The Future of Contracts & Commercial: Defining Our Mission
Published: 15 Nov 2011
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This article appeared in Contracting Excellence magazine on 15 Nov 2011
Good contracting starts with defining the best form of relationship to achieve the desired business results. Since ‘the relationship’ will often continue well beyond contract signature, it is essential that the parties include governance principles. Negotiators should think in three phases – first, relationship models; second, contracting models; and third, communication models. .
Good contracting starts with defining the best form of relationship to achieve the desired business results. Since ‘the relationship’ will often continue well beyond contract signature, it is essential that the parties include governance principles. Negotiators should think in three phases – first, relationship models; second, contracting models; and third, communication models. Traditional approaches to contracting tend to be too narrow in their focus. For example, Procurement and sourcing processes typically concentrate on price, rather than value. They are built on assumptions that ‘suppliers take advantage of us’. Many suppliers, on the other hand, feel that customers are ‘confused about what they really want’ and use contracts to protect themselves, rather than achieve clarity. This stand-off frequently results in poorly established relationships and a failure to focus on ’value extraction’.
In the future, contract and commercial management will be measured on its ability to deliver growth and value. That demands involvement throughout the contract life-cycle. Since resources must be contained, this enhanced role will be enabled through extensive automation and outsourcing of transactional management; commercial resources (buy-side and sell-side) will provide an integrated overview of market conditions and trading relationship performance. They will identify business inhibitors and propose the changes to policy, practice, procedures and terms that enable competitive advantage and financial performance.
Contract and relationship management must integrate in order to deal with the growing complexity of today’s trading relationships. This transition will face obstacles and challenges, among them is the need for different skills among procurement and contracts staff; another is a shift in measurements; and a third is to address the challenge of organizational models and perceptions – in particular, to determine the connection between relationship management and contract / commercial management.
A Charter For Balanced Risk And Value
Improvements require a clear statement of goals and purpose. This ‘charter’ is a model that was presented at the recent IACCM Global Forum for Contracting Excellence.
The process owner will ensure:
• Investment in creating contracting competence that works within consistent strategic and operational principles
• Ownership and accountability for the quality and integrity of the contracting process, measured by outcomes
• Testing and validation of functional positions to ensure compatibility with overall business objectives
The resulting process will seek to deliver:
• A reasonable allocation of risk and incentives that engender positive behaviors within the supply network
• Terms and procedures that establish governance practices to reduce risk probability and encourage sharing of responsibility
• Terms and procedures that cope with change and enable increased agility and flexibility
• Proposed terms and commercial models that are appropriate for relationship needs and induce open and honest appraisal of customer requirements and supplier capabilities
• Clarity and integrity in bidding and negotiation
• A body of skills and knowledge adequate to support business needs and responsive to shifting demand and requirements
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