What is a ‘fit for purpose contract’? And how can it really drive collaborative behaviour? When it comes to complex projects and 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 Contract?
There are certainly some major client–supplier relationships which seem to work perfectly well with a less than perfect written contract in place. However, both the accepted research on the subject and our own experience of hundreds of high-performing supplier relationships, evidences that this is usually due to a ‘fortunate’ combination of good client and supplier side leadership. While this does happen and the results can be positive, the evidence dictates that such performance is not sustained should the individuals holding this delicate balance in place move on.
Uncomfortable though it may be to acknowledge, high failure rates are common in most complex projects and 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 project relationship has a higher likelihood of failure than success. With this in mind, 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.
Building consistency so that it works for all of your complex projects throughout your relationships with strategic suppliers, even when you or the supplier team members change, requires a sustainably strategic process built into your agreement.
However, 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 drafting 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 achieve a fit for purpose project and service delivery, on time, first time and on budget.
Throughout the technical development of a fit for purpose contract, it is important to ground all participants involved to ensure that the foundations of the contract are to serve a number of primary outcomes, which are that the project and/or services need to be fit for purpose (but affordable), on time, first time and on budget. To achieve this, the contract terms and schedules must facilitate the creation and development of a truly collaborative relationship, one which drives, and is driven by, commercial trust between the parties.
The contract terms and schedules are the ‘anchor’ to which the agreed mechanism corrects the attitudes, expectations and actions to drive and guide the parties should a correction of direction be needed. This process usually requires a little extra effort at the outset, but by not scrimping on this you will be rewarded with an earlier delivery of the benefits and outcomes you anticipated at the outset.
The Potential for Misaligned Perceptions
If you fast-forward to the implementation and day-to-day operation of a complex contracted project or service without adequate consideration for your contract being fit for purpose (driving the right behaviours), adverse issues are likely to arise between you and the supplier.
The result of these adversities usually include an increase in your service costs, poor service delivery, delays, misaligned behaviours, reduced commitment to innovation, and the likelihood that when these issues arise, they take significantly longer and are more costly to resolve.
The more intricate the complex project or service delivery, the more opportunity there is for misunderstandings to occur and friction to exist.
Examples of a complex project or 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.
Essentially, a complex service is where you will be looking to a supplier to provide more than a standard step by step implementation, and hoping that innovation will be central to their process; a ‘creative thinking’ mindset which will only be possible with a truly invested strategic partner.
When material issues arise on such projects, they often do so as a result of some missing element of due diligence that either the client or the supplier had not undertaken before the service or project was due to be implemented. These key issues are often only found as the project or service implementation process progresses and can often be the catalyst for the decline of the relationship. In turn, these missing operational factors will have an adverse impact on how the rest of the solution/service will be delivered.
In some cases, sensible workarounds can be found. If such workarounds are not practically feasible, progress of the implementation of the project or 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 minimised 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 overlooked.
How to Align Expectations
Our own experience of having dealt with over 500 complex projects and service delivery relationships and our research into how the best organisations operate to generate maximum value in these delivery situations, has given us a unique insight into the behaviours that both good and bad contract drafting can drive.
These insights cover not only what can go wrong during a supplier’s due 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’s due diligence and contract strategy process than any other aspect of procuring service delivery. This sets the most effective foundation 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 one of the core foundations of a fit for purpose contract, assuring that the solution/service to be implemented is likely to achieve the outcomes expected. If 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 must be redesigned from the ground up.
Getting to a Fit for Purpose Contract
Over the years we have been called in to review and remediate hundreds of complex projects and service relationships that are performing poorly. Most of the time the client will look to us to help them understand how to get their complex project and supplier relationship back on track to achieve the objectives everyone had articulated at the outset.
The concerning point of reference for ourselves is that fairly consistently over those hundreds of poorly performing relationships, we find that the contract terms, project schedules, operating governance and service/supplier relationship are out of step with one another. And that remains the case even when these contracts have been drafted by highly experienced lawyers and barristers from major well-known firms.
Now, this article is not intended as a ‘lawyer bashing session’. Many legal firms have excellent technical ability to draft ‘standard’ contracts that help to hold suppliers to account when they don’t deliver something in the specification of requirements. However, few contracts that are drafted (a) provide the method of articulation to make clear what are the outcomes that the supplier should be delivering, and (b) have appropriate mechanisms to drive really great behaviours between everyone to assure delivery of those outcomes.
This is likely to be because the legal firms often don’t have service/operational on the ground delivery expertise. In turn, this often means that contracts and schedules don’t necessarily align sufficiently to achieve the business outcomes expected.
The purpose of this 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: 7 Foundations to a Fit for Purpose Contract
It is important to structure a contract’s strategy and terms around both the key business objectives and the operational strategy for a complex project and/or service delivery process.
In the first instance, this means that both your own team and that of the supplier should 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 its business objectives and outcomes.
‘Reverse engineering’, in the context of drafting a fit for purpose contract, actually means that your starting point – to decide whether you (your organisation) is ready to draft a contracting strategy and contract terms for any potentially complex service solution – 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 seven key questions:
- Have we clearly defined the Future State?
“Are 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 reach through the delivery of this service?
The vast majority of disputes within complex service delivery relationships occur due to a fundamental lack of clarity on the objectives of the project. Does everyone know what ‘good looks like’ in this future state, have you articulated this to your strategic partner and have you confirmed their understanding?
The starting point is clarity of vision determined by the involvement of all key stakeholders in the formulation of a picture of what you have now, where you would like to be at a specified point in the future, why, and by how much (quantifiable) the future state will benefit the organisation.
- Have we identified 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?”
Firstly, develop the operational process flow for each service or business objective you wish to achieve. Then run several ‘Use Case’ scenarios to identify how you might achieve the outcomes you wish to contract for and create a process map, in diagram form, to test these ‘Use Cases’.
Only by creating a clear plan of action through the formation of carefully considered, evidenced and quantified outcomes, agreed with all key stakeholders and fully understood by your suppliers, will you have a yardstick for determining success (or distance from it). How else will you be able to know when your objectives have been reached?
Once you know your objectives with crystal clarity, you can build your contract terms to focus on encouraging behaviours which will move you towards achieving them.
- Do we know the Key Positive Behaviours required?
“What specific behaviours are we encouraging from both parties to help us achieve our objectives?”
Foremost among the behavioural foundations of many a successful project are a supplier’s potential ‘duty to warn’ borne from its expert status responsibilities and a client’s requirement to step back just enough to allow their supplier to optimise its performance for them.
I’ve classified ‘duty to warn’ as a behavioural matter as it speaks to the approach a supplier will take. It’s the implied contractual legal obligation to inform a client, from pre-contractual due diligence stage onwards, of not only any inability to match the needs of the project and the ramifications of this, but to also explain where a client’s vision for the project may be lacking (which leaves room for ambiguity and misunderstanding or just plain old guesswork, to creep in).
While implied in nature (this means that appropriate legal case law usually implies these responsibilities upon ‘specialist’ suppliers), it would still make sense to expressly include them within a fit for purpose contract. It serves as a reminder (as well as an express obligation) of these duties to avoid confusion and to nudge supplier behaviour in the right direction.
As for the client, it can be tempting to get too involved in directing a supplier in ‘how’ they should go about delivering a complex solution, in particular, if your own internal team have a lot of experience of delivering these projects and/or services. Some clients will feel they have an intimate understanding of the problem, so why shouldn’t they add their thoughts into the mix?
The answer is that the more direction you give your supplier on how they should go about their work, the less you are placing trust in their expertise, thus undermining their propensity to innovate, and holding them back from achieving the outcomes you originally requested. This does not mean abdicating your responsibility for oversight, just that there should be clear lines of management demarcation and these need to be respected.
The reality is that a focus on behaviours is designed to achieve one thing above all else in a relationship: collaboration. Truly ‘invested’ strategic partners are the most productive, innovative and dedicated of all. A desire to trust, to share knowledge and to support one another, through good times and less good ones, is a trait common in most successful strategic relationships. A collaborative relationship is often more flexible, more willing to change when needed and more forgiving when things don’t go according to plan. In short, these attributes go toward forming more resilient partnerships.
- Have we determined the SMART KPIs we’ll need?
“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?”
KPIs need to be realistic, achievable, regularly assessed and tested against a variety of scenarios to ensure, to the best of your ability, that a change is most likely to achieve a positive outcome. The ‘carrot’ and ‘stick’ tools within your contract need to be specific and concise in order to drive certain behaviours from your partners/team. This is about (a) encouraging good behaviours and discouraging bad ones and (b) driving more targeted action that is most likely to benefit the relationship and the project service delivery.
Arguably, most important of all, is your agreement’s ability to encourage innovation from your supplier, the mindset which draws individuals, teams and organisations to want to go further and feel an obligation to do so, to break boundaries in order to create more cost-effective solutions.
An agile agreement constantly reviews the connection between effort and effectiveness. It adapts and evolves to shift the milestones that have been set to guide you on your path, even if by small amounts, to reflect more accurately what needs to be done to achieve your end goals. It will create a more commercially and emotionally stable relationship with fewer surprises and less opportunity for friction.
- Is the Contract Designed to be Fully Understood?
Though less so than in the past, contracts may often be written in a language only those from a legal background will fully understand. An overly complex structure, legalese, inconsistency, and a focus on direction and punishment are still quite common.
However, for your agreement to be the effective, collaboration-enhancing tool it needs to be, you should make sure that it is drafted in such a way as to be easily understood by all.
Clarity and appropriate detail provide suppliers and clients with the guidance needed to minimise ambiguity and promote teamwork and trust. A full and complete understanding of roles and responsibilities, milestones and targets reduces opportunities for misinterpretation.
Contract perfection at first draft (or often at any draft…) is rare, underlining the need for flexibility to reshape the project’s services and in turn, other contractual and requirements documents periodically, based on wisdom gained through experience within the relationship and due to necessity as the agreement needs to keep up with change in the outside world.
- Is your Contractual Escalation Process fit for purpose?
No relationship is perfect. Expectations will become misaligned at some point. It will result in a misunderstanding, a disagreement or a behavioural pattern that needs to be addressed. And when this happens, how will you handle this? Your contract should provide a clear, understood and agreed format for dealing with such issues, removing the ‘personal’ out of an experience which may otherwise feel very personal, a realignment of behavioural attitude. But will your contract’s escalation process be a guide to change or a whip to lash your supplier into line with?
Clearly, you’ll want it to be the former so, therefore, carefully constructed and clearly articulated processes need to be detailed in your agreement or the casualty here will be the commercial trust you’ve spent some time fostering, potentially resulting in a spiralling relationship decline.
The result you’ll want to achieve at the end of this process is a meaningful change and the maintenance of the quality of relationship (or at least to be sure that whatever negative relational domino effect has been set off, will be short-lived and easily recovered from).
- Do we have an adequate Reshaping Process (operating governance) in place?
“Do we know what the operating process is for ‘learning’ what to change in the project and its relationship to drive ongoing maximum value for its life cycle?”
This includes the process of reshaping your requirements and improving the process of contractual escalation to ensure appropriate accountability for both parties and that ‘persistent’ performance issues are resolved promptly.
Your contract can be structured to encourage the right behaviours from your strategic partners. Sometimes it takes a little time on a project together to identify the best ways to achieve this goal. This is why it’s so important to have a regular review and refine process built into your agreements (ideally an official meeting between supplier and client at least twice a year subject to the criticality of the project and/or service deliverables), so the documentation can evolve alongside your knowledge of how to get the best from each other.
This review and refine process can also help to identify and resolve clarity issues in important contract terms and requirements documentation, as it’s vitally important for all parties to fully understand their roles and responsibilities and what is expected of them on the project in order that all parties have every hope of executing them efficiently and effectively.
Beyond this should also be a regular assessment of whether your contract is driving collaborative working, commercial trust, ethical practices, innovation and the search for added value.
Finally, the contract can be used to align or realign where some shift of either expectations or deliverables has occurred, or differences revealed in cultural alignment. This is a delicate area, but it is possible to set out in your agreement what ethical standards are expected of parties to the contract and the appropriate action to be taken should there be a breach of these standards. A light touch is needed here in the use of recourse as such mechanisms should be considered as guiding tools, not punishments.
Where change is considered necessary, this will still need to be appropriately communicated, negotiated and agreed with your supplier; they may see things from a very different perspective. Gather your evidence, create your business case, prepare your key points of influence and manage any subsequent meetings carefully to convince – not tell, show or blame – in order that commercial trust can be maintained while also bringing your supplier with you through the change process.
An important additional point to consider is that if the required change is due to a fall in productivity or a deviation from expected targets/milestones, make sure that you check whether your own team are contributing to the issue you’re looking to negate. Your findings may change your view of what’s needed and who is responsible, or it may add nuance to your discussions with the supplier where you admit that there are things that you need to adapt as well to bring you both together to amend behaviours to achieve shared outcome goals.
If you have considered the seven points above 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.
Throughout the whole process, it should be remembered that a contract is not just a tool for dictating right from wrong along with the recourse for deviations from the path, it should be a document for building trust, cooperation and innovation, for steering the behaviours of the parties in directions that will benefit them both and lead to defined, quantified outcomes that are far more likely to be achieved.