Five ways to ensure a contract stays relevant – for its whole lifetime
Friday, February 03, 2017
By the time the contract is signed, your goals have often changed…
It happens all the time. After months of talks, negotiations, drafts and re-drafts, the two parties in an outsourcing arrangement shake hands and sign the contract, only for the client to realise their company’s business priorities have changed since tendering started. The average cycle time from starting a procurement to signing the outsourcing contract with a successful vendor is around 11 months. With average durations of contract length reducing from four years in 2013 to three and a half years now, there are increasing demands from both sides to establish the right bases in the agreement.
The cycle time is a period that can span multiple financial years. In today’s economic environment, where market conditions are so changeable, it could start in one chapter and conclude in a completely new era for a business. Strategy may have changed and market conditions materially altered, and likely strategic imperatives will have moved on. Not just for the procuring client – also often for the winning vendor.
The result can create a deep frustration for both client and vendor. Both parties can end up having to deal with rigid service-provision definitions, lots of service measurements (very few of them directly related to business value), and a lack of connection between their contract and the up-to-date strategic imperatives of the client.
So what should you do? How can you retain the discipline of a structured and complex procurement process, without ending up with a contract that isn’t responsive to the changing needs of your business?
Here are five tips to avoid the unwanted scenario of contracting based on the wrong objectives. They’re relevant to both clients and vendors.
1. Agree strategic outcomes, not measures for service activities Often contracts are weighed down by a long list of measurable indicators for the service. Many of them can actually be hard to measure, and often few of them relate directly to the business-value outcomes of the end users. This disconnect between service level agreements (SLAs) and business imperatives illustrate a need for greater thought to be given to what the service is for, and why it is important. More contracts are now based on business outcomes rather than activity-based SLAs. Some examples are: the number of clients serviced, the revenue secured, or the new client acquisition results. Those often transcend financial years and create a direct link between business value and measurable service.
2. Agree how you will work together, not just what you will do Even when outcomes are well understood and appropriate methods of measurement in place, there can be something important missing. Measures often define clearly the “what” in a contract, but rarely do they approach the “how”. Technical conditions can address the ways of working. For example: What approaches will be taken to test continual alignment? What is the feedback and review mechanisms? What improvement-planning responsibilities exist? What relationship maintenance and developmental outcomes are sought? Often companies shy away from these because they can create undesirable joint accountabilities. With thought, though, it is possible to be specific about the duties of each party in these “ways of working” elements. Projecting potential outcomes can help forge agreements that will withstand the early tests that always appear in a new arrangement.
3. Build in learning systemically
Even where there are no fundamental gaps between contractual agreement and strategic goals, there is almost always a need for a service to evolve as time progresses. Build conditions that allow regular learning into the management. Identify any emerging trends and themes, and ensure there is provision for appropriate tweaks to the service.
4. Sign a multi-year deal, and a rolling 12-month plan
There is a growing view that multi-year goals are too risky for most businesses now. The economic conditions are too volatile, and periods beyond a year are too long to be definitive about. To avoid material contractual change within your multi-year deal, write in provision for critical outcomes to be reassessed and agreed upon on a rolling 12-month basis, within predefined parameters.
5. Create a governance that focuses on business benefits, not simply service and supplier management
It is now normal practice to see well-defined governance in contracts, from strategic level through to operational control. It’s rare that they compromise either party. They can, however, be inhibited by not taking into account the strategic ambitions of both sides. Include, at the highest level of governance, a review of the business value that is being created through the service. This can create a much more insightful conversation that addresses the strategic topics of the whole ecosystem, rather than just a transactional client/supplier governance review.