Occidental Petroleum Corporation
Author: Tim Cummins
Formal, institutionalized corporate governance is a relatively recent concept and still maturing, yet few today would suggest it is unnecessary.
Given this fairly recent focus, it is perhaps no surprise that contract governance is some way behind in gaining executive (and regulatory) attention. Yet arguably, the institutional management of an organization's trading practices and relationships is just as important as the management of its internal relationships and controls. That is why it must become an area for serious focus and improvement.
Not entirely new
Just 10 years ago, Oliver Williamson was awarded the Nobel Prize for Economics, recognizing his work on transactional costs within contracting. Thirty years before, he had written a seminal paper on contract governance, in which he focused on commercial contracting and concluded: “The efficient organization of economic activity entails matching governance structures with transactional attributes in a discriminatory way”. In current terminology, that means transactions must be segmented based on specific characteristics (such as risk, value and uncertainty)and then a variety of contract management methods must be available to support them.
A serious gap
IACCM research has identified the continued absence of sophisticated segmentation techniques as lying at the heart of contract value erosion. Essentially, contract governance is at best partial in its coverage, with the greatest maturity applying to relatively low value and / or high frequency transactions. While these are important for efficient and reliable operations, they are rarely critical. When it comes to longer term or strategically important relationships, contract governance is rarely well defined or managed.
This matters for many reasons. It results in cost overruns, delayed or missed revenues, massive increases in transactional cost, contentious relationships and potential reputational risk. Yet while so many of these damaging issues could be avoided, traditional approaches remain intact, often resulting in inadequate supplier selection techniques, inappropriate forms of contract, value-eroding negotiations and poorly defined and equipped post-award operational teams.
Addressing the problem
Not all is doom and gloom. As with any problem, the initial challenge is to gain recognition that it really is a problem. Then comes the need to demonstrate it can be fixed. In the case of contracts – just like corporate governance – the big issue is the enormity of action required. Contracts and their performance permeate just about every corner of the business – as well as the counter-party's business and potentially beyond. There is no 'owner' of contract governance in today's corporations – it's just too complicated.
But change is in the air. Executive awareness is growing and emerging technologies are starting to offer the critical components needed to drive integrated data flows, to provide on-demand information and knowledge – in short, to deliver a backbone that supports the mapping and implementation of differentiated contract governance structures.
As the world's only non-profit association for contract and commercial management, IACCM has spent years researching and designing improved methods. Unique in its worldwide coverage and integration of both buyer and supplier perspectives, it has been able to develop ideas and methods that truly enable rapid and major advances in contract governance. These are exciting times!