Video transcript
Ten pitfalls TIM CUMMINS: It's obvious that some contracts fail to deliver the results that people look for. But how many and how h ow much? And what are the causes? That information i nformation was missing, so IACCM started to gather data from its 35,000 members. We found that almost 40% of contracts don't deliver the financial benefits that were expected, costing businesses an average of 9% of their annual revenue. But of course, this can only be reduced if we understand the causes. So our o ur member companies started to look in more detail of what were the actual underlying sources of those losses. Here's what we found: The number one issue is the lack of clarity about the scope and the goals of the contract. What is it that the parties were actually requiring and committing to do to and for each other? Not surprisingly, that becomes then the number one cause of claims and disputes as the parties try to resolve their differences. Secondly, there's major variation between situations where the legal and contracts experts are involved early enough to help shape a deal, plan the negotiations, versus those that are left out of the process until later. That has a significant impact, not only on the time it takes to get the deal settled, but also the subsequent level of disagreement. Quite often it can lead to the wrong type of contract, a structure that doesn't reflect reflect the relationship the parties need. A failure to adequately engage or understand stakeholders is the third big cause of problems. Now stakeholders are people with an interest in the contract. They could be workers within the business or people outside it. For example, many public sector contracts have a significant signif icant impact on the wider population. And if they're not consulted or disagree with the use of public funds, they can become a massive obstacle to implementation. implementation. Adversarial negotiations is the next area which causes loss of value. Too often, current negotiation practises involve the parties fighting with each other over terms and conditions
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Contract Management
Video transcript and particularly the issues of price and risk. This undermines the trust they have in each other. And it also prevents them from talking about the areas where real value and breakthrough ideas could be achieved. It also leads to longer lead times. Many negotiations simply take way too long. And as a result, very often, other participants become frustrated. Decisions then get rushed. And opportunities are missed. Number five is that negotiations are often focused on the wrong terms and the wrong risks. Many negotiators focus on the consequences of things going wrong, rather than thinking about the likely causes of failure and how those could be avoided. Indeed, the ten issues on this chart are all high likelihoods of risk, yet relatively few of them are considered in the planning phases of a deal. And another consequence of this is that contracts often lack the flexibility they need to deal with today's constant change. They lack good mechanisms for performance management. So rather than dealing smoothly with changes, we find the parties wait until things are going wrong and then they start to blame each other. Contracts are difficult to use or understand. And that often means people don't do the things they said they would. As one European specialist commented, contracts today are often written by lawyers for lawyers in the expectation of litigation. In other words, the structure and the drafting style of agreements maybe makes a lot of sense for a trained attorney, but for anybody else, it really isn't a usable instrument. And of course, when you've got a complex document that needs to be translated, interpreted, implemented, the fact that people find it difficult to understand-- and about 90% of business people say they do find it difficult to understand contracts-- that's a real source of weakness. There's often also very poor handover from those who negotiated the deal to those who are actually going to be responsible for implementing or managing i t. And that also leads to all sorts of downstream problems. Very often, the people responsible for forming the contract take the view that it should just be filed away. And they try and work out what they're doing without any real reference to the contract. That has some obvious consequences, like
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Contract Management
Video transcript obligations that get missed or key misunderstandings of what it is that the parties had agreed with each other. Technology has permeated businesses in many, many areas, but generally not in the world of contracts and contract management. That means we fail to automate things that we've failed to create good instruments for communication. And it means, too, that we don't have good reporting. Contract performance often relies on manual processes, which are quite fragmented in terms of who does what. And there's no real ease of handover between the different members of the team. That's where technology would be invaluable in improving results. And finally, related to all the things that have happened before this, it's not surprising that there are poor disciplines and poor methods, often inadequate resources, to oversee the ongoing performance of the contract to make sure that the commitments are met, that the obligations are honoured, and that the parties continue to work collaboratively towards their mutually desired result. What you can see here is an average value erosion that occurs at some 9.2% of annual revenue, a phenomenal amount of money. Not all of it's avoidable, but certainly a significant amount of it could be avoided.
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Contract Management
