The IACCM rightly points out that key supplier relationships underpinned by robust and comprehensible contracts are essential to the implementation of significant strategic change. Their research identifies a 9.2% impact on bottom line from contract weakness. Top 5 causes being:
- Disagreement over contract scope,
- Weaknesses in contract change management,
- Performance failures due to over commitment,
- Performance issues due to disagreement over what was committed,
- Inappropriate contract structures or responsibilities.
Two things are given in this mess: (i) Firstly, that contractual structures are weak and inappropriate to deal with high levels of operational complexity and technical risk, and (ii) secondly, that legal means of enforcement are cumbersome, expensive and ineffective.
That business is ready to solve this legal problem by contracting for outcomes is (a) nonsense and (b) missing the point. Business is already dealing with the operational and technical risk of large and complex contracts. Business is already structuring many of its agreements to deal with outcomes. Large prime contracts, alliance contracts and performance-based contracts are already commonplace in PFI/PPP and Defence sector deals. That neither are wholly efficient or effective is for another time. It is, however, for the legal community to devise more sophisticated ways of contracting in order to solve their side of the problem.
PEOPLE ARE THE KEY
The primary reason for not being able to contract for outcomes is that the vendor doesn’t own the people. This is critical because without the ability to control and intervene in the delivery of work the risk increases exponentially. Consequently, the risk premium paid for outcome-based contracts will either make them (a) prohibitively expensive, or (b) impossible to perform (within parameters). So, a business which offers you an outcome-based contract is either having you on or just about to charge you the earth.