INTRODUCTION
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.
PROACTIVE APPROACH
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.
|
Attributes
|
Conventional approach
|
Proactive approach
|
|
Looks at matters
|
After the event,
Backward looking
Ex post; reactive
|
Ahead of the deal,
Forward looking
Ex ante; Pro-active
|
|
Sees Contracts as
|
Legal documents,
Legal rules
|
Framework for relationships,
Management tools
|
|
Core concerns
|
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
|
|
Discipline
|
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
|
|
Focus
|
Law; legal decision making; legal theory; legal precedent
|
Cross-professional collaboration;
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,
Dispute resolution,
Curative, corrective action
|
Contracting parties; private actors,
People, process, culture, future facts,
Contract(ing) in organizations,
Program/project management,
Contract portfolio and process,
Dispute prevention and management,
Proactive, preventive action
|
|
Central themes
|
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.
CONCLUSION
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.
