HYPOCRISY IN CONTRACTING LEADS TO WASTED NEGOTIATION
We all know that most large companies would never sign their own contracts. The terms and policies they offer when selling are diametrically different from those they demand when buying. A direct consequence is that many business transactions are delayed by repetitive, predictable negotiations that bring little or no value to either party.
This is reflected in the International Association for Contract & Commercial Management (IACCM)'s annual study of 'the most frequently negotiated terms', a list that is dominated by risk allocation terms such as liabilities, indemnities, data protection and jurisdiction 1. In other words, negotiations are often dominated by discussions that deal with the consequences of failure, rather than determining how to build a relationship to deliver success.
As our understanding of the impact that terms and conditions have on business outcomes increases, more and more suppliers are advocating collaborative and risk-sharing contract models. They point out to customers (especially those in the public sector) that creativity and innovation are closely linked with greater mutuality in key terms and that there is a joint responsibility to ensure success. All the research - from IACCM and a growing body of academics - continues to point to the validity of this conclusion.
But unfortunately, most suppliers continue to undermine the sincerity of their position because if more balanced contracts indeed result in better outcomes, why are they not applying this principle to their own procurement contracts? Why do they continue to impose burdensome terms on their supply base?
This is an important question for executives, lawyers and contracts professionals to answer. And it is something that any negotiator should be exploring as they seek to improve contract terms with their trading partners, or to understand the sincerity of their corporate culture.
Addressing this hypocrisy would represent an important break-through for the integrity and quality of contracting - and a few market leaders have started to understand this point. For example, I was talking with a major service provider that is looking to eliminate the flow-through of burdensome terms from its customers, because it truly believes that this will be an important market statement and will generate new and higher levels of collaboration within and from its supply network. In the product world, SKF is a company that has similarly embarked on harmonizing its buy-side and sell-side contract principles because they are convinced that better balance results in the creation of greater value. And software and services giant Microsoft recently completed a harmonization exercise, in an effort to make itself 'easier to do business with'.
These are encouraging signs; but are they just aberrations? I hope that more of us will at least start asking the question. In these days where management is increasingly concerned about business integrity, reputation and value creation, should we not at least be reviewing the hypocrisy that underlies our own contracting practices?
And if you know examples of organizations that have already addressed this issue, then let's share their names and celebrate this progress in corporate thinking.
Tim Cummins is Chief Executive Officer of the International Association for Contract & Commercial Management (IACCM). IACCM is a non-profit association dedicated to improving the quality and integrity of worldwide trading relationships. For more information, visit www.iaccm.com. If you would like to make - or view - comments on this article, it can be found at http://tcummins.wordpress.com/2011/03/02/hypocrisy-in-contracting/
1 IACCM undertakes this study each year, gathering input from more than 1,000 international companies and public sector agencies. The 2011 results will be issued in April.
Copyright © 2011 Tim Cummins
Copyright © 2011 The Negotiator Magazine
The Negotiator Magazine (May 2011)