Last week I was asked to present on the topic of 'Contract compliance as a core competence'.
Compliance is not a new issue. It lies at the heart of all successful business because it relates to meeting commitments. So why has it become such a major item on the corporate agenda?
I believe the answer is because of trust – or in reality, the erosion of trust. This has been documented by a variety of researchers and it appears to be accelerating, especially with regard to the public view of corporations and politicians.
Some of this erosion is probably justified. Certainly modern societies have witnessed an erosion of loyalty and a growth in transparency, revealing many previously hidden secrets. Behind this lies the networked world, which has severed long-standing relationships and driven a culture of low-cost acquisition. Globalization has introduced many challenges regarding controls, ethical standards, effective jurisdiction – the list goes on.
In their eagerness to redeem their own reputation and to ensure some continued relevance, politicians have added to the confusion and mistrust by rushing to introduce or threaten new regulation, helping to create a compliance nightmare. Indeed, Stephen Covey estimates the cost to US business associated with this ‘lack of trust’ is $1.1 trillion annually – and that estimate was made in 2004!
Other research has found that the biggest single factor in engendering trust is a visible commitment to ethical business practices – though sadly it often seems that ‘success’ and ‘ethics’ become confused, when you consider how many highly admired companies have fallen from grace when the source of their success unravels.
An article in Psychology Today seemed to capture the essence of what a compliance system should be trying to achieve when it observed that “Trust is based on the perception that efforts between parties will be reciprocated, reactions will be predictable and produce a sense of security for the parties”.
So what part does the contract and contracting process play in creating this trust environment? Today, I would suggest it is frequently very little. In fact, the terms of most contracts and the way they are negotiated tends rather to reinforce the absence of trust through its tendency to be adversarial in style and focused on the terms and conditions that essentially say ‘I don’t trust you’.
It seems to me that our contracting process has to become far more expansive in its thinking. As a start, it might seek to better understand the likely causes of failure (non-compliance) and seek to address their root cause, both internally and externally. As a simple example, failure to achieve committed outcomes could be a result of lack of integrity or could be attributable to lack of competence. But since we tend not to distinguish these characteristics, we do nothing specific to guard against them. When it comes to business exposure, I would deem absence of integrity to be in general far more serious than lack of competence. Competence I can correct or make up for; integrity I cannot.
Best practice compliance systems are those which are capable of distinguishing the types and severity of non-compliance and far more adaptive in their means of addressing lapses. In the end, we come back to the point that corporations have inflicted severe costs and damage on themselves by dismissing the value of long-term relationships built on trust and founded on integrity.