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Troubled contracts - why missing these steps may trip you up

Published: 28 Sep 2015 Average Rating: 4.3 / 5 Print
 
This article appeared in Contracting Excellence magazine on 28 Sep 2015 view edition
 

Author: Steve Olson, founder and president of Contract Management Solutions Group, Inc. (CMS Group)

The ink on the contract is not yet dry - yet trouble may already be brewing. How can you make sure your contract doesn't contain the seeds of big problems ahead? Part of the answer lies in having all parties agree on the game plan during negotiations before it gets costly, time consuming and potentially embarrassing.

Agree “who does what” before signing

Author Steve Olson, who has seen many troubled contracts throughout his years of experience, believes the best way to avoid misunderstandings and conflict is to make sure from day one that everyone knows the overall game plan and their individual responsibilities.  And the best time to have everyone agree “who does what” is during contract negotiations, rather than after the contract has been signed – when it might be too late. 

The process of establishing a Relationship Charter (RC) will ensure focused discussions take place to establish roles and responsibilities ahead of time, information that can be included within the contract, and also within the Joint Governance (JG) plans that are agreed. In this article the author gives his personal perspective on the troubled contracts he has seen, and why they got that way. He also provides useful guidance for developing your RC and JG, with helpful examples and templates.

One case study highlights the risks

Over the years I've been asked to improve many Contract Administration Systems (CAS) and JG plans that were ineffective and negatively impacting relationships. Here is a case study that illustrates what can go wrong: you can apply the principles and lessons learned to your contract regardless of its size or complexity. This case was an outsourcing contract between an IT services provider and a global client with business entities in multiple countries and geographies. The contract had been in effect for just over a year and they were having multiple problems, spending too much time and resources in meetings to resolve the issues.  Here's what was happening - and the root causes of what went wrong.

  1. Unauthorized people requesting changes

In this case, joint governance roles and authorities had been defined but not effectively communicated.  Unauthorized personnel from the buyer were requesting additional services or midstream software development changes that were not included in the contract. In good faith, and wanting to please their customer, the service provider obliged, starting new projects and committing resources that weren't in their budget. When later discovered by the buyer, the projects were halted – but not before the provider had already incurred significant and unrecoverable costs.

  1. No standard forms or processes

With no standard forms or processes to use, neither the buyer's or seller's contract administrators knew where to submit requests for new services, contract changes, deliverable sign-offs, and formal contract communications. In addition, neither had adequate record-keeping systems for their contract-related activities, communications and artifacts, in some cases these were lacking completely. This was the source of several compliance issues for both parties when audited.

  1. Decisions not communicated

When roles and authorities are established, they must be communicated to all stakeholders, especially those involved in delivering services and administering the contract. In this case, although the Roles and Authorities Matrix had been developed and approved, it had not been properly disseminated - and unauthorized personnel were still making requests, providing approvals and sending formal correspondence that was binding to their company.

Everyone needs to know the game plan

This example is not unusual. I've seen many contracts that needed changes, deliverables submitted, and binding contract communications sent all in the first several weeks after signature. Not knowing who is authorized to submit or approve new requests or projects is a risk to both parties, and one that can easily be avoided.

Once you have defined, established, agreed and documented the RC and JG as part of the contract negotiation process, you will be able to communicate this key information to all stakeholders as soon as the contract is signed. And, if this isn't discussed, agreed and documented in the contract, it should be done as soon as possible after signature at the post-award kick-off meeting.  This information should be updated and re-communicated whenever any changes occur.

The importance of communication cannot be overstated. It should be done via a communication plan, as part of the overall implementation plan.  Someone needs to take ownership and responsibility for these communications, otherwise, they will fall through the cracks.  The stakeholder list should include everyone who is…

  • responsible for providing the products or services;
  • responsible for executing and administering the CAS (processes, plans, policies and forms);
  • accountable for the desired results and outcome of the contract; and
  • affected by the performance of any of the above.

Development work will inform all processes

Defining the RC and establishing the JG are linked processes: the information you establish for one will flow down into the other. This information will also help you to develop a Roles and Authorities Matrix (RAM) which takes this one step further, identifying who has binding authority to submit, approve or escalate on behalf of their respective company. Your RAM will underpin all your processes - and ensure you have full and accurate information for your stakeholder list!

Explaining the terms

The terms below have been used widely and are subject to interpretation. My objective is to clarify what they should mean and how to apply them to your contract.

A Relationship Charter

defines the intent of the relationship between the buyer and seller. It describes how two or more people or organizations regard and behave toward one another and grant authority or rights.

Joint Governance

occurs when two or more parties define and agree on how they intend to use the RC, processes, plans and policies to work together, to communicate and make decisions or escalations when needed.1

The type of RC and JG you develop will depend on the nature of the contract and intent of the relationship. The RC and JG requirements will differ for a transactional commodity-based purchase contract compared with a large and complex business process or IT outsourcing agreement where partnership and innovation is encouraged, for example.

Defining your Relationship Charter

The RC should describe the intent of the parties' relationship and desired outcomes, answering the following questions:2

  • Why are we in this relationship?
  • What is our mission, vision and what are our values?
  • What is our strategy for the goals we will set, core activities we will define, and the focus of our products or services?

It is clearly to everyone's advantage that these discussions take place as soon as possible, ideally, as part of contract negotiations, so this information can be included in the contract (not many do however). If not clearly delineated in the contract or understood from the negotiations, the parties should meet as soon after contract signature as possible. The buyer and seller need to discuss the intent of their relationship before they can develop the RC and how they will govern the contract together via the JG.

The RC can provide a global standard for both parties and all of their other businesses or subsidiaries in multiple geographies but the JG can vary widely depending on their business and autonomy.

Establishing Joint Governance

The development of JG flows down from the RC, and provides a “playbook” defining the objectives, how they will be achieved, and how the contract will be managed. It should include most if not all of the following:3

  • strategic planning;
  • delivery management (including all processes, plans, policies and forms documented in your “contract repository”);
  • risk management;
  • issues and disputes management (escalation and conflict resolution);
  • harmonization during the development, review, and approval of the processes (used to manage all contract-related activities);
  • alignment and change management;
  • performance management (relationship scorecard, meetings, reports); and
  • any specific arrangements for international organizations with decentralized decision-making.

Many contracts I've seen typically include three levels of committees for governing the contract. These are usually located in the Master Services Agreement:

  • operational (Operations Committee)
  • tactical (Management Committee)
  • strategic (Executive Committee)

Defining 'who does what' and who is responsible

Now that the RC and JG “playbook” define our relationship, roles and authorities, and how we will endeavor to manage the contract, we need to define the “players” and what they do. My best practice recommendation is to tackle this in two stages – first defining who the functional interfaces are, and then using this information to develop the RAM.

The example below defines who is carrying out each role and who they interface with across all the functions (buyer and seller) – important information for contract or program managers, enabling each party's account teams to identify their counterparts.

Functional Interfaces example:  

Functional Role

Buyer

Seller

Product or Services Manager

Name:

Title:

Email:

Phone:

Name:

Title:

Email:

Phone:

Service Delivery Manager

Name:

Title:

Email:

Phone:

Name:

Title:

Email:

Phone:

Transition Manager

Etc.

Etc.

Contract Manager

 

 

PMO Manager

 

 

Finance Manager

 

 

Other functional roles as appropriate for your contract  

 

 

 

How to build your Roles and Authorities Matrix 

The RAM extends the functional interface analysis, identifying additionally:

  • who is responsible and accountable for each role;
  • who has the binding authority to submit, approve or escalate on behalf of their respective company;
  • who needs to be consulted;
  • who needs to be informed; and
  • how each person can be reached.

The RAM also maps all processes, plans, policies and forms documented in the "contract repository," with those responsible for approving them, their owners, who are responsible for reviewing them, and those responsible for performing them.

I find the traditional RACI (roles and responsibilities) template a very useful way of doing this (see example below).

Roles and Authorities Matrix example

Role &

Description

Buyer

Seller

Responsible

Accountable

Consult

Inform

R

A

C

I

Contract Change Request - Authorized Submitter(s)

Name

Title

Email

Phone

Name

Title

Email

Phone

Name

Title

Email

Phone

Name

Title

Email

Phone

 

 

 

 

Contract Change Request - Authorized Approver(s)

Name

Title

Email

Phone

Name

Title

Email

Phone

Name

Title

Email

Phone

Name

Title

Email

Phone

 

 

 

 

New Service Request - Authorized Submitter(s)

etc.

etc.

 

etc.

 

etc.

 

 

 

 

 

New Service Request - Authorized Approver(s)

 

 

 

 

 

 

 

 

Formal Contract Communications -Authorized Submitter(s)

 

 

 

 

 

 

 

 

Formal Contract Communications -Authorized Recipients

 

 

 

 

 

 

 

 

Other role examples:

  • Risks
  • Issues / Disputes
  • Deliverables
  • Finance/Invoice
  • Contract Interpretation
  • Other roles as required for your contract

 

 

 

 

 

 

 

 


​Importance of maintaining your Contract Repository

As mentioned, each of the underpinning processes, plans, policies and forms and other documentation used to determine your RAM should be included in your contract repository. This should be held within your Contract Administration System (CAS)4 and must be kept updated with any changes. Your repository should include:

  • all CAS processes, plans and policies necessary for managing the submissions, approvals and storage of all requests, approvals, communications and artifacts;
  • all submission forms needed for submitting and approving authorized requests, approvals, or formal contract communications;
  • your governance library or project control book structure and definitions necessary for audit-compliant record keeping; and
  • all current contract documents, amendments and artifacts.

Joint Governance will evolve over time

One thing is constant in every business – change. While your RC shouldn't change much, if at all, your JG will need updated whenever there are business or environmental changes such as mergers and acquisitions, restructuring, personnel changes, new business unit requirements, new regulatory requirements, and other triggers unique to your business that you will want to identify. We need to be aware of and watch for any of these “triggers” that would require an update to our JG and, critically, make sure any changes are promptly communicated to all stakeholders and old versions deleted.

In conclusion

My best practice recommendation is to discuss relationship intent and governance during the contract negotiation and documentation so this can be written into the contract - if not before signature, then as soon as possible afterward. This makes it so much easier and quicker to get the JG developed, implemented, and ready to use. The sooner we do this, the sooner and better we are able manage the activities and issues that always seem to come up right after signature.

Each successful transaction of a contract-related activity enhances trust, confidence, and the relationship between buyer and seller, allowing both to focus on the quality of products or services, rather than having to spend time resolving problems, issues and disputes that eventually lead to degradation in performance - and their relationship.

END NOTES

  1. Joint Governance (Source: Contract Management Solutions Group, Inc. www.cms-groupinc.com )
  2. Relationship Charter (Source: Strategic Relationship Solutions, Inc. www.srscan.com)
  3. Elements of Joint Governance (Source: Strategic Relationship Solutions, Inc. www.srscan.com)
  4. Contract Administration System (Source: Contract Management Solutions Group, Inc. www.cms-groupinc.com)

ABOUT THE AUTHOR

Steve Olson is the Founder and President of Contract Management Solutions Group, Inc. (CMS Group). He previously served 15 years as IBM's lead Contract Initiation Services Manager with 114 BPO and IT outsourcing contract startups of the world's leading Fortune 500 companies and U.S. Federal and State government agencies. Steve was recently published in the August edition of Contract Management, National Contract Management Association's (NCMA) magazine, titled Start Your Contract off Right with a Post-Award Kick-Off Meeting, and will be speaking at IACCM's America's Academic Forum, October 6-8, 2015. Contact information: steveolson@cms-groupinc.com

 
 
 

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