Our worldwide business environment is accelerating which means contract negotiations are becoming increasingly important for the telecommunications industry. We cannot afford the costly, time-consuming procurement processes of the past. Can we change that? How? Where do we start? This article suggests how model contracts might speed up procurement processes.
No doubt -- today’s procurement practices are too slow. One of the strongest verifications about this arose during the World Commerce & Contracting webinar titled Why Does Procurement Take So Long? (And how to fix it).1 Almost half of the webinar participants agreed that negotiating terms and conditions are by far the biggest friction points in the procurement process.
Most commercial contracts are so complex you cannot draft them from scratch, therefore most of us use contract models that provide familiar terms and conditions that reduce the need for negotiation and shorten cycle time to signature, because negotiators focus less on assessing established boilerplate and more on clauses related to the engagement itself.
In his famous 1994 report Construction the Team, Sir Michael Latham2 recommended standardization of various levels but notably of the forms of contract in the construction projects to avoid disputes and uncertainty. Latham recommended a complete family of interlocking documents is required and that public and private sector clients should phase out "bespoke" contracts.
Given that, what is our commercial argument for standardizing contracts in telecoms? Although mobile telecommunications were globalized many years ago, clients – typically the telecom operators – provide much procurement consulting but charge legal fees for drafting ad-hoc procurement terms in accordance with internal policies. Although these contract terms are ostensibly drafted to benefit a client, such contracts often contain excessively long provisions drawn from traditional legalese that does little for the client except to bloat the contracts.
Telecom vendors’ contract managers and corporate counsels spend even greater efforts in responding to client terms to lower their risk. Large legal contract headcount and marathon contract negotiations are hallmarks of the telecom sector. Nothing like bogging down the process!
So, what’s the uptick and what stands in the way?
Mobile protocols for wireless technology generation speed expressed as mobile protocol generations 2G-3G-4G- -5G have been tremendously successful in commercializing technical standards.
You could argue that the telecom industry owes its importance to standardization, but over the last decade the importance of this sector has been diminished by powerful players within the internet and smartphone sectors as shown in Figure 1.
Figure 1. Market capitalization of Internet firms, operators, smartphone makers and phone makers. Key players: Amazon, Google, Facebook, and Apple.
As evidenced by much 5G publicity, there is still innovation and potential business in internet/mobile convergence. However, many hardware functions of a mobile network can now be replicated in virtualized or other setups. Examples:
- The O-RAN Initiative is just one group devising open specifications for base stations, telco clouds and similar.
- Starlink is one alternative to mobile broadband using satellites.
- Geopolitical forces around Chinese 5G vendors are fuelling discussions further, leading to competitive, and possibly disruptive, alternatives.
This proves that the business environment is aggressive and prepares an enterprise for successful business outcomes like negotiating customer-bespoke contracts -- an activity the telecom industry can increasingly ill afford.3
Why? Non-value adding contract negotiations are efforts poorly spent. For a vendor, the interpretation of multiple customer contracts -- all using different terminology and preferred wording -- may be complex, time-consuming, and ultimately costly -- not to mention confusing to the entire process.
This gives us reason why industry standard contracts were developed for the construction sector. Arguably, no sector has as many contacts as exist in the architecture, engineering, and construction sectors. In construction and engineering, familiar contract templates are mostly developed by the construction professions. For example, consider the contract models developed by:
- The International Federation of Consulting Engineers (FIDIC) contract created for standard contracts used for a variety of constructionand installation projects worldwide founded upon the same main principles.4
- The Joint Contracts Tribunal (JCT) contract producesstandard forms of contract for construction, guidance notes and other standard documentation to use in the construction industry in the United Kingdom.5
- The New Engineering Contracts (NEC is a formalized system that guides thedrafting of documents on civil engineering and construction projects to obtain tenders (RFPs) for awarding and administering contracts.6
The contract models published by FIDIC are widely used internationally. Models represented are from 1999 or even 1987. Additionally, public procurement and financing -- notably the World Bank -- has widely adopted the FIDIC models to govern their terms under which their projects are procured. To date no equivalent of FIDIC or NEC in the telecommunications industry exists.
In telecoms procurement, contract templates are either drafted by in-house legal counsel or outsourced to an external consultant. By contrast, construction and engineering both have widely adopted industry standardization in procurement despite each having an extremely wide portfolio of products and services within many subtypes of projects like infrastructure, industrial, and residential.
The FIDIC models are updated very cautiously. For examples:
- In 2017, not less than 18 years after its last edition was published in 1999, the FIDIC suite of contracts was last updated.
- The 2017 version of the well-known ‘Red Book’ is the sixth release following previous editions in 1957, 1969, 1977, 1987 and 1999.
- Even today, the 1999 version as well as its older predecessor, the 1987 (sometimes called the ‘Fourth Edition’ of the old Red Book) are both commonly used for construction projects in the Middle East and elsewhere.
The longevity of these models illustrates their time-honored success per se, but also shows how an industry has opted for familiarity. The flipside to familiarity is a risk of conservatism. However, observing the efforts exerted in telecoms, it is safe to argue that some conservatism is a marginal cost compared to the potential gains of familiarity.
Every new FIDIC release has been met with delay in implementation, but as Nail Bunni7 noted on the slow adoption of the 1999 models:
“The main reason is perhaps that users are by now very familiar and comfortable with the provisions of the Fourth Edition of the Red Book, and particularly their version of it if they have changed the standard form to suit their own particular needs.
Furthermore, after 40 years of use, the meaning of most of the provisions of the Fourth Edition of the Red Book has become known through court decisions and some arbitral awards. Users were and are reluctant to start the process of adopting a new form of conditions of contract as they believe, maybe rightly so, that it is likely to cause further disputes and problems in an industry that is already overloaded with conflict.” (Nail G. Bunni 2005)
Contracting principles vs. model contracts
FIDIC, like other industry models, is drafted on the principle of fair allocation of risks between the client and the contractor. In later editions the model had increased emphasis on (among other things) alternative dispute resolution, dispute adjudication and dispute avoidance.
The New Engineering Contract (NEC) now in its 4th edition, adopted novel contract principles by taking a radical approach to contract language, structure and obligations related to dispute avoidance.
These are important contracting principles. Arguably, an approach to standardization could be contracting principles themselves. An example is the World Commerce & Contracting Principles8 which aim to accelerate ‘Speed-to-Contract’ through fair and balanced terms.
However, contracting principles, even with irrefutable contents per se, offer much less of the direct hands-on benefits of contract models. Principles are akin to non-negotiable terms or ‘business-critical terms and conditions’ which contract managers use as negotiation playbooks. As such, principles are subsets of contract models. Principles would reflect what has already been widely advocated in the contract management community over the years, albeit widely ignored in telecommunications.
Key commercial principles are advantageous, but experience from other industries show that a fair and balanced contract model is a good mechanism as a starting point of a productive contract negotiation.
I recommend that World Commerce & Contracting (WorldCC) is the most appropriate advocate for a set of model contracts for the mobile telecoms industry. Such model contracts should:
- Be developed jointly between WorldCC and the appropriate telecommunications industry forum.
- Have characteristics, sensitivities, and the preferred position of the industry as a whole
- Be based on WorldCC contracting principles
- World Commerce & Contracting webinar
- Ref: Insight to the future of telecommunications Industry: A Dual Transformation and How to Improve Customer Retention in the Telecom Industry
- Latham (1994), Constructing the team: joint review of procurement and contractual arrangements in the United Kingdom construction industry: final report, June 1994 / by Sir Michael Latham. HMSO.
- World Bank signs five-year agreement to use FIDIC standard contracts
- Wikipedia definition of Joint Contracts Tribunal
- NEC contracts defined by Wikipedia
- Bunni, Nael.G, (2005) The FIDIC Forms of Contract, Third Edition, Blackwell Publishing
- World Commerce & Contracting Principles
About the author
Lars Nielsen is an engineer with a contract management tenure spanning 15+ years including experience from contractors and telecom vendors (Nokia and Ericsson) in Europe and the Middle East. He has been in telecoms uninterrupted since 2009 and was accredited CCME in 2014. He also holds a part-time position at Heriot-Watt University where he supervises post-graduate Quantity Surveying (QS) and Construction Project Management (CPM) students in submittal of their M.Sc. dissertations.
Content reflects views and opinions of the author and do not necessarily reflect the views and opinions of World Commerce & Contracting.