When contract specialist Tim Cummins, president of the International Association for Contract and Commercial Management (IACCM), began a recent presentation, he opened with a telling message: “Driving contract performance through the fear of failure just doesn’t work.”
He means that negative incentives, unequal terms, excessive penalties, imposition of onerous burdens on vendors (e.g., “unlimited liability”), and inflexibility prevent both sides of a buyer-supplier relationship from realizing the full benefits of their agreement to work together. And this, in turn, affects productivity, access to innovation, problem solving, analysis of performance, and eventually, profitability.
In previous postings on bad contracts and contract language, I discussed Cummins’ views on the need for an enlightened approach to contract development and what bad contracts cost companies in lost revenue. Here, I look at his recommendations for assuring that contracts provide the synergies both parties need to achieve their objectives.
In many cultures — though not in the West — contract negotiations begin when the document is signed, Cummins observes. In other words, both sides leave themselves latitude to reassess and revise the scope of their commitment to each other, in order to better meet challenges and opportunities and achieve strategic goals.
Cummins believes that this flexibility is essential to good deal-making and positive results, and if more companies engaged in this process, negotiations and the contract conditions they produce would be less adversarial and more supportive of each party’s goals.
The often-punitive language in many contracts satisfies lawyers, but also “breeds people who are not open or helpful,” he says. While Cummins concedes that some negative incentives are necessary, relying on them for motivation doesn’t work anymore effectively than applying such measures in our personal lives to sustain friendships or families.
There is, of course, no single model for the perfect contract in terms of language, conditions, and resultant relationships. Each industry has different needs. Nevertheless, there are steps companies can take toward framing enlightened contracts.
One involves developing a business structure with the right tools, systems, and knowledge for developing meaningful relations with vendors through contracts. Goals include:
- Developing business strategies and drafting contracts to help each side achieve its goals
- Putting a system in place that monitors compliance by both parties — not in the form of punitive oversight but periodic checks to make certain each side meets its obligations and benefits from the relationship
- Analyzing the contractual relationship to be sure it is generating expected returns.
To the last point, Cummins says few companies have insight into what causes disputes and claims — or how much they cost. He tells a story about a business whose managers gave unauthorized discounts to clients as compensation for service shortfalls. “This is a bribe,” he notes.
Moreover, the company is giving away money without learning why service problems exist, much less how to correct them.
“If contracts are a key economic asset, how effectively are they being managed?” Cummins notes. Few managers, he believes, can qualify the performance of their contracts.
Cummins says procurement managers can develop sustainable value from suppliers by improving their skills in relationship management. Repositioning their operations to make these skills a centerpiece of contractual negotiations will lay the groundwork for improved relations in buyer-supplier contracts, along with more productive, predictable, and profitable outcomes.