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In his article The Logistics Industry - a Canary in the Contracting Coalmine, Phil Coughlin describes the imbalance that exists in a highly competitive environment, where customers are able to demand the most onerous terms - and suppliers simply acquiesce, to win business at almost any cost.

The price of that acquiescence is highlighted by Thomas Pfeller in his article, How to Prevent International Oil and Gas Disputes from Landing in Court. Thomas describes the growing volume and value of disputes and the expense associated with their management. He suggests approaches that might reduce both their volume and their individual costs of resolution.

Finally, Professor Rob Handfield's recent article in the Journal of Strategic Contracting and Negotiation (JSCAN) promotes an antidote to these endemic problems - the role of collaboration between trading partners. In this edition, a summary of this report titled, Relational Approaches Are More Critical Than Ever on Extreme Oil-Gas Projects concludes: “This report calls for further research on critical issues such as talent management and up-skilling of those working in major project contracting roles, with longer-term studies on both the conditions needed for collaborative relationships to take place and organizational barriers to partnering. Further research is also needed on the role of procurement and supply chain executives who, in order to manage value and risk in large projects, need to spend more time in the early phases of contract negotiation engaging and involving a larger pool of stakeholders.”

So what are the key take-aways from these articles?

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Up-skilling and increased awareness

Each article illustrates how the pressures and complexities of today's markets demand improved commercial knowledge and judgment throughout an organization. Whether it is over-commitment by Sales, limited understanding within Engineering or Project Management, or use of inappropriate dispute resolution by Legal, the impacts are similar and contract risk is increased.

Traditional responses by many Contracts or Procurement groups - to seek added resources, to demand earlier engagement or to increase "review and approval' – no longer work. Our focus must be on how to enable better decision making. The main initiatives appear to be:

  • Greater use of technology - While contract management software can help by providing templates and improving oversight, creative contracts groups are also looking at the use of apps or videos, which offer on-demand information access.
  • Shared services and “help centers” - Improving ease of access to qualified support makes it more likely that such support will be used. It also ensures that repetitive issues are identified and eliminated.
  • “Commercial Academies” and training - There is a flurry of activity in creating “academies” or “excellence initiatives” which provide structured training across many functions. In more complex industries, particular focus is on defining the role of “contract owners” and ensuring they have the skills, experience and knowledge needed for performing their role.
  • Contract simplification and design - Make contracts easier to understand and you will increase the chances that they are put to more effective use. Growing evidence shows that poor design and wording of contracts is a major source of errors and misjudgements.
  • “Principles-based negotiation” - Growing use of playbooks and fall-back options is assisting improved negotiation and better management of risk.

Collaborative relationships and organizational barriers

The drive towards “relational contracts” appears unstoppable – except, that is, for the resistance or reluctance by many contracts, procurement and legal groups to adopt or understand this approach.

As performance and outcome-based relationships become increasingly critical to project and business performance, traditional contracting and negotiation models are rapidly reducing in their importance. Yet many contracts and legal professionals remain wedded to narrow, adversarial approaches based on battles over risk allocation. Each party blames the other for this lack of movement and together they are reducing their relevance and value to the business. In frustration, management turns to others (such as Project Management) to lead work on more creative contracting models.

Collaborative contracting focuses on broader selection criteria that include organizational and cultural alignment. Leaders in this field drive internal collaboration between stakeholders as well as external collaboration across supply networks. They change the focus of negotiation to ensure the contract provides a framework for subsequent business operations and they ensure that there is organizational capability to implement and execute.

The role of procurement and supply chain executives

It is not just Procurement and Supply Chain Executives who are impacted by these trends. They affect everyone charged with forming or managing trading relationships, or the policies and practices that support commercial strategies.

Businesses exist to trade. As each of these articles illustrates, the conditions for trade are becoming steadily more demanding and raising the focus on the overall contract lifecycle process. That is proving challenging for many organizations because contracting remains fragmented, poorly understood and dismissed by some as essentially an "administrative" task.

In reality, contracting is becoming the core discipline that drives quality of operations and performance. Functions such as Legal and Procurement are contributors to that discipline, not owners of it. If they wish to raise their value and status, they must grasp the opportunity to expand from their current activities – many of which will soon be eliminated through automation.

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