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Sunday, 25 February

Contracts - the Beginning of the End of Innovation?

Payment in advance; the right to charge additional fees; no penalty clauses; and an everlasting contract. Just some of the things Andy Erskine would like to see in his ideal contractor world...along with a two-sided commitment to innovation.

A colleague recently asked me to put together a set of terms and conditions for a new client that didn't have a standard form of contract for services. My initial simple and glib answer was:

  1. Invoices to be paid 180 days in advance of service delivery.
  2. Contract never expires...ever!
  3. We may charge the client additional fees which they cannot challenge or not pay.
  4. We require the delivery of the first-born child of every staff member (cheap labour) within the next 7 days.
  5. Oh yeah! No penalty clauses.

This created some chuckling amongst the team but ultimately it set me to thinking about contracts in general and the complexity and effort that both clients and service providers inject into defining contracts to make them robust and enforceable when things fall out. The focus of both parties effort being firmly placed on determining a mechanism to ensure that the contract and the punitive measures that it contains can be fully brought to bear in the face of poor performance by either party. There is almost always very little emphasis, if any at all, placed within commercial contracts around shared vision, shared risk and reward or indeed the benefits that both parties will receive if the partnership succeeds. The emphasis within these defining documents is always pointing towards the recognition of failure and breach of specification. It is a little like telling a child not to push a button and then expecting them not to spend most of their time thinking about the button...

 

Innovation - a one sided expectation

Where there is a reference made within service contracts to build on the tendered specification, develop best practice, drive innovation and move the service delivery model beyond the core tendered specification, the requirement is almost always placed solely upon the supplier with no requirement from the client to partner fully or participate in the development of the solution. The reference within the contract becomes a token set of words tipping their hat towards the concept of forward thinking. Both partners then typically park these clauses, working solely to maintain compliance to the defined specification rather than working to the spirit of the contract.

An even worse scenario is when the partners use the clause against each other accusing the other of not working together to innovate.

 

The beginning of the end

Traditional contracts are therefore seemingly the start of a declining relationship where both parties are focused on the consequences of failure rather than the benefits of success, both parties working feverishly to ensure that they aren’t the cause of a breach instead of focusing on what is important – that both parties are working within a dynamic environment where business culture, technology, legislation and the economy itself are driving change that is outside of the direct control of either the client or the supplier.

For a service contract to be successful beyond a short term reference point it needs to have flexibility built into it, a mechanism for recognising that yesterday’s specification is only reflective of where the business was yesterday. It is almost impossible for an organisation (outside of perhaps the public sector and even there the requirements are changing) to know exactly what its required specification will be in a year or five years time. The global economy is moving at an extraordinary rate and businesses that stand still aren’t likely to be there in five years.

KPI and SLA measurements rarely change over the life of the contract, creating a situation where the measures and controls that were important at the start of the agreement lose relevance to corporate performance as the core business changes over time. The old adage of what gets measured gets done (and this is repeated a lot) has never been more apt. Exactly what is being measured is what is being delivered by the service provider and unfortunately this often means that the things that should be being done such as innovation and added value services that recognise the shift in the client's business are often ignored to ensure rigid compliance with the KPI/SLA models.

 

All change?

How then do we create contracts that recognise variation and innovation as a prime driver for both parties, pushing both client and supplier to actively seek to deliver over and above the baseline specification and at a level that allows both parties to grow and achieve a level of partnership that adds value to both parties?

Within my own organisation we have funded a wealth of training over the last few years to develop our teams and allow them to engage with our clients differently, actively encouraging them to work with their clients to innovate and move service beyond the simple specification. This isn’t always successful but where it is, we know that the relationships are stronger and when things go wrong (and they invariably do) within the complex environments within which we operate, the relationships developed allow us to move forwards and address the failing without automatic recourse to the contract. Getting individuals to think differently is challenging but ultimately very rewarding for all parties.

Contracts that consider the tendered specification to be an absolute are missing an opportunity to allow truly innovative service delivery opportunities to flourish and grow. I am not saying that there shouldn’t be any controls or limits and a baseline specification for measurement is important, the focus should however be placed on easing the variation to contract approach so that the baseline becomes part of the continuous improvement process of the contract, recognising that yesterday is gone and rewarding services that focus on forward planning and growth.

KPI and SLA models need to be reviewed on a regular basis to ensure that they are measuring what is important and not simply measuring the adherence to the tendered specification. By creating fluid models that reward innovation and service evolution it requires a different level of engagement between the partners, working collaboratively to ensure that the successes and changes are recognised correctly. This is very different to a model where continuous improvement simply means that you get a higher score each month on the same KPI metric. This adds no value other than to say that you are doing the old specification better than you were last month.

When clients and service providers grasp the importance and the commercial advantage of fluid contracts we will see the industry leap forward and become a fully engaged, strategic partner within the core business.

By Andrew Erskine of Ocean Integrated Services

Article written by Andy Erskine

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