In our last blog, we discussed the importance of remembering your ‘why’ and identifying what success looks like for your organisation as the starting point for unlocking the power of your contracts and commercial relationships. In this blog Brooke Consultant Sophie Andrew takes a closer look at how to do this.
In the same way that your organisation must have a clearly defined ‘why,’ you must also establish the ‘why’ for each of your contracts and commercial relationships.
“Why?” you ask? Good question. Contracts and commercial relationships that are not outcome-focussed and driven by clear purpose are almost guaranteed to fail to realise their full potential, or worse, result in disputes. So, let’s make sure that doesn’t happen.
There are three things you need to remember when defining the ‘why’ for each of your commercial relationships.
The first consideration is that the ‘whys’ for each contract should individually and collectively support your organisation’s ‘why’. In other words, the required outcomes for all commercial relationships should complement and reinforce each other in helping to drive organisational success. This means taking an integrated approach to your external relationships, rather than treating each contract in isolation. While this can be difficult when contract management is dispersed across different business units, knowing your organisation’s why provides the reference point for aligning and integrating contracts.
For example, in one large resources company that we spoke to different business units were actually bidding against each other for the services of the same suppliers. This not only raised costs, but also made it difficult to maintain supplier continuity across large projects.
The second thing to remember is that every party to the contract will have their own ‘why.’ The trick here is to structure the contract and relationships so that as each party pursues its own ‘why’ they help to increase the size of the pie – the value generated by the contract.
In the resources company example, suppliers found it difficult to manage their workforces when they were constantly swapping between contracts from different business units. Once the resources company understood this, they started developing long term “master” contracts with each supplier, based on their forward pipeline of projects. The resources company achieved its objective of securing supplier services at reduced cost, while the suppliers were better able to attract and manage talent to not only reduce their costs, but to expand and improve their scope of services.
The third thing to remember is that while each party to a contract will have their own ‘why’, it is important to define an overarching ‘why’ for the contract that all parties agree to and can relate their individual ‘whys’ to. This overarching ‘why’ is in effect the pie that all the parties are seeking to grow in size, and in doing so achieve their individual ‘whys’. It is vital to make this overarching ‘why’ for the contract outcome-based and measurable. Making it outcome-based allows each party to find innovative ways to deliver on their obligations and generate more value. Making it measurable helps drive performance.
Let’s use an example from the airline industry. Airlines rely heavily on various commercial arrangements that are formalised by contracts in order to move people and cargo around the country and the world. They need reliable service providers across key global locations to make sure they get away on time, on budget and most importantly, safely. To enable them to do this, the airlines need workforces on the ground that value and share these same goals. Sure, these companies often have shareholders, and of course they have staff they need to pay. But when you ask what it is that brings them together with the airline, the answer from these suppliers should be around their shared outcomes of providing reliable, timely and safe ground operations to enable the airlines to operate to the highest expectations of their customers.
This may all seem very complicated to set up, but in our experience the hard work pays off. Far too often we are called in to help sort out commercial relationships that have become dysfunctional, where each party is preoccupied with point scoring, paper warfare or compliance with the minutiae of the contract. We usually start by getting everyone to remember why they entered into the relationship in the first place and we often find that this was either never very clear to start with or got lost in translation in the drafting of the contract.
Take it from someone who has seen a lot of money, and a lot of love, lost in contract combat – the best way to make your ‘why’ work for you is to do it from the outset.