing model which is clearly written so there is no confusion later.
Process Step 2-Contract Negotiation
· Prior to Negotiation
o For complex contracts it is critical to prepare for the negotiation with the Customer or you will be at a major disadvantage. This is an opportunity for the Contract Manager to take a leadership role by forming the negotiating team, and scheduling sessions to prepare for the negotiation. The team is typically composed of representatives from Sales, CM, and someone from the group which has P&L responsibility (business development, market manager, etc). How often have you been presented a contract for review and approvals that had already been negotiated by Sales without the involvement of the other stakeholders? Pulling together a team up-front helps to avoid this type of situation.
o Describe the desired negotiation outcomes based on input from the key internal stakeholders (finance, legal, executive, engineering, etc.). This also enables the team to understand what flexibility they have during the negotiation to satisfy the Customer’s needs.
· During the actual negotiation:
o Agree with the Customer on a timetable for closing the contract. The timetable combined with a daily review of open/closed issues is very useful in keeping the teams focused and avoiding an open ended negotiation. How many times have you worked on a contract that drags out over a period of weeks or months? Agreeing on a timetable forces decisions to be made sooner rather than later.
o Understanding each others desired outcome up-front is very helpful in reaching a timely and balanced agreement. Too often the parties hold their cards too close to the vest and as a result talk past each other.
o Maintain an issues register which is not only useful for time management, but is also the vehicle for documenting agreements at the end of each day.
o Arrange for the key decision makers (both Supplier and Customer) to be available by phone during the entire negotiation process to make real-time decisions, and to handle issues which are escalated for executive discussions. Much too often not having access to the key players will push out closure to the next week, month, etc. Timely decisions are needed by them.
o At the conclusion of the negotiation both parties should agree upon and produce a draft for final review and approval. Producing the final draft while still being face-to-face accelerates the process, and prevents a misunderstanding as to the agreements that were made during the negotiation.
Contract management systems should also be considered as a tool to improve efficiency and reduce cycle time. A good portion of our day is devoted to handling inquiries, approvals, gathering stakeholder input, locating contracts, modifying contract language approved by Legal, exchanging contract changes internally and with the Customer, etc. If some of these functions can be automated it will give us the time to focus on the more strategic aspects of our job.
In summary, it’s up to the Contract Management Team to earn the right to be a strategic player. The first step is to create a mission statement that will meet the needs of your clients. Clearly, in today’s competitive environment time to market is critical, and closing the contract is in the critical path. The organization will also value CM acting as a consolidator of the various stakeholder’s interests. Often times their interests conflict and CM can act as a neutral party to facilitate agreement on an optimal business model.
For those of you that want to be a “strategic player” it’s time to take control of your own destiny. Need I say that during these economic times functions (and individuals) that are not adding value may be at risk. Before you take the plunge it’s important to do a self assessment as to whether you have the skill set to succeed in this new role. If not, training and finding a good role model may be the answer. Department heads may also want to consider engaging with a coach that has been through this transformation in the past.
Good luck, and remember that quality contracting is more then managing the company’s risks and business terms-it is also about timeliness and communicating a sense of urgency to close the business.
The Learning Journey of Contract and Commercial Management Professionals
This article considers some of the factors in deciding how to improve learning within contract management and commercial teams, buy-side and sell-side...
Paul Mallory, VP Training & Development, IACCM
This article considers some of the factors in deciding how to improve learning within contract management and commercial teams, buy-side and sell-side including:
· Why do some companies outperform others?
· Education is not enough... (we have to DO something, as well as knowing)
· Models and steps towards behaviour change
· Impact of culture
· Collaborative learning, and some suggestions for how to achieve it
Some are better than others...
Why do some corporations consistently outperform others? Why do some corporations head the IACCM surveys of most admired companies for negotiation and post-award contract management while others do not figure at all in the lists?
After all, the contract management/commercial management role that we perform for our companies comprises a fairly generic list of activities that need to get done in pre-sales, post-sales and buy-side processes, not many companies will be doing something especially unique and revolutionary, albeit that in different companies the tasks are split between different functional groups and organised in different ways (for example, in some companies sales support, bid management, pricing and estimating may be part of the Commercial function, in other companies they are part of Sales or some other functional department).
Part of the reason that some companies outperform others in the area of commercial and contract management is their propensity to learn, to be a learning organisation.
What does that mean? Well, let’s take the example of bidding for customer contracts in a competitive environment. Some companies will recognise, at senior level, that they spend a large sum of money each year bidding for new deals. Some may consider it valuable to think about how many deals are won, out of the total deals bid for. And some companies may even think it would be a good idea to improve the ratio of wins to losses in competitive bidding. I say some, because it is clear that not all companies think this way, or if they do, not all act on it.
So perhaps a learning organisation would gather win/loss data, analyse it, set targets for improvement in their results over time, and take process improvement steps to raise their hit rate. Do all companies do this? Does your company do it?
This is just one example of an area of the business that Contract and Commercial Management can choose to play a key role in making improvements which add real, tangible measurable value to the businesses we work for, for the benefit of the shareholders, and with the side benefit of an increased role and respect for our function in the business.
Another example would be to look at the cycle time for concluding contract negotiations in the company, and to ask what are the most common factors in delaying the winning of business, and the inflow of cash. Are our standard terms of sale fit for purpose in making us an easy company to do business with, or do we regularly negotiate the same issues, and give way on the same points time after time, to get the business. Does this ‘dragging our feet’ approach to negotiation meet the objectives of the business?
Education is not enough
Knowing the right answer is not enough by itself. How many times have you been in a meeting where everybody agrees what needs to change, agrees that the change is desirable, agrees that the change is such a ‘no brainer’ that it almost insults our intelligence to even question it, yet everybody then goes away from the meeting and nothing changes?
A great example of this for me would be the learning point that preparation for negotiation is absolutely crucial to the outcome, both in terms of having the team and negotiation strategy and tactics well thought out as well as aligning the company internally (‘the internal negotiation’) so that everybody is clear on the desired outcome, walk-away points, negotiation margins and latitude and so on. Obvious, everybody knows it. Hmm, how many DO it?
So an intellectual appreciation of a best practice is not enough. Education will give us that intellectual appreciation, but will not necessarily affect the business outcome, because we often fail to practice and apply these principles in the real world, and to measure their effectiveness in terms of outcomes. How many training courses have you or your teams been on, where some new knowledge was gained, but you can’t quite put your finger on what changed as a result?
Making process changes to improve effectiveness and efficiency is often part of the answer.
Almost always part of the answer is achieving behaviour change. How do we get people to think and act differently, to improve business results? After all, we are creatures of habit, we often act and react on autopilot, we each have a certain worldview that we bring to work with us, and getting our teams (and ourselves) to think and act differently can be quite challenging.
I came across a useful model recently, which includes 7 steps to behaviour change:
Equally useful, here is the reverse view, the 7 stages of behavioural inertia, which helps to explain why behaviour change can be so difficult to achieve:
So, in order to achieve behaviour change, we need to help our teams to:
1. Become aware of the need for change
2. Decide that participating in and supporting the change is desirable
3. Become knowledgeable about how to change
4. Get the ability to implement new skills, behaviours, knowledge and perhaps attitude
5. Feel reinforced to keep the change in place into the future
Impact of culture
Culture is, simply, ‘the way we do things around here’. In a quality-conscious, continuous improvement company culture, change will be expected, encouraged (demanded, even), measured and rewarded, as a way of improving company performance to meet business goals.
In many companies, lip service is paid to these ideals (they are, after all, ‘no brainers’), but little real systematic attention is paid to them. As we can see from the behaviour change model above, if our teams operate in a culture of short-termism, where all that matters is the sales result for the next month or quarter, or landing the one big deal that will make up for all the many deals we regularly lose, often for the same reasons time after time, then the awareness of the need for any change (and executive support for it) will be low, as will reinforcement of the individuals who attempt such systematic changes.
In short, the job of leaders in Commercial and Contract Management (and leaders can emerge at any level of the hierarchy!) is to identify the need for change, champion it to the executive management, get buy-in, and then set the culture for the team in our function, which is one of constant striving for improvement.
As someone expressed it to me recently, ‘just when we think we are nearing the peak of the mountain, we discover a further peak just over the top! Welcome to the world of the pursuit of excellence!’. The companies who top those ‘most admired’ surveys, and certainly the companies who are market leading and achieving those higher win rates and shorter cycle times are almost certainly those who adopt this culture and attitude.
We can (and many do) decide to adopt a ‘hero culture’, where a small and select band of individuals (the ‘A-team’) know how to win deals, shorten negotiation times, get great results in negotiation, then effectively manage and maximise value from contracts post-award. In this culture, the few grow their careers by knowing the secret formula for success, ensuring that their internal rivals for promotion do not know as much, and using this power to secure career advancement and salary improvements. They do this by achieving better business results in their business unit/group than their peers in other units. Of course, over time, their satisfaction in watching other business units perform less successfully than their own, gives way to anger as their personal rewards and career progression are thwarted by the failure of their employer to keep pace with the faster, more innovative competition. A short-sighted approach.
It will be obvious from the above that interaction between team members is key to achieving the kind of improvements which will keep our company ahead of the competition. As companies source and sell more and more globally, we need to understand the perspectives and culture differences which exist in our global team internally, as well as with our trading partners externally. How do we learn how to make these improvements, how do we share this knowledge, how do we communicate with people who are based remotely? (And believe me, another team can be based ‘remotely’ when they sit a few feet away, across a corridor, with a sound-dampening barrier between them and you, I have seen this first hand!).
Part of the answer is by use of technology. IACCM’s member search and messaging forums enable communication of learning and sharing of knowledge across the world, and are found to be highly effective by members using them.
IACCM’s corporate learning programs have been found to deliver collaborative learning to commercial/contracts management teams, both buy side and sell side, through design, with the corporation, of a six months’ program of learning which emphasises through a series of webcasts and ongoing communications those key themes and strategies of the company that enable sharing of best practices in the real business environment of that organisation.
In our corporate learning programs, we require each course participant to post a minimum of 5 messages to the company’s secure learning portal message board, to encourage a flow of knowledge sharing to begin. Many participants post many more than the minimum number, as momentum picks up and their colleagues around the world share with them ‘secrets’ of how to operate better. These postings bring the best practices of the IACCM body of knowledge into the workplace, by sharing examples of their application in the corporation. Challenges and barriers to implementing best practices are discussed, and cost savings/process improvement opportunities are identified, leading to value generation. And great ideas are generated in some surprising parts of the world, often by people who are not aware that their thinking ought to be constrained in the same way as it is in other countries!
These programs provide a flexible learning environment for the participants enabling them to manage their time, develop their intra-team communications, allow interactions on a global basis, provide sharing of ideas, increase motivation of the participants to make changes, encourage different perspectives and views, establish a sense of learning community, help to create a more positive attitude to learning, enhance self-management skills and develop skill building and practice.
Another example of collaborative learning being promoted by IACCM is a new program we are launching in Q1 2010, for leaders/future leaders of function, to facilitate culture exchange and cross-fertilisation between people from different companies, industries and countries. We’ll be encouraging those program participants to examine the differences in the ways they think and work, to learn from one another and to find new ways to add value and raise standards in the performance of their teams as a result.
I recently visited Manchester Business School at the University of Manchester, UK, to learn more about their MSC in Commercial Management. This course is evolving to provide leading edge Commercial Management education and is another option for participants to broaden both their Commercial expertise and their cultural interaction with people from other countries and industries. IACCM endorses this course of study. Some places are still available in MBS’s next cohort, which starts in the New Year. Additionally, MBS are looking to expand their suite of offerings to include a post-graduate certificate and post-graduate diploma option, in addition to the full MSC.
· There are reasons why some companies outperform others... ‘success leaves clues’! Our professional function can add real business value by improving the way contracting is carried out
· Learning new information is great, but wont of itself change the business outcomes of our companies, for that we need to practice and apply learning, in a way that impacts bottom line performance
· Our teams need help in achieving behaviour change which will deliver better business outcomes, including encouraging and reinforcing the attitude that leads to suggestion and implementation of improvements
· The company and team culture needs to support the changes we are trying to make (culture can be changed, culture is ‘the way we do things around here’... let’s start doing them differently!)
· Collaborative learning is highly successful in delivering change in the team and in business outcomes
For more information on any aspect of this article, or to make a comment or suggestion, please contact: email@example.com
The Nemesis of Conventional (Reactive ) Contracting -- Transformation to Pro-active contracting model
Traditionally, researchers & consulting agencies have described contracts as 'the life blood of an organisation'. I would rather slightly depart from this custom and state that contracts are the spinal cord of the organisation. I see 'Contracts' as the framework of a relationship and their focus on managerial decision making - in the same way as the spinal cord which translates the neural signals from the brain ('Management') to the rest of the body ('other entities' of business environment) and also contains neural circuits that can independently control numerous reflexes ('Proactive').
N. BALACHANDAR, Manager-Contract Administration & Management, Technip India Limited
Traditionally, researchers & consulting agencies have described contracts as 'the life blood of an organisation'. I would rather slightly depart from this custom and state that contracts are the spinal cord of the organisation. I see 'Contracts' as the framework of a relationship and their focus on managerial decision making – in the same way as the spinal cord which translates the neural signals from the brain ('Management') to the rest of the body ('other entities' of business environment) and also contains neural circuits that can independently control numerous reflexes ('Proactive').
Contracts form the documental 'yarn' that converts in to 'fabric', while binding People, Clients, Suppliers and Organisation into coherent working relationships wherein goods & services may be exchanged in a mutually agreeable framework. It is worthwhile to recall that a recent study1 reveals that the typical Fortune 500 companies maintains 20,000 to 40,000 active contracts at any given time. With this background, it is imperative that the contracts be 'proactive' rather than 'reactive'.
Before embarking on the nemesis of 'reactive' Contracting, it will be appropriate to define 'Contract' and the core elements of Contract Life Cycle.
CONTRACT per se
Gartner Research2 defines contract as the sum of all transactions & interactions that have taken place between the Parties, both before & after the award of Contract. For the purpose of our discussion, we can consider the contract to be a set of documents governed & restricted by law, that clearly establish the boundaries & extent of the executing Parties' relationship & responsibilities along with the rights & responsibilities, of the entities involved.
In more than one occasion, I have observed Mr. Tim Cummins, CEO, IACCM reiterating the bottom line of contracting (adage):
IF YOU ARE NOT IN CONTROL OF YOUR CONTRACTS,
YOU ARE NOT IN CONTROL OF THE BUSINESS.
Tim further states,
ORGANISATIONS THAT DO NOT MANAGE THEIR CONTRACTS EFFECTIVELY WILL BE AT A TREMENDOUS COMPETITIVE DISADVANTAGE.
CONTRACT LIFE CYCLE
Contracts are 'living entities' with a Birth, a Maturation period and in most cases a Termination – maybe a smooth close-out or an abortive exercise.
Contract life cycle consists of the following basic stages3:
CONTRACT CREATION – authoring the contract using standard clause templates.
CONTRACT COLLABORATION – collaboration with legal, risk management cell, taxation, Audit, insurance & other groups internal to the organization, negotiation & collaboration with Suppliers, Clients & other business partners.
CONTRACT EXECUTION – specifying contract start date, completion date, capturing signatures from all entities involved and establishing a control repository of all contractual information.
CONTRACT ADMINISTRATION – tracking & auditing of contract terms, pricing, discounts, quality level compliance, change management & performance.
CONTRACT ANALYSIS – enforcing spending against budget, balancing orders, assigning resources for the optimal management of the most profitable projects & customers; Also term analysis of contract performance and attributes to determine future sales, budgeting, sourcing and risk strategies including the exercise of Lessons Learnt.
As addressed before, it is imperative that contracts be proactive rather than reactive.
Proactive Contracting refers to the use of contracting processes that blend 'Best Practices in Contracting', Quality conformance, Risk mitigation practices with “Pro-active / Preventive Law”.
Thus the goals4 of Proactive Contracting can be listed as below:
Ø To promote successful performances & frame work of relationships
o To identify & eliminate root causes of potential problems
Ø To optimize risk & return and
o Minimize deterrent when problems arise
Ø To manage conflict & prevent litigation
o To minimize costs & losses where they are unavoidable
PROACTIVE CONTRACTING MODEL
Often contracting is merely referred as a legal document and many organizations never formalize the management of their contracts during the agreement period; Contracts are archived away in departmental filing cabinets never to be reviewed again until a problem arises5.
Contract dispute management is not just a walk in the park.
“Contractual disputes are time consuming, expensive & unpleasant. They can destroy the Client-Contractor relationships painstakingly built-up over a period of time. They can add substantially to the cost of the contract, as well as nullifying some or all of its benefits or advantages. They can also impact on the achievement of value for money. It is in every one's interest to work at avoiding disputes in the first pace………….6”
Traditionally, the steps in providing legal care resemble those of Medical care:
diagnosis – treatment – referral, all steps that happen after a client or a patient has a problem. Care has been reactive.
You get sick, you seek treatment;
You encounter a dispute, you turn to a lawyer7.
As core professionals, we have to lean away from this approach. Businesses benefit from a proactive approach focusing on how to secure & sustain success and help the team out of trouble.
One should clearly understand that businesses do not succeed by winning disputes or court cases, or by looking for parties to blame and claim damages from. Companies are not interested in damages or remedies; all they want is successful frame work of relationship and the expected level of performance. They seldom benefit from spending hours drafting and negotiating clauses dealing with liabilities (read limitation of liabilities) and remedies – instead they benefit much more if those efforts are aimed at clauses that enhance communication, clarify liabilities & responsibilities, and help in securing successful performance.
The following table8 is presented just to highlight the differences of the conventional approach as opposed to proactive approach to contracts & contracting.
Looks at matters
After the event,
Ex post; reactive
Ahead of the deal,
Ex ante; Pro-active
Sees Contracts as
Framework for relationships,
Contracts' validity, enforceability and interpretation in a dispute; contract / project failure, liabilities and remedies
Contract's usability and functionality; success in reaching parties' goals, optimizing & managing risks, contingency planning/business continuity planning
Predominantly law and commercial
Multidisciplinary and working in teams – project/matrix management
Serves primarily the interests of
Courts, research and academia; litigators; public lawmakers
Contracting parties; people in sales, procurement, finance & projects, contracts professionals; private lawmakers
Law; legal decision making; legal theory; legal precedent
Managerial decision making; reaching business goals cost-effectively, risk management
Centre of perspective
Judges; public policymakers,
Rules; past facts,
Contract in dispute or litigation,
One contract at time,
Curative, corrective action
Contracting parties; private actors,
People, process, culture, future facts,
Contract(ing) in organizations,
Contract portfolio and process,
Dispute prevention and management,
Proactive, preventive action
Conflict & dispute resolution; what courts or legislators or tribunals have done or should do
Contracting skills and tools; process, roles & responsibilities; good relationships, successful performance
Contracts do not exist in isolation and do not make things happen -- It is driven by the People; It should be for the People. After negotiating & signing the contract, the parties must follow their agreement. The contract documentation becomes the blueprint for the project and for managing the relationship; it provides the boundaries within which the relationship has to be managed. Hence it is essential that Contracts should be made simple, effective & enforceable.
The contract is not the goal; successful implementation is9. Successful implementation is what contracts are made for; contracts must transform into desired performance. Here resides the role of the Contract professional. Contract reviews should be done ceremoniously ensuring that all the actors are fully conversant with the Contract clauses. The way in which they are involved differ Company-wise, Industry-wise, Project-wise and type of contract-wise. When managing the project they not only manage the Client (sell-side) contract but also a portfolio of contracts which need to effectively pass on to Suppliers & Sub-Contractors, the applicable terms and the associated risks of the main contract. So Contract professionals need to capture the nuances of both sell-side and buy-side contracts, and managing the interfaces.
An experienced Contract professional can make a valuable contribution at the contract planning stage by sharing his experience & knowledge from previous projects & of his colleagues. 'Lessons Learnt' exercise by Project Managers would be a useful & effective tool. It should be noted that these Lessons learnt should not be limited to capturing technical issues as is being done in most of the cases. It should also include contractual issues. The Contract professional can help tailor the contract to the needs of the project, and protect the relationship between parties and ultimately protect the project.
On both sell-side and the buy-side, the roles of contract professional need to be coordinated with project managers, sales managers, finance managers, legal professionals and others. Some of their contract-related activities and the varying extent of their authority can even cause conflict. It is often useful to map out what the organisation's current contracting process, roles & responsibilities, eliminate the potential bottle-necks & try to arrive at a rejuvenated Contracting process. It may become apparent that no one really has ownership and is accountable for the process, end-to-end. Each organization must make its own determination as to who is in-charge. What matters the most is that the process & the role of individual team members should be made clear to every one involved.
Thus a Pro-active approach combined with an understanding of the Contracting process is a key for a Project to succeed. Teamwork, communication and clearly stated roles & responsibilities give a good leverage for effective Contract management. A well thought-out contract and the early involvement of the contract professional in the contracting process will set the stage for successful project completion. All team members from the word 'go' must commit to making it happen.
As the adage goes along the same lines as “war is too important to be left to the generals”, it can be said that contracting is too important to be left to the contract professionals or lawyers. If the allocation of tasks is unclear, then everything is unclear, and problems will follow.
Nevertheless, 10to create good quality contracts that serve both as business tools and as legal tools, organizations need the skills and strengths of business managers and proactive project & contract professionals. These skills & strengths must be integrated through collaboration & communication. The core of corporate contracting capabilities resides in companies' ability to merge and optimize their respective knowledge and skill sets.
Proactive contracting offers a new, practically focused approach that deserves to be widely known. Its ramifications have wide implications & potential both in business and training, and in the continual development of contract professionals. This learning should be promoted and its results should be shared. Here resides the collaboration of total commitment of the top Management of an organization and the professional association of educators and researchers like IACCM.
Before we come to an end, once again quoting the recent words of Tim Cummins, IACCM (though meant under a different context),
Whatever we write in the Contract,
However diligent our Management is,
It is our culture that will drive behavior.
Let us make PRO-ACTIVE contracting a part of our business culture.
References & Quotes:
1 Institute of Supply Management
2 Gartner Research, Oct'03, 'Six keys to better Procurement Contract Management
3 Alti Inc., 'Enterprise Contract Management – An Overview'
4 Helena Haapio & Linda Baines
5 Hummingbird, 'Contract Management – a strategic asset'
6 UK-OGC: Dispute Resolution Guidance 2002
7 Linda Baines
8 adapted from Haapio 2007a
9, 10, 11 Helena Haapio & Linda Baines
My sincere thanks to Mr.K.Shanker, MD, Technip India Limited and Mr. Tim Cummins, CEO, IACCM (International Association of Contract & Commercial Management) who were instrumental in preparing this article.
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Tim Cummins, CEO, IACCM
Today I attended the 1st European Proactive Law Symposium, organized by the IACCM Proactive Think Tank in partnership with the ICN Business School in Nancy, France.
Among a host of interesting topics and papers, there was a panel discussion featuring academics from several Law schools that addressed “Proactive Contract Management as an Evolving Academic Discipline”. Based on wide agreement that contract management is an important business discipline, in need of a common language and established techniques, the panel discussed whether contract managers should be lawyers and / or whether contract management should be incorporated into legal training.
There was agreement that lawyers would benefit from the inclusion of contract management content in law school programs. It was felt that holistic case studies would assist the development of wider skills. “Today’s programs are rule-based and testing is based on those rules. It is a deductive discipline and the belief is that wisdom and judgment will come from on-the-job experience,” observed Tom Barton, a professor at California Western School of Law. He went on to explain that case studies from the world of contract management could assist in developing wisdom and also teach lawyers in areas such as gathering and analyzing information, coordinating ‘teamed’ resources, active listening skills and greater behavioral understanding.
There was wide consensus that contract management will increasingly be an attractive path for some lawyers, but that it is not necessary to be a lawyer. Indeed, the cross-disciplinary nature of contract management was emphasized as one of the reasons why it is so difficult to build academic programs for this community. However, all the academics present believe that it is important to develop contract management as a discipline in its own right, as well as making it an element of other programs – for example in law, finance or marketing.
In responding to this enthusiasm from the academic community, I commented that we must work together to build executive understanding of the importance of this role. While dedicated undergraduate and business school programs will be welcomed, uptake will be limited unless students are confident that the discipline offers a career path. However, we already have initiatives under way with several universities and business schools to offer internationally applicable programs for the contracts community.
We also discussed how content would be developed and I suggested that we should utilize the existing, practitioner- developed body of knowledge that is managed through IACCM as a base, and then have academics build from that syllabus to include more refined techniques and methodologies that would bring greater consistency and value to the contract manager’s output. One critical aspect of this is that everyone involved in contracting must have improved understanding of the economic outcomes of decisions. Many contract issues are resolved by functional owners who have little understanding of the potential market impacts. Many decisions have interdependencies with other terms and conditions; contracting must become more holistic and disciplined so that it can offer increased value and innovation.
A synopsis of the papers delivered at the symposium is being collected and will provide the content for a future special edition of Contracting Excellence. To comment on this article, visit http://tcummins.wordpress.com/2009/10/14/should-lawyers-become-contract-managers/