Given that most organisations are often critically dependent on IT suppliers to underpin their business operations, a lack of understanding of the relationship between organisation and supplier can have a fundamental impact.
In fact, not only could a lack of understanding undermine an original business case, it may lead to a lack of service, deterioration in the supplier relationship, protracted disputes and, in some cases, costly legal action.
Failure has become an option
There are many reasons why contracts fail and supplier relationships go off the rails, often spanning the full contract lifecycle. Some of the key issues are:
Notice that all of the above contract failures are primarily caused by the customer. While IT suppliers are no paragons of virtue, in reality, the causes of contract breakdown are generally more nuanced.
The Devil’s in the detail
On September 23rd, 1999, communication with NASA space probe Mars Climate Orbiter was lost as it descended into Martian orbit to study the planet’s climate. The fault was subsequently found to be computer software producing output in imperial units instead of the metric units specified in the contract. Consequently, the Orbiter flew too far into the Martian atmosphere and disintegrated.
Know the knowns!
For most businesses, the impact of poor contract management may not be quite as catastrophic as NASA’s. However, an ongoing understanding of what’s written into (and often left out of) a commercial contract is critical to avoid:
- Automatic renewal of contracts beyond the initial period, locking customers into outdated, unfavourable terms
- Failure to leverage key contractual rights such as audit, benchmarking, or technology refresh
- Poor management of the IT assets stipulated in the contract, leading to significant “regret spend”
- Lack of alignment between the customer and the supplier, resulting in the customer’s failure to adhere to contractual obligations and consequential poor supplier performance
- In essence, the “we’ve signed the contract, it’s now the supplier’s responsibility to deliver” approach is wrong on many levels.
Choose the right line
Most internal business operations have codified governance documents, with organisations often creating an entire process handbook or repository which defines “the business of doing business”.
However, if business processes are not aligned to fulfil your contractual obligations, you’ll be left with below-par supplier performance. Contest this with your supplier and they’ll be well within their rights to point out the ways you helped contribute to their failure.
Good commercial contract management is not just about enforcing obligations. Done well, it’s a vehicle for significant business process improvement within your own organisation, which can reap benefits well beyond the scope of the contract itself.
Contract Management from “cradle to grave”
The potential benefits of rigorous management are substantial: better handling of supplier performance risks, identification of cost saving opportunities, improved supplier relationships and, ultimately, optimised business processes.
Avoiding the contract management nightmare that can result in the early demise of your supply relationship – and possibly even your business operations – requires some forethought.
In Peru Consulting’s experience, a little pre-planning of contractual roles and responsibilities can reap significant rewards. Even in the day-to-day lifecycle, regular contract reviews and another read of the small print can ensure mutually successfully commercial outcomes “from cradle to grave” of any client/supplier relationship.