I have found myself struggling to pen down my next contracting user story as part of my Contractpreneurship series. Like many others, no doubt, I have found myself distracted by events playing out on the global scene…
The war in Ukraine is raging with devastating economic and political effects globally. Global supply chains disrupted, energy prices soaring, inflation at an unprecedented high. The impact of this conflict is being felt daily - as much on a personal as on a business front.
So whilst I will be sharing some learnings, this piece is also one of contemplation.
Contracts in trying times
The Covid pandemic taught us to be agile and resilient; current circumstances are challenging our agility, creativity and flexibility in unprecedented ways.
Contracts are the backbone of our commercial ecosystem. So when searching for confidence amidst growing complexity and volatility, it makes sense to turn to the contracts for answers and commercial leverage.
If the pandemic was the period when organisations examined their force majeure clauses with renewed interest, then the second half of 2022 certainly is the era of dusting off the indexation clauses with unseen intensity.
Most companies have seen a frenzy of requests into the legal and contracting departments seeking clarity on which contractual levers can be pulled to renegotiate prices in order to slow down escalating costs and narrowing margins.
But what about at your company? How is that going for you? Have you found your contracts and have your hard-won indexation clauses given you the protection you need? Does the right to increase your pricing match up with that of your suppliers? Do the indexation mechanisms align back-to-back?
Creating contractual clarity to understand your exposure and risk profile so as to inform your negotiation strategy is absolutely the right thing to do.
I trust however that your massive spreadsheet, indexing your expanse of data points, also captures the value of your respective relationships and their interdependencies on your entire business ecosystem.
In a world where every company and contractual party is going through the same exercise with the same intent, the solution is not as simple as triggering contractual protections and working through these to achieve the right suitable business outcomes by means of bi-lateral dialogue.
Recent months have highlighted the importance for businesses to move away from what I would call two-dimensional contractual relationships and establish multi-dimensional value ecosystems.
What do I mean by that?
In its literal sense, the term ecosystem is defined as “a biological community of interacting organisms and their physical environment”; in more general terms as “a complex network or interconnected system”[i]. At its core lies the interdependency of things. To appreciate the significance of that interdependency, one has to look at the role, i.e. the value, each organism plays within the collective.
The point here is that any commercial relationship is more than merely two parties agreeing to transact. Many more parties in the ecosystem depend on and/or are impacted by that transaction. Understanding that interconnectivity makes you look at that transaction in a different way, makes you value that transaction differently.
I would argue that any commercial relationship should be assessed on the value that flows from that business relationship as well as the value it delivers to a company’s business ecosystem.
Seeing contracts are the articulation of those relationships, they should do more than reflect the bi-lateral transaction and become a manifestation of that value ecosystem.
I am not arguing for a wholesale move to multipartite contracting as that would drive huge complexity and cost & time inefficiency in the way we do business.
I am however challenging how we assess the relationship with our counterparty, the importance of the goods/services they deliver upstream and downstream within the ecosystem and how we contract for that.
The closest I ever got to such a multi-dimensional commercial contracting approach was when I was working at a global telecoms company managing a global outsourcing agreement for a FMCG client. The broad portfolio as well as the global footprint meant that we were working with close to 600 suppliers - all of them critical in the service delivery to the client.
Constant pressures on margins required a strategic restructuring of this intricate supplier ecosystem. I had to convince my procurement colleagues that more was required than merely renegotiating the pricing of the top percentile of suppliers by spend. Bringing down the cost base is vital yet purely focusing on costs, i.e. a two-dimensional approach, does not result in the right business outcomes.
We embarked on a 360° assessment of price, quality of service, service levels and speed of delivery assessed against the strength of service delivery in support of critical points within the clients’ supply chain. In critical markets, we introduced competition through targeted RFPs. The whole exercise was about creating sustainable value.
The approach enabled us to strike a sound balance between cost and quality of service. The cost base was reduced but not by as much as initially targeted by my procurement colleagues. Yet the avoidance of cost by means of strong service uptime and service quality was perhaps more valuable as it resulted in a high NPS score - a satisfied client!
Whilst the exercise was executed with value in mind, the contracts underpinning the newly negotiated relationships did not reflect the value approach we had adopted: all relationships were captured in bilateral, i.e. two-dimensional, agreements and none articulated the role, the value, they played within the wider ecosystem.
A new way of contracting?
Contracts are still the backbone of commerce but are they enough in today's world? How can contracts bring those complex, collaborative and interconnected set of solutions to life?
Our contracting efforts should focus on the primary role that contracts play, namely that of economic instruments designed to support the delivery of value. Yet industry reports continue to highlight the fact that the terms we most often negotiate are not those that negotiators and indeed operational practitioners, operating within the ecosystem, say are most important. 
Change is required. Let’s rethink some of our ingrained contracting habits:
- focus on embracing and elevating the cooperation needed for shared benefit
- turn contracts into operational manuals clarifying what is being delivered and the value it plays within the business ecosystem
- define your must-haves in light of the type of trade and the role each of the parties play
- place these must-haves at the heart of your contracting efforts and move away from the predefined concept of general Ts&Cs
- manage risk through pragmatic and operational solutions in-life rather than trying to pre-empt every eventuality upfront and locking these into standard, more restrictive provisions, such as liability and termination
- redirect your negotiation efforts into managing your contract, your relationships and thus your ecosystem, in-life
- use data insights to assess whether your contracting framework is still fit for purpose to keep in step with changing external circumstances
Such change can only take place if legal and contracting teams adapt how they approach contracting and are prepared to leave behind their – dare I say – incorrigible legacy approach.
I would even go a step further - legal and contracting teams have the opportunity to take the lead and reinvent the practice of contracting. An appeal to all contractpreneurs[ii] out there!
If any of this resonates or has triggered your curiosity, please join me in the conversation or contact me on +44 7789895143.
[ii] Contractpreneur is my definition of someone who is a transformer who re-imagines how things are done along the contract life cycle by unlocking commercial value from contracts and thereby accelerating sustainable and profitable growth
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