Why should you care about collaborative contracting?

I’ve been preparing for an in-house workshop I’m delivering later this month. The audience will be senior commercial managers in a large PLC, dealing with contracts worth £10m, £50m, 100m+. Scary biscuits! These are contracts big enough to sink a small country, let alone a company. So, as you can imagine, I’ve been working hard to identify ways I can help them contract even more successfully.

In the course of my research, a single theme keeps cropping up. Collaboration, it seems, is the secret to success in large and difficult deals. At an instinctive level, that makes perfect sense if the parties are working together towards a common goal, rather than regularly doing battle, it stands to reason that outcomes should improve.

Given the frequency with which we are told that collaboration, and collaborative contracting, are ‘the right way’, why are there so few truly collaborative projects in action?

As you’ll know, if you’ve ever heard me speak or read my book, Deal Makers, I see contracts as the ‘ererer Guide’ for the commercial relationship. From my perspective, a contract should be a helpful document that ensures each party understands what’s expected of it, and what it can expect of the other party. It should help the parties through the inevitable hiccups along the way, and guide them to a successful deal outcome. This approach leans heavily on the collaborative philosophy.

What I find in practice, though, is that when companies talk about ‘collaboration’ what they really mean is along the lines of ‘Heads I win, tails you lose.’ In other words, ‘We’ll collaborate where it suits us to do so, but we reserve the right to beat you up with the contract, if we choose.Many deals that begin with discussion of ‘gain share’ finish up with negotiations about service credits and liquidated damages!

In a 2006 study by the National Audit Office (NAO), a number of companies who had used collaborative frameworks to deliver successful projects were interviewed. Remarkably, these projects had shown significantly better performance (in terms of cost and time overruns, and project outcomes) than comparable projects that had not been managed collaboratively.

Representatives from the companies were asked which factors were most important in facilitating effective collaboration, and driving value from that collaboration.

The number 1 contributor to collaborative success was agreed universally to be Project Leadership. In particular:

  • A strong link between corporate governance and project governance
  • The leaders’ strength of belief in collaborative working
  • The leaders consistently modelling a climate of ‘high challenge, no blame, no surprises’

This provides some key insights into why it’s so hard to contract collaboratively.

Alignment

While those involved in negotiating or managing a particular contract might be keen to work collaboratively, and have faith in the value of collaboration in delivering great outcomes, if this isn’t supported by their corporate governance, it just won’t happen. We see tension between enlightened and enthusiastic commercial managers, who try to take on board our wider messages about the value of the ‘User Guide’ approach, and their organisations which are still driven by ‘The Contract as Weapon’ or ‘The Contract as Insurance Policy’ thinking.

If we are to drive change, this has to come from the top. The executive management of the organisation must embrace the value of collaborative working. This means embracing the potential risks, as well as the benefits. It means persuading the lawyers that covering one’s behind (legally speaking) is not the most effective way of reducing risk. It means aligning the reward system within the organisation with behaviours that drive collaboration and intelligent thinking, rather than rewarding conformity and risk-avoidance.

‘High challenge’

What do we mean by “High challenge”? The NAO research did not define this concept in detail, but to me, this means “asking difficult questions, and not being fobbed off with a stock answer”. It means asking “so how will that work in practice?”, and pushing for more detail until you’re satisfied that the contract-specified process is genuinely workable.

When I was a software project manager, back in the 1990s, I had a poster on my wall with a flow chart describing the software development process. In amongst the boxes specifying “Requirements Definition”, and “Module Development” was a large red box bearing the legend “Here, a miracle occurs”. Tongue in cheek, yes, but it clearly illustrated the way that many projects are highly optimistic in their planning. A “high challenge” environment would not settle for such a box in its contractual flow chart!

‘No blame, no surprises’

If you ask most lawyers what you should do if there’s been a contract breach, they will start by inviting you to describe the circumstances that led to the breach. They’ll be looking to determine how much of the problem was caused by you, and how much by the other party. In other words, they’ll be looking to apportion blame for the breach.

Much of the contracting process is driven by the need to put boundaries around each party’s responsibilities, so that we can easily identify when one or other party has failed. Then we can hold them accountable (usually financially, using unpleasant instruments like indemnities, penalties or liquidated damages).

While it’s essential that each party understands its responsibilities, we should be approaching this from a project and relationship management perspective, rather than with blame allocation in mind. So if you fail to meet a deadline, I should flag this up and see how we can help get things on track, and we should work together to address any issues caused by the delay, rather than simply viewing this as an opportunity to allocate cost to you. Cost allocation is important, but a successful outcome is even more so (watch this space for an upcoming post about how we decide what ‘successful’ means!).

The NAO’s survey highlighted that at every level, openness around raising difficult issues and challenges, and a no-blame approach to dealing with them, was essential. Where it was employed successfully, this approach encouraged problems to surface early, when they were quicker, easier and less expensive to address.

What next?

Delivering against a commitment to collaborative working and collaborative contracting means supporting cultural change throughout the contract lifecyle. It means encouraging those staff who are grappling with new ways of working, and helping them to take the long view and not slip back into old-fashioned, adversarial mind-sets.

To truly engage with collaborative contracting, we must work to align objectives, working methods, rewards and governance from top to bottom and left to right, across the full supply chain. We must recognise that the short-term costs of investing in collaborative relationships will be repaid many times over in long-term benefits. Because while collaborative contracting brings many challenges, the potential rewards are even greater.

If you’d like some help in building collaboration, and the rewards it brings, into your commercial organisation, drop me a line or give me a call.

 

tiffany kemp devant

 

 

 

 

Tiffany Kemp
Founder and Managing Director, Devant

2017-02-19T13:49:49+00:00

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