5 Foundations To A Fit For Purpose Contract To Drive Collaborative Behaviours
Byon September 26, 2017
What is a ‘fit for purpose contract’? And how can it really drive collaborative behaviour?
When it comes to complex service delivery relationships, the aim of a fit for purpose contract is for it to provide the operating foundations to drive ‘enabling’ behaviours between client and supplier. The ultimate objective of the contract is to aid a client in their efforts to achieve a defined ‘Future State’ of service operations in the shortest and most cost-effective manner possible. At the same time, it should fairly and equitably protect each party’s interests in an appropriate manner.
Do you really need a fit for purpose written contract?
Some major client/supplier relationships work perfectly well without a decent written contract in place. However, both the accepted research on the subject and our own experience of high-performing supplier relationships, evidences that this is usually due to a ‘fortunate’ combination of good leadership on both the client and supplier sides. While this does happen and the results can be positive, the evidence dictates that such performance is not sustained should these individuals move on.
Uncomfortable though it may be to acknowledge, high failure rates are common in most complex service delivery relationships. Some research puts failure rates as high as 87%, while others present a figure as ‘low’ as 56%. Either way, based on these statistics and our experience, unless structured in the right way, a client’s chances of driving maximum value in any complex supplier relationship has a higher likelihood of failure than success. With this in mind, the evidence determines that a suitable process should be followed to ensure that parties to an agreement use an appropriate mechanism for together committing to a greater chance of success.
Certainly, without fit for purpose contractual foundations, the evidence suggests that good performance is likely to be unsustainable across an organisation, and service relationships based on a particular individual’s skills within a client or supplier team is usually only sporadically achieved. Building consistency so that it works for all of your complex service providers throughout your relationships with them, even when you or the supplier team members change, requires a sustainably strategic process and approach built into your agreement.
Driving sustained consistency is a lot of work – because you have to make it ‘simple’ to operate. Distilling detailed requirements and expectations down to their core essence, and then to draft a fit for purpose contract to include them, is hard. In essence, it is very complicated to get to ‘simple’. But by ‘training hard’ you ‘fight easy’, and you can get to simple.
The potential for misaligned perceptions
If you fast-forward to the implementation and day-to-day operation of a complex contracted service without adequate consideration for your contract being fit for purpose, adverse issues are likely, at some point, to arise between you and the supplier. Remember, we are focusing on complex service delivery in this series of articles, and the more intricate the service delivery the more opportunity there is for misunderstandings to occur and friction to exist. Examples of a complex service delivery would be (a) ‘transformational’ outsourcing (where fundamental business change management is part of the service being delivered by the supplier), (b) a large IT systems integration and/or consolidation programme, (c) perhaps the instigation of a shared service across multiple stakeholder organisations or (d) the building of a hospital or school under a PFI / PPP type arrangement.
When material issues arise, they are often as a result of some missing element of due diligence (a future article will address this) that either client or supplier had not undertaken before the service or project was due to be implemented. These key issues are often only found as the service implementation process progresses and this can often be the catalyst for the relationship’s decline. In turn, these missing operational factors then have an adverse impact on how the rest of the solution/service will be delivered.
Sensible workarounds are either found or, if such workarounds are not practically feasible, the progress of the implementation of the service slows down significantly while the parties try to identify who is responsible for the misunderstanding, what will be done about it and at whose cost. The possibility of this occurring is often minimalised with the existence of a thoroughly considered and mutually agreed fit for purpose contract. By definition, this would have incorporated structures and strategies designed to reduce the likelihood of key factors being missed and how to handle such eventualities if they have been.
How to align expectations
Our own experience of having dealt with over 500 complex service delivery relationships and our research into how the best organisations operate to generate maximum value in complex service delivery situations has given us a unique insight into the behaviours both good and bad contract drafting can drive. These insights cover not only what can go wrong during a supplier’s diligence process when assessing their client’s requirements, but why these issues are often missed until far later down the line.
In reviewing the performance of the very best Intelligent Client Function (ICF) and project teams, we see that they apply more effort to structuring the supplier due diligence and contract strategy process than any other aspect of procuring service delivery. This sets the most effective foundations for collaboration and enabling behaviours in the ongoing service delivery process.
The output from a well-executed supplier due diligence process, or ‘Service Design’ phase as it can also be known, is the core foundation to assuring that the solution/service which is implemented is likely to be fit for its intended purpose. Of course, where a supplier (or client) uses a poorly skilled/resourced team to implement an excellent service design, the service/project will still have the potential to go wrong. But a good service/project design is quickly recovered by putting a well-skilled and well-resourced team back into the implementation and operational process.
On the other hand, a poor service design, even if implemented by a well -skilled/well-resourced team, will usually end up with a whole multitude of issues. No amount of sticking-plaster scenarios will solve a poor service design in practical and cost efficiency terms. It is vitally important that you re-evaluate the design and align it to the business objectives both expected and agreed at the outset. From this, you can determine which parts of the existing design can remain or be realigned, and which aspects that must be redesigned from the ground up.
Getting to a Fit-for-Purpose Contract
Over the years, we have been called in to review hundreds of complex service relationships that are performing poorly. Most of the time, the client will look to us to help them understand how to get their supplier relationship back on track to achieve the objectives everyone had articulated at the outset.
The concerning point of reference for ourselves, is that over those hundreds of poorly performing relationships, we have rarely ever seen a fit-for-purpose contract that suits the particular service/supplier relationship in question. Often, these contracts have been drafted by highly experienced lawyers and barristers; the majority from major well-known firms.
Don’t get me wrong, this article is not intended as a ‘lawyer bashing session’. As with any profession, the law has an eclectic mix of practitioners when it comes to the measure of quality. But, in our experience, complexities in the drafting arise as a result of a focus on the non-operational aspects of the contract that do not materially affect the business outcomes each side is trying to achieve.
The purpose of this and the following article is to explain the process of structuring the operational aspects of contract terms that assure (a) the foundations that drive really good behaviours between everyone are in place so the business outcomes are met for both sides, (b) where ‘wobbles’ occur in achieving those outcomes, how the terms can help get the issues resolved quickly and (c) where ‘wobbles’ in service delivery are persistent, how to ensure accountability and ‘reshaping’ to achieve the business outcomes by alternative methods.
Reverse Engineering; your service objectives and outcomes provide the key foundations to a fit for purpose contract.
It is important to structure a contract strategy and terms around the key business objectives and the operational strategy for a service delivery process.
What does ‘Reverse Engineering’ in the context of drafting a fit for purpose contract actually mean? In the first instance, it means that both your own team and that of the supplier fundamentally understand, and agree, that everyone will follow the contract terms in order to encourage ‘good behaviours’ so that each party is able to achieve their business objectives and outcomes.
As the procurement and/or legal lead within your organisation, your starting point – to decide whether you (your organisation) are ready to draft a contracting strategy and contract terms for any contract for solutions that involves potentially complex service relationships – is to project forward in your mind’s eye to a point where the solution has already been implemented. In this context, you must ask yourself five key questions before you start the contract strategy process:
- The Future State. “Is both my organisation and that of the supplier clear on what will be achievable once this service has been implemented and we are receiving the benefits everyone expects?” In other words, is everyone clear on the ‘Future State’ our organisation is trying to get to through the delivery of this service?
- The Target Objectives. “What specific and quantifiable business objectives are we looking to achieve that we could not achieve before the implementation of the service?”
- Behaviours Required. “What specific behaviours are we encouraging from both parties to help us achieve our objectives?”
- SMART KPIs. “Are we all clear on what measurements will tell us that we are getting the right behaviours from both parties to achieve our Future State and from which we can learn what to change?”
- Reshaping Process (operating governance). “Do we know what the operating process is for ‘learning’ what to change in the relationship to drive ongoing maximum value for its lifecycle?” This includes the process of reshaping and improving the process of contractual escalation to ensure appropriate contractual accountability for both parties and that ‘persistent’ performance issues are resolved promptly.
You need to be able to answer the above five questions with clarity before starting on the contracting strategy.
If you can answer these questions, and your supplier, who has undertaken appropriate due diligence on those expectations, has reflected back to you in unambiguous terms how their proposed solution/service will enable your organisation to achieve those objectives, then you are on a firm foundation to start developing the contracting strategy and drafting process.
If these five questions cannot be answered in specific and quantified terms, you are very unlikely to be able to put in place fit-for-purpose contract terms that will provide the foundations to ensure that the business objectives for both parties are achieved.
The above five questions/steps constitute the ‘heavy lifting’ portion of developing the foundation of a fit-for-purpose contract, but is by no means the end of the process. To understand the consequences of not having a fit-for-purpose contract, the process involved in structuring a fit-for-purpose contract, and why you should go light on your legalese, look out for article number two in this series, coming next week.