ROSS MITCHELL, senior consultant and general manager at Changing Directions, reveals how the management of contracts can be transformed to create sustainable outcomes.
When one is the custodian of a multi-million-dollar asset, or even a multi-billion one, there are several undeniable truths. Not least of these is that managing the outcomes for your organisation and finding the most appropriate service partners to assist you in managing those assets is not particularly easy.
Contract relationships have much in common with personal ones and, just as the rate of personal relationship breakdown remains unabated, the same is true for many contractual relationships between service deliverer and buyer. How can the management of contracts be transformed to create more sustainable outcomes?
DYSFUNCTIONAL CONTRACT RELATIONSHIPS
Once the selection process is complete and the contract appointment made, contract performance management is the most important part of your agreement with that provider, and will take precedence for the next few years. Managing a relationship that has traditionally become adversarial, as the competing interests of the parties come to the fore, can be daunting.
Just like entering a new relationship, we sometimes overlook each other’s imperfections as part of the ‘getting to know you’ period. The first few weeks involve each party finding their feet, agreeing that a low base was started from, and also agreeing that performance will be evaluated every couple of months. A formal meeting process is usually gone through after a couple of months – pretty much the week after the contractor’s mobilisation team has left – and the reality of the marriage starts to hit home.
Just as wedding bells become a distant memory, so too does what was agreed to by your new service provider’s business development team as the reality of the work ahead for the operational/production team of your new partner becomes clear. You wonder what it is that you have done wrong, and why they don’t get it – after all, you only want what was agreed to.
The problems that cause this level of dissent and distraction are not new. They have occurred since time immemorial. Accountability and truth in service delivery need not be some pipe dream that only other people can get. It is time for your new partner to start to deliver beyond the point of lip service and that can be a point of major distraction as you start to hear the excuses for the failure to deliver what was agreed.
In the second, third or fourth month of a new five-year partnership many find it difficult to be confrontational. We don’t want to upset our newlywed, so we let things go unsaid… to them at least. In the fifth or sixth month, if action has not been taken, things start to spiral out of control. You are now getting heat from your boss, your fellow employees, the board and all other stakeholders.
Now you have to lay the cards on the table and let your new partner know that you are unhappy and that some of what they said they would do has not materialised, and you say what you would like them to do. At least that is what you think you say, but they hear you say it so nicely that they think you are kidding. Another month goes by and they still don’t improve. You get more incensed and still don’t say what really needs to be said.
Eventually you just get fed up. The phone has not stopped ringing and the board have threatened that it is them or you. You are now ready to take action. The problem is that the service provider has now been in place for about six months and the bad service has continued unabated, the maintenance of your asset has fallen by the wayside, the expected asset life has started to shrink and the replacement costs are increasing and looming a lot faster than you had planned and hoped.
The next meeting with your service provider is a bit more intense. The chief executive officer from their side attends because you threatened them with termination. He placates you and makes some new promises, including replacing that poor manager who he now feels is not right to manage your service. They don’t take action, however, and another month goes by.
You write a letter, invoke the penalties you have agreed to (you do have the records available, don’t you?) and you are now spending hours each day fielding calls from disgruntled people. You call the service provider. The result is more promises to fix it and little further enhancement.
The eventual reality is that you don’t renew the contract, you go over the same ground again in 12 months, your new provider needs money to restore the asset to the condition you expect and then you are looking to go back to stage one all over again.
Unlike a personal monogamous relationship, at work you are polygamous. You have not one, but two, three, four, five or maybe even 50 partners. It really is no wonder that you have no peace at work.
DOING THINGS DIFFERENTLY
Taking a different approach to contracts is not really that hard, but it takes commitment and a genuine desire to work in a true partnership with service partners, founded on a well-defined contract that is genuinely fair to all parties involved.
A contract that is based on the historical perspective of master-servant is surely a thing of the past. They are the types of contracts that invariably become adversarial at some point, where disputes and service failures are prevalent, where the service provider is paid more for what they don’t do than what they actually do. Sadly, many service partners – not all – take an approach that says that they must make hay while the sun shines.
A contract that does not fully reveal the requirements or one where the client accepts an offer that seems too good to be true and, either knowing or suspecting that the contractor may have it wrong in their bid, takes it anyway and then uses adversarialism to manage outcomes is surely destined to not last.
The new way of sustainability in contracting is one that is founded on sustainable practices – social, environmental and economical – and relies on trust, full disclosure and entering into a partnership where it is not only expected that honesty will prevail, it is genuinely lived and delivered.
WHAT SUSTAINABILITY IN CONTRACTS REALLY MEANS
When considering sustainability, most people will say that it is engaging in ecologically and environmentally sustainable practice. Some will say that it is using green cleaning, manufacturing, recycling and all of the other green labelled elements. Yet, if these were the only things considered important for sustainability in contracts, what else would be potentially forfeited?
Sustainable contracting involves areas equally important to building owners such as:
- how sustainable is a contract that has been let
- how much at risk is my multi-billion-dollar asset
- how much time will I spend managing the contract, and
- will it distract me from my principal role?
1. Financially responsible
- Does it afford the contractor the necessary opportunity to generate a commercial return?
- Will it allow you as the asset manager to be able to have true visibility across the entire asset and contract to ensure that you are gaining best value?
- Will the contract place in jeopardy the lifetime value of the asset through having the appointed partner not being up to the job and fulfilling it properly?
2. Socially responsible
- Will the rates being paid in the contract allow all levels of the supply chain to be paid at the correct rates?
- Will the contractor engage in illegal contracting that places you at risk through having engaged a contractor who has little or no intention of complying with legal requirements?
- Is the contract sufficiently profit generating, meaning that employment is increased and the potential burden on social welfare diminished?
- Will the contract create new learning opportunities for all people involved?
- Will the contract provide security to the people touched by it, the employees, stakeholders, owners and customers of both organisations?
3. Environmentally sustainable
- Will the contractor use processes and ingredients that have the least environmental impact?
- Will the contractor use locally made ingredients and components wherever possible?
- Will the contractor use green-labelled products?
- Will the contract contribute to or diminish the effect of carbon emissions?
- Will the contract be a source of inspiration to others to take up the mantle of sustainable contracts?
PAY IT FORWARD
Once you have established the desire to have a sustainable contract and understand the components required, it will be something that takes enormous effort and commitment. This is where the really hard work begins in the development of sustainable contract management.
What the development of a sustainable contract should really entail:
- board commitment
- agreement on what a sustainable contract is
- full disclosure upfront each way
- truth in tendering each way
- appropriate selection of service partners
- realistic budgets
- unambiguous contracts that clearly define expectations and outcomes
- true partnerships acknowledging that contractors must achieve a commercial return and clients must achieve an outcome
- working with a contractor to establish some new rules – trust that if a contractor is provided with the opportunity to provide solutions that those solutions may well be better than current solutions
- responsibility of the parties
- accountability of the parties
- proof that the services meet expectations
- agreement that the services have met expectations
- regular dialogue that is productive, effective and outcomes driven, and
- openness in communication.
Once you have gone down the path of putting into place a sustainable contract that ticks most, if not all, of the boxes, you will wonder why you have put yourself through the grief of the past.