When to reach for the Contract?
Maintaining a mutually beneficial contract throughout the full term, once dissatisfaction with the supplier is experienced, can be a challenge and often past the point of recovery. The recurrent reason for this is the stage at which the contract is brought in. Concerns usually fester long before they are raised.
In my years of experience working for both customer and supplier companies, I have seen a common theme with service contracts, in that by the time either side decides to open up and cite contractual clauses, the customer/supplier relationship has already passed the point of recovery. The recurrent reason for this is the stage at which the contract is brought in. The customer’s dissatisfaction with the performance of the supplier usually festers long before the concerns are raised
directly. Then, once all other avenues of reconciliation or dispute resolution have been exhausted, the contract is finally discussed, with the terms examined and argued over in minute detail. From this point forward the options for both sides are bleak. The customer begins the process of looking to exit the contract, whilst the supplier (quite naturally) looks to protect its revenues, its profits and its people.
In analysing the root causes for the disputes, a number of consistent themes emerge:
The contract did not adequately cover the mechanism of implementing change:
Transactional changes are handled through a ‘change control notice’ process, but the sum of several changes have created a material variation that has ultimately moved away from the original basis for the agreement. No effort has been made to consider the impact to either party’s business model of material change.
Pressure by the customer to cut costs was met with ardent resistance from the supplier:
In these situations it is often the case that the customer does not understand both the cost drivers for the supplier or the business objectives against which its original proposal was based. It may be that the contract did not contemplate the need to restructure the cost base, during the term of the deal.
The contract was doomed to fail from the outset because there was insufficient strategic alignment from the get-go:
Frequently, both the customer and supplier enter the contract with good intentions but their respective visions do not align. Customers look to rationalise, consolidate and cut costs and partner with suppliers whose market proposition are built around investment and driving value. This situation usually results in misaligned expectations and a contractual arrangement that does not reflect the intentions of the sides.
Insufficient effort was expended in the ongoing governance of the contract:
Many contracts have explicit provision for continual improvement with the supplier often responsible for owning the ‘continual service improvement programme’. In most cases the perception from the customer is that this is something that the supplier does without the need for change or investment by themselves. The customer is effectively asking the supplier to invest supplier profits to reduce supplier revenues. Without the right contractual provisions, it is perhaps of little surprise that these initiatives rarely deliver material enhancements to service.
In all of the above scenarios it is possible to find fault with either side. The customer has the belief that the supplier has inexhaustible ability to flex and adapt the underlying operating model to respond to changes in customer requirements or direction, irrespective of the contractual provisions. From the supplier, the pressure is always to increase revenues, protect or grow margins and create long term partnerships. It’s clear that during fluctuating economic times and where businesses are under intense pressures to manage costs, that these objectives are unlikely to be met concurrently. Attempting to do so can result in the customer feeling that every request results in a contractual Change Control Notice process (with resultant cost creep).
So what can be done to ensure that the relationship remains largely, on a true course? When navigating a sail boat the captain is constantly required to tack against the influence of external forces - wind, tides, etc., adapting his actions to the changeable environment. Rarely is the trajectory of any customer/supplier relationship linear during the term so why should the contract be? Changing focus, pressures to cut costs, re-alignment of investment, new requirements, lapsed requirements and the availability of new technologies all need to be managed if the contract is to remain relevant for not only the current term but the following ones too.
So… what are my top tips for avoiding expensive and unproductive contractual disputes?
- Don’t be limited by what you agreed on the date the contract came in to force. Proactively and formally invest in making sure that the contract continuously reflects the changing needs of all involved. Every year set aside time to review the contract and make the small changes that ensure that the broader contract, including service schedules, SLAs, unit costs etc. continue to represent the needs of business.
- Make sure that if you’re involved in managing or evolving the partnership, that you clearly understand the parameters under which your opposite number operates.
- Strike early; if dissatisfied advise the other party early on, before the dissatisfaction has time to fester and the parties turn to the contract.
- Do not allow dissatisfaction with one facet of service to taint other areas of service which may be being performed appropriately.
- Don’t be afraid to talk to independent third parties to help bring objectivity to a point of friction. A small investment early on will often prevent an expensive and distracting resolution process for developing down-stream; share the cost of the external support and be prepared to accept that the customer is not always right.
When agreeing to a contract it is important to ensure that business needs and priorities align from the beginning. During the term of the contract, it is important to recognise early on when there is a potential clash between business objectives and services. Constant and regular dialogue, breaking away from the day-to-day service delivery will allow for contract maintenance and satisfaction for all involved. Truly understanding the other’s driving force helps to minimise frustration and to reach an amicable plan of action to benefit all involved in the contract.
If this article resonates with you, or if your supplier relationship needs support then contact Quantum Plus and we can help to assess the issues and facilitate improvements to the relationship. Using our tried and trusted methodologies, our experienced consultants can carry out an unbiased assessment, offer feedback and facilitate solutions to getting the relationship back on an even keel.