Drafting Good Behaviour into Fit-for-Purpose Contracts
Byon March 4, 2019
Welcome back to our two-part series on the whys and wherefores of developing a fit-for-purpose contract. In our last instalment, we considered the foundations of why a fit-for-purpose contract is so important. It focused on the reasons why the extra time and effort to create one helps to cut the cost of services, improve the chances of achieving your objectives and reduce management time in your supplier relationships. It also reflected on the five most important questions you should be asking yourself in order to gather the insights you’ll need to develop a fit-for-purpose contract between you and your supplier.
This second and final part is all about identifying to what degree your contract is already fit for purpose, whether you need to design such an agreement from scratch, if you should prioritise simplicity over legalese in your drafting, and to help you to soundboard some insights into the practical and management ramifications of failing to consider each part of this process thoroughly enough.
How failing to develop Fit-for-Purpose contract terms increases your service costs
I appreciate that this title sounds ominous, and that’s for good reason because the ramifications for failing to put enough consideration into the creation of your contract terms can be quite severe.
In essence, the impact of not having fit for purpose contract terms can be summed up as:
- A material likelihood of increasing your service costs,
- An increased chance of key adverse issues arising between you and your supplier, and;
- A reduced chance of you being able to resolve those issues swiftly and amicably.
To expand upon this in the context of complex service delivery arrangements, without individually developed contract terms created through a considered analysis of needs, wants, motivators and methods most likely to achieve the business outcomes all parties can agree on, you have a greater chance of misaligned behaviours between you and your supplier. This often results in poor service delivery, severe delays and significantly increased costs in your BAU operations.
If you look at your contract for the agreed means to escalate the matter in order to improve supplier performance and you find that, while it hangs together ‘OK’ in terms of the words on the page, the practical mechanism to escalate issues in a meaningful way to assure they are resolved in an appropriate priority and timescale are found wanting, then your contract is not fit for purpose.
With statistics evidencing that complex service delivery relationships fail more often than they succeed (as mentioned in part one ‘Some research puts failure rates as high as 87% while others present a figure as ‘low’ as 56%’), it is vital that as much as possible is done by both sides in the agreement to ensure that the contract terms have had the ‘hard thinking’ applied to them to make them ‘simple’ to follow.
The mechanics behind drafting a fit-for-purpose agreement
What is the process/method involved in structuring a fit-for-purpose contract? Providing you have done all of the ‘hard thinking’ up front in terms being clear on your outcomes and objectives (as set out in part one of this two part series), structuring the contract is quite straightforward.
However, if you haven’t already done the hard thinking on those outcomes and objectives, then structuring, drafting and negotiating the contract will end up being quite onerous, time-consuming, and likely to be argumentative (both internally with your own team and lawyers, along with a similarly consequential impact on the supplier’s team and lawyers).
This will likely result in the end-to-end contract negotiation process being (a) more expensive and (b) ironically, despite the increased cost and time, less likely to be suitable (fit for purpose) for driving the right behaviours between everyone to achieve the business outcomes either you or your supplier envisage.
From the research we have undertaken and analysed, and from our own experience, the process undertaken by the most effective contract strategy teams to design a fit-for-purpose contract, includes the following five elements:
- Process flow. First, identify the operational process flow for each area of service and/or outcome/objective you want to contract for.
- Use Case. Then run a ‘Use Case’ for how you want that element of the governance/relationship to operate in order to achieve the service objectives you have outlined.
- Process map. Once you are happy the Use Case is accurate and reflects how that element of the service will operate in practice, you then process map it in diagram form – with example outputs and so forth. Test the map by pushing the Use Case through the map to assure its accuracy.
- Contract drafting. Once the process mapping has been completed, you should ‘reverse engineer’ the Use Case into contract drafting within the contract terms. Test the early contract drafting by pushing the Use Case through it to assure its accuracy.
- Cross-reference. Once you have completed items 3 and 4 above, you insert cross references in each contract term to the diagrammed process map. Then, from each diagrammed process map, cross reference to each related term of the contract.
Is the contract drafting understandable by non-lawyers?
The point at which the lawyers start their process of reverse-engineering the Use Cases and process maps to draft the contract wording, is when clients often worry the wheels might come off the process a little.
Lawyers can sometimes be criticised for using too much ‘legal jargon’ that no one but another lawyer can understand. However, the operational team (or Intelligent Client Function (ICF) team) running the day-to-day relationship with their supplier is not usually headed up by a lawyer. Instead, this is often someone chosen for their understanding of the business (the objectives the service is expected to achieve and how the service is intended to operate), which leaves room for misunderstandings to creep in.
So why do lawyers use ‘legal jargon’? A good question, but one that we do not have the space or time to delve into here. However, it is one that will be addressed in a future article. Suffice to say that the brightest and best in the legal field will, of course, do their utmost to keep their draftings easier to understand so both sides can be as self-sufficient as possible in their review and understanding of the agreement they are making with one another.
However, even good lawyers must sometimes use legal jargon, and this is because some words have very specific legal meaning. Many common-use words in most languages can be interpreted in a myriad of ways, according to the circumstances and context in which they are used. While that is also true of some legal jargon, there is less scope for misinterpretation. So, lawyers will often use words that they believe will create less ambiguity in the event a misunderstanding occurs over expectations in the contract and it has to be formally escalated – perhaps even to a court.
This in itself does not help a non-lawyer to understand the contract, but it does at least explain why legal jargon is used even if this ‘precise’ wording often doesn’t actually help the front-line teams manage the relationship. In our expert witness work where we provide our opinion on evidence in failed service relationships to a court, we see how senior judges in the High Court and Court of Appeal can apply very strict interpretations of the wording within a contract. However, we also see that there are circumstances in which the higher courts and senior judges will often take a view on the business efficacy of a contract, in addition to its pure drafting, subject to the context of the reasonable expectations of the parties. It is, therefore, essential that clients and suppliers agree on the specific meaning of their contract drafts.
This is why it is so important to walk the hard miles, putting clear business outcomes and objectives for complex service relationships into place from the outset as this work will really pay dividends.
The fact is that clear articulation of your business outcomes and objectives will assist your own and the supplier’s team to get onto the same page and drive really good behaviours between you both. Conversely, it will be very difficult for a supplier to argue that it was not responsible to fully understand your expectations or that you haven’t legitimately changed your requirements, when not only have they been agreed, but they have completed specific due diligence on them to determine whether they could achieve those objectives in the first place.
So, to summarise, a fit-for-purpose contract is important to your complex delivery relationship’s success because it will:
- Provide the operating foundations to drive enabling behaviours between client and supplier
- Create a clear and unambiguous agreement that is both understood and agreed between the parties
- Provide both sides with confidence when issues require escalation in order to quickly and amicably resolve them with minimal impact on operational service delivery; and
- Evidence your understanding of, and expectations from your supplier should things escalate into the legal arena.