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Agile Procurement and Collaboration (Part 1)

“It is a bad plan that admits to no modification” – Publilius Syrus (fl. 85–43 BC)

“Becoming agile in procurement allows you to create an adaptive partner ecosystem where you adapt to needs and circumstances in a relationship rather than having contractual handcuffs on.”[1]

Introduction

Agile procurement is a hot topic as organisation’s are seeking agility and responsiveness in an exceptionally volatile environment.  Pinning down a definition of ‘agile’ in the procurement space though is illusive.  Whilst the term has its origins in the software development arena with the agile manifesto , agile procurement means many different things to many different stakeholders. This blog explores some of the definitions of agile procurement and the common themes or principles that emerge out of the literature.  One of these key recurring themes is the need for collaboration at all levels to realise the benefits of agile approaches. Successfully implementing agile approaches through collaboration is the theme of part two of this blog.

Agile in the Software Development Domain

Almost two decades ago the agile manifesto was born with the following values:

  1. Individuals and interactions over processes and tools
  2. Working software over comprehensive documentation
  3. Customer collaboration over contract negotiation
  4. Responding to change over following a plan[2]

Along with the 12 principles of agile, the aim was to avoid lengthy waterfall development approaches by adopting short development cycles, meeting customer needs, and embracing change. Whilst the agile manifesto offers a neat summary of what is arguably best practice, there is a lot of prior art that captured many of these agile principles many decades earlier.  Kelly Johnson (of Lockheed Martin Skunkworks fame) embraced the principle of ‘keep it simple’ and his 14 rules identified the need for buyer and supplier collaboration with ‘very close cooperation and liaison on a day-to-day basis’, and the use of small and skilled teams. Likewise, in Brooks’ Mythical Man Month he emphasised the need for small, agile, high-performing teams developing minimal viable products.  Like many initiatives, the agile manifesto captures best practice and builds upon it.  In all things, we should treat agile principles as exactly that; principles not rules.

Agile Procurement

The success of agile in the software domain raised questions about whether such approaches could be effectively applied in the procurement space.  No doubt, procurement practitioners wanted to reap the claimed benefits of agile approaches including:

  • Faster time to market (noting that speed and value are interlinked),
  • Enhanced customer satisfaction,
  • Dealing with change effectively, and
  • Reduced conflict and enhanced collaboration.

Can these benefits be achieved in the procurement function? The answer is ‘of course’ and agile procurement approaches have been implemented in various guises for many years.  A cost reimbursement contract with supplier and customer integrated product teams is a clear example of how procurement can be agile. Similarly Cost As an Independent Variable (CAIV) approaches support many agile features such as; a focus on collaboration with early and continuous end user participation, a focus on minimum viable products, ability to trade high level requirements, and the promotion of flexibility. Whilst these approaches have been used effectively at the project and program level, the shift to agile approaches at the enterprise level is a more recent initiative. 

When we move to the enterprise level, we need to ensure the whole organisation is aligned to agile principles and not just the procurement function.  This means focusing on strategic objectives and adopting a top down approach as observed by NaDaud:

Agile procurement addresses big picture business needs rather than automatically finding solutions comparable to what is in place and re-bidding the demand. This might result in the selection and implementation of a solution that looks completely differently than what has been done in the past but satisfies the same objective.[3]

In essence, agile procurement is nothing remarkable. Agile requires us to focus on enterprise objectives (with a strong customer emphasis), ensure our process do not slow us down, achieve outcomes rather than specify how to do things, and effectively collaborate with all stakeholders. This does not mean we have to abandon traditional sourcing strategies, rather we must be able to select agile methods when they are required.  Mitchell makes this clear in the following observation (emphasis added)

Agile procurement is the ability to satisfy all of the objectives of strategic spend management (savings, resource efficiency, risk management, supplier performance/relationship management) without the rigidity of being tied to any of the typical ways we achieve those things. [4]

Agile is not the death knell of the Kraljic Matrix or Category Management approaches. Many organisations will still maintain a section of their portfolios that will require more traditional approaches, but agile demands that deviation from boilerplate templates and traditional processes is permitted. Where we have complex emergent environments, unknown solutions, a demand for innovation, and a need for end-user participation, then the business case for pursuing agile is compelling.[5]

The Problems with Agile

A procurement delivery system that offers all the benefits of agile is enticing but we must be alert to the challenges or risks of going agile. First, we need to recognise that agile is not a free for all with an unstructured, no-liability, cost reimbursement contract where contract managers simply ‘tick and flick’ progress reports independent of any value being delivered. As Rigby, Sutherland and Takehuchi state, ‘agile is not anarchy’.[6]  With agile, there must be appropriate governance arrangements in place and a flexible commercial model that incentivises performance.  This is not just the remuneration model but also other non-price factors such as the amount of workshare and security of supply with possible guarantees for follow on work.  Herein lies a major challenge, how do we legislate for a flexible process with a contract? By design, contracts are tools that allocate risks and liabilities, provide stringent processes for managing change, and clearly articulate the contractual outcomes.  Whilst not insurmountable, we can craft contracts and commercial models to deal with agile environments and this will be explored in out next blog. Suffice to say, adopting a commercial framework that is agile friendly, requires a radical departure from traditional contracting approaches and this brings us to the next problem, culture.

For many organisations, operating in an agile environment will require a substantial shift from business as usual approaches.  Having the right culture with leadership participation is crucial for successfully implementing agile approaches.  The importance of leadership and the right culture is illustrated  in the 14th Annual State of Agile Report  which states that the top barriers to realise agile outcomes are:

  1. general organisation resistance to change,
  2. not enough leadership participation,
  3. inconsistent processes and practices across teams,
  4. organisation culture at odds with agile values, and
  5. inadequate management support and sponsorship.[7]

Rigby et al go further to claim that traditional organisation structures and C- suite activities are unsuited to agile methodologies.[8]  To successfully embark upon agile approaches, a cultural transformation with leadership support is needed.

A further challenge with agile approaches is with the skills and capacity of the team members who must make agile methods work.  One of the key organisational drivers for adopting category management and segmented purchasing (with tools such as the Kraljic matrix) is to enable procurement professionals to only be given the training and skills they need for their job.  For example, the skills needed to manage ‘non-critical items’ are quite modest compared to ‘strategic items’. Where we move to agile procurement, contract managers and procurement professionals require more formidable skills, training, and experience. Even more so, we need people with the ‘mental agility’[9] to drive value.

Conclusions

Agile procurement offers many benefits but there are risks and cost associated with adopting agile in an organisation. None of the challenges with Agile are insurmountable. Our next blog will explore practical aspects of implementing agile approaches through collaboration, cultural alignment, commercial alignment, and effective expectation management. 

For those who are interested, Dr Andrew Jacopino and myself are hosting a network session on Agile Contract Models and Performance Based Contracts as the IACCM Vibe Summit on Tuesday September 22nd, 5:40pm – 6:15pm AEST.


[1] D. Craik ‘How to be an Agile Procurement Team’ (2018)  https://www.cips.org/supply-management/analysis/2018/october/how-to-be-an-agile-team/

[2] https://agilemanifesto.org/

[3] J. Nadaud ‘Agile procurement defines next wave of success – how well do you walk the talk?’ https://journal.iaccm.com/contracting-excellence-journal/agile-procurement-defines-next-wave-of-success

[4] M. Mitchell ‘What does Agile Mean Anyway?’ (2018) https://www.determine.com/blog/what-is-agile

[5] D. Rigby, J. Sutherland and H. Takeuchi’ Embracing Agile’ Harvard Business Review (May 2016) https://hbr.org/2016/05/embracing-agile

[6] Ibid.

[7] Digital AI “14th Annual State of Agile Report” (2020)  https://explore.digital.ai/state-of-agile/14th-annual-state-of-agile-report.

[8] Rigby et al, opcit.

[9] T. Cummins ‘Agility, contracts and value: time for new thinking’ (2019) https://commitmentmatters.com/2019/09/22/agility-contracts-and-value-time-for-new-thinking/

Collaboration and Partnering Principles

Clearly, the best dispute resolution is dispute prevention. Acting to prevent disputes before they occur is key to building new cooperative relationships. ” – Lieutenant General H. Hatch, Commander, U.S. Army Corps of Engineers[2]

What is Partnering?

Partnering approaches have been used for many decades, bringing customers and suppliers together to deliver outcomes and move away from transactional and adversarial relationships. Partnering promotes common goals, timely communication, effective disputes resolution, and a commitment to excellence as illustrated in Figure 1 below:

Figure 1: Partnering Concept[3]

We must recognise that partnering is a process that helps align goals, encourages teamwork, and fosters joint problem solving. Partnering operates outside of the contract but should only be pursued where the commercial arrangements are consistent with partnering principles. To realise partnering outcomes, we typically rely on a non-binding partnering charter. The partnering charter has no legal force. As observed by Briggs, the partnering charter is more of a ‘moral commitment’.[4]

Partnering can be used in conjunction with most forms of contract, though partnering will be more successful where contracts allow parties to work collaboratively. Partnering does not mean that risks must be shared or that fixed price arrangements will not work. Stephenson makes this point clear:

“The basic partnering concept is relatively simple and is not intended to give rise to a change in the legal structures, which regulate the risk of the participants to the project.[5]

The Alberta Infrastructure and Transport Partnering Guidelines also provide valuable insights into what partner is not:

“Partnering is NOT about relaxing the contract terms or circumventing the processes, it is NOT about expecting service providers to do “extra” work for free, it is NOT simply about dispute resolution.”[6]

Is Partnering Successful?

Numerous studies have shown that where partnering principles are applied, superior project outcomes are more likely to emerge.[7]  We should be alert to a correlation fallacy here though in that buyers and suppliers who are committed to reasonableness, cooperation, and reject adversarial behaviours are more likely to select partnering approaches. Consequently, it is more likely that a collaborative culture and mindset will drive superior outcomes and selection of the partnering process is a natural symptom of these positive behaviours.  Conversely, we should not expect exceptional performance where adversarial and transactional participants tack a partnering charter onto their project.

When to Use Partnering

There are no hard rules that state when and when not partnering should be used. The following procurement features should inform us of when partnering is appropriate:

  1. Projects involve a relatively long-term commitment,
  2. Complex and high-risk projects,
  3. Delivery quality is of paramount importance,
  4. Significant scope exists for innovation, and
  5. Success will be underpinned by close collaboration between buyer and supplier (interdependency).

We also need to recognise that partnering is not just for acquisition activities but may also be applied to sustainment activities.

Crafting a Partnering Charter

The partnering charter must be developed collaboratively with all relevant stakeholders. Typically, workshops will be conducted well before contract signature to ensure the parties can reach agreement on the scope of the charter, protocols, and mutual objectives.  The charter must be consistent with the proposed commercial framework.  The United Kingdom, Joint Contracts Tribunal offers a useful template for drafting a partnering charter here.

The following are examples of partnering charters from various jurisdictions:

  1. Alberta Infrastructure and Transportation Projects (Page iv)
  2. Australian Department of Defence Frigate Enterprise Sustainment Charter (page 32) 
  3. Queensland Government Bruce Highway Upgrade Project (page 77)
  4. US Army Aviation and Missile Command CH-47 helicopter upgrade
  5. US Army Corp of Engineers Human Performance  Wing Construction Project (appendix F)
  6. United Kingdom Happisburgh to Winterton Sea Defences (page 6)

Commercial Arrangements

In some instances, we may wish to import some of the partnering principles into our head contracts. This requires careful consideration as some of the partnering ‘goals’ could create significant risks in terms of liability, indemnities, and insurance. Some of the lower risk partnering principles that could be incorporated into a head contract include:

  1. transparency provisions with obligations to report issues in a timely fashion,
  2. internal dispute resolution mechanisms that require internal resolution prior to seeking arbitration or litigation, and
  3. express good faith obligations.

We also need to consider the broader commercial framework including tender selection processes. Partnering will likely fail if we select suppliers purely on the basis of lowest price and we subsequently deal with suppliers in a clinical, arms-length fashion prior to contract signature.

Conclusions

Partnering offers substantial benefits provided the parties to the agreement have a suitable mindset and culture. Partnering alone will not realise exceptional performance but will assist in driving the parties towards the achievement of common goals, and reasonableness in projects.  A partnering charter is best crafted within a joint workshop environment, well before contract signature. We must also ensure our commercial framework is consistent with the partnering approach.


[1] US Army Corp of Engineers ‘Partnering’ https://www.iwr.usace.army.mil/Portals/70/docs/cpc/91-ADR-P-4_Partnering.pdf

[2] US Army Corp of Engineers Policy Memorandum 11, 7 August 1990.

[3] Adapted from Queensland Department of Transport and Main Roads ‘Transport Infrastructure Project Delivery System’ Volume 1 (2020)

[4] Briggs I., ‘Alliancing: Reshaping Infrastructure Delivery in Australia’ (2007).

[5] Andrew Stephenson, ‘Alliance Contracting, Partnering, Co-operative Contracting – Risk Avoidance or Risk Creation’ (paper presented to Clayton Utz Major Projects Seminar, Melbourne, October 2000).

[6] Alberta Infrastructure and Transport Partnering Guidelines (2007) at http://www.bv.transports.gouv.qc.ca/mono/0968447.pdf

[7] Weston D and Gibson G ‘Partnering-project performance in U.S. Army Corps of Engineers’Journal of Management in Engineering. 1993 Oct pp 410-425; Black, Akintoye, Fitgerald ‘An analysis of success factors and benefits of partnering in Construction’ International Journal of Project Management 18 (2000) 423-434. Contra R. Quick who claims that partnering has not been successful in Australia since ‘ the law gets in the way’ R. Quick ‘Queensland’s ECI Contract’ The International Construction Law Review 4 (2007).

Collaboration, Risk , and Remuneration

risk and cards

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do.” – John Ruskin

 Introduction

In previous blogs we explored risk allocation and highlighted the fact that inappropriate risk allocation significantly erodes value and creates an immense barrier to collaboration.  We also observed that contractual risk allocation may often provide a false sense of security, especially in complex environments where uncertainty is rife, variations are prolific, and the customer rarely has clean hands. The solution is to select a commercial model that encourages a shared vision, shared risk and opportunities, and creates an environment where all parties win, or all parties lose.  How then can we create such a commercial framework?

Money at any cost?

In terms of profitability, a reasonable risk-adjusted rate of return is to be expected across the enterprise. This does not mean that each project, contract, or activity will yield the same rates of profit, rather the enterprise as a whole should be generating suitable profits in the interests of shareholders, current and future. This latter point is very important as short-term profit taking must be discouraged.

Commercial models must never jeopardise buyer or supplier cash flow or place business continuity at risk. We should never underestimate the importance of money as a motivational factor but, at the same time, we must also need to recognise that it is not just the contract value and remuneration strategy that will influence behaviours.

Remuneration and risk

The remuneration options available for a contract almost limitless.  We can select between the spectrum of cost-plus to firm fixed price arrangements, we can vary remuneration strategies throughout the contract life cycle, we can adopt different remuneration strategies for different packages of work, and we can frame payments in terms of sticks (liquidated damages) versus carrots (early completion bonuses).   The challenge in crafting and negotiating a commercial agreement is to strike a balance that meets the commercial needs of both parties whilst at the same time creating a framework that encourages problem solving, innovation, and the delivery of enterprise outcomes. In other words, how do we drive collaboration through the contract?

Best Practice Risk and Remuneration Strategies

In Andrew Jacopino’s blog on perverse incentives, he explores the phenomena where seemingly valid incentives can drive the wrong behaviours.  Our risk and remuneration strategy must be crafted to drive the right behaviours.  To achieve this, we need to strike a balance between monetary (fees and damages) and non-monetary (e.g. contract extension, increased contract scope, preferred supplier status) aspects.

Incentive based remuneration helps align the parties’ interests and drive collaboration. Incentive fee reimbursement includes; cost plus incentive fee, cost plus fixed fee, and cost-plus award fee options.[1] Remuneration of this type often requires the development of a Target Outturn Cost (TOC) against which the performance fee is determined.   A focus on achievement of the TOC alone though is insufficient. The commercial framework should also allow for price adjustment based on delivery quality, schedule, and any other key result areas. Adjustment of incentive fees can be a based on a combination of both carrots and sticks. For example, our carrots can include a bonus pool set aside for early delivery or for achieving superior quality outcomes (provided such outcomes are of value to the client). Conversely, we can rely on sticks such as abating incentive fees for late delivery or where quality fails to meet minimum requirements.  Such remuneration strategies must be crafted so that enterprise objectives are realised, all parties win or all parties lose, and the system is fair.

Challenges with Developing the Target Outturn Cost

The development of the TOC requires validation by the principal either by using inhouse capabilities or third-party estimators. Where there is an asymmetry of information, TOC integrity can introduce the risk that the TOC is set too high and result in erosion of value.  Typically, the TOC is set at the most likely value or P50 estimate of costs.  In some larger, complex projects the TOC may include an allowance for uncertainty (unallocated contingency).

Profit Sharing Arrangements

A more revolutionary approach for sharing risk and rewards is to adopt a profit-sharing arrangement.[2] This could be through an incorporated joint venture or a commercial model that focusses on rewards directly linked to the client’s commercial outcomes. An example of this latter approach is with Seimens’ energy efficiency initiative with Pilkington.[3] In this project, Seimens invested in energy efficient systems with upgrades to Pilkington’s equipment with the aim to reduce energy costs by £340,000 per annum.  Rather than adopt a service contract or other risk transfer model, Seimens was remunerated based on energy costs saved. The client incurred zero investment costs under this initiative.

We must ensure profit or revenue sharing arrangements must also be fair. If too much risk is passed to suppliers, then project success is unlikely.  The Boeing Dreamliner risk sharing approach where ‘no strategic suppliers will receive payment for the development cost until Boeing delivers its first 787 to its customers[4] actually incentivised suppliers to deliberately deliver late.  Situations such as this must be avoided.

Conclusions

Effective collaborative relationships must be underpinned by a fair and equitable risk allocation framework. Best practice risk allocation places an emphasis on risk sharing and incentive-based remuneration where buyers and suppliers are both liable for success or failure.  We must be alert to perverse incentives in our commercial framework and strive to craft a commercial model that drives the right behaviours and is fair.

[1] US Government Department of Defence ‘Guidance on Using Incentive and Other Contract Types’ (March 2016).

[2] Qin Z., and Yang J. “Analysis of a revenue-sharing contract in supply chain management” (2008) International Journal of Logistics 11(1) pp 17-29.

[3] “Siemens supports Pilkington’s investment in energy-efficiency at zero net cost Case Study: United Kingdom” at https://assets.new.siemens.com/siemens/assets/api/uuid:4a52b5f48d29507018d85b6d13b0a248e8a1d81a/version:1510824643/sfs-uk-pilkington-case-study.pdf

[4] Tang, C.& Zimmerman, J. & Nelson, J. ‘Managing New Product Development and Supply Chain Risks: The Boeing 787 Case’ Supply Chain Forum: an International Journal 10 (2009).

Disputes and Issues Resolution – Best Practice for Collaboration (Part 2)

“One is not exposed to danger who, even when in safety is always on their guard.” – Publilius Syrus (circa 60 BC)

ludit lexus

Ludit Lexus  – J.Davies (2020)

Introduction

In part one of our discussion on disputes and issues resolution, we explored strategies for effectively dealing with disputes internally. The key theme here was to resolve issues quickly, fairly and at the lowest possible level.  In some circumstances though internal mechanisms may be insufficient to resolve critical disputes.  In our current volatile and uncertain environment, some aspects of the commercial relationship may not be possible to perform and the contract could be frustrated.[1] Even force majeure can introduce substantial uncertainty to the performance of the contract.  We therefore need to anticipate mechanisms to deal with serious issues that cannot be effectively resolved through internal measures.  We should not rely on litigation or arbitration to seek resolution.  Litigation and arbitration are very time consuming, expensive and uncertain processes that are very unlikely to support future positive relationships. Consequently, we must explore other, less destructive, external resolution mechanisms.

External Disputes Resolution Options

In our first blog we recognised that disputes and issues resolution processes and largely unfettered so long as they do not ‘oust the jurisdiction of the courts’.  This means that we are free to select any form of disputes and issues resolution process so long as the commercial agreement does not fetter any party in pursuing litigation until after the dispute resolution process has run its course. For effective collaborative outcomes we need to adopt the same mantra of disputes and issues resolution principles we explored earlier; that is resolve quickly, fairly and at the lowest level practical.  Once we move to external disputes resolution, solving problems at the lowest level means anything other than arbitration or litigation. Best practice resolution here includes mediation and expert determination

Mediation

The Resolution Institute offers a succinct definition of mediation as follows;

Mediation is a confidential process where an independent and neutral third party assists the disputants to negotiate and reach a decision about their dispute.[2]

The role of the mediator is not to impose a solution or binding outcome, rather the mediator facilities a joint, win-win outcome by exploring issues and positions of the parties collaboratively.

A mediator will only participate in the process if all parties are committed to resolution of issues in good faith.  Mediation is usually the quickest and cheapest of all the external dispute resolution processes and is also more likely to preserve positive business relationships.

Expert determination

For technical disputes, an expert can be employed in a resolution role. Quite often the expert’s ruling is considered binding.  The Australian Institute of Arbitrators and Mediators recommend the following rules apply to expert determination:

  1. The Expert shall determine the Dispute as an expert in accordance with these Rules and according to law.
  2. The parties agree that:
    1. the Expert is not an arbitrator of the matters in dispute and is deemed not to be acting in an arbitral capacity;
    2. the Process is not an arbitration within the meaning of any statute.
  3. The Expert shall adopt procedures suitable to the circumstances of the particular case, avoiding unnecessary delay and expense, so as to provide an expeditious cost-effective and fair means of determining the Dispute.
  4. The Expert shall be independent of, and act fairly and impartially as between the parties, giving each party a reasonable opportunity of putting its case and dealing with that of any opposing party, and a reasonable opportunity to make submissions on the conduct of the Process. [3]

For more complex and long-term commercial arrangements, parties may pre-select the expert for each discipline area. For example, the parties could pre-select an expert for pricing issues, technical solutions, or for contract interpretation.

There are several permutations in how the expert can decide on an issue. In most cases, the expert is free to come to their own conclusions as to how the dispute should be settled. In other cases, the expert may be bound to select a course of action between the ambit of the parties’ positions.

A variation of the expert determination decision making process is final offer arbitration or baseball arbitration.[4] In this situation, an expert is only permitted to select one course of action provided by one of the parties. There is no scope to select within the middle ground. Consider the following example:

A supplier is seeking additional sums related to a substantial contract change proposal initiated by the customer.  The customer is expecting a $100,000 increase in costs associated with the change, whereas the supplier expects the change to incur an additional $500,000 in costs. If the parties wish to resolve this issue via baseball arbitration, then they will need to submit a best and final offer to the arbitrator. Each party does not get to see the final offer from their counterparts.  The arbitrator will estimate the cost of the contract change proposal and will select the best and final offer that is closest to their expert estimate.  In this example, the expert may decide that the additional costs are $250,000. If the customer digs in their heels and sticks to the $100,000 additional sum, but the supplier is more reasonable and adjusts their escalation fee to $300,000 then the arbitrator will select the $300,000 escalation fee since this figure is closest to the arbitrator’s estimate.

Baseball arbitration prevents any one party making outrageous or unfair claims for fear that their claim will be considered less equitable or fair when compared to the other party’s claim. This can be implemented relatively quickly and cheaply provided there is an arbitrator with the necessary skills available.  By design, this approach nudges parties to provide reasonable offers and will likely preserve business relationships.

Conclusions

For resolving disputes and issues, we must first craft a commercial strategy that minimises the likelihood of disputes and issues arising in the first place. Fair and equitable risk allocation, early engagement, and transparency are all tools we can adopt to achieve this. Nonetheless, we need to anticipate disputes arising and ensure our contract has effective internal disputes and issues resolution processes.  With an effective collaborative culture, we should not expert disputes and issues to require external resolution processes, but we should not create a situation where arbitration and litigation is the only step available to us.  Mediation and expert determination should be considered, especially for longer term, strategic relationships.

[1] J. Curle & C. Allin ‘Coronavirus COVID-19 and frustration: Is your contract at risk? (United Kingdom)’ (Mar 2020)  https://www.dlapiper.com/en/chile/insights/publications/2020/03/coronavirus-covid-19-and-frustration-is-your-contract-at-risk/

[2] Resolution Institute (2017)  https://www.resolution.institute/dispute-resolution/mediation

[3] Resolution Institute (2017) https://www.resolution.institute/dispute-resolution/expert-determination

[4] L. Samples ‘Resolving Construction Disputes through Baseball Arbitration’ American Bar Association (2019)

Disputes and Issues Resolution – Best Practice for Collaboration (Part 1)

“Bulls do not win bullfights; people do. People do not win people fights; lawyers do.” – Norm Augustine (Chairman and CEO of the Lockheed Martin Corporation)[1]

lawyers at twenty paces

Lawyers at Twenty Paces – L. Ruigrok

Introduction

In previous blogs we recognised that for effective collaborative, we require disputes and issues to be resolved at the lowest possible level, quickly, and fairly.  In an increasingly volatile economic environment, we should be investing in our business relationships to ‘engineer in’ resilience to the partnership to effectively deal with both high risks and uncertainty. To achieve this, we should not hobble ourselves with a business relationship that is likely to generate unnecessary disputes. In addition, we need a commercial framework that supports timely and effective resolution of disputes when they arise.

Resolving disputes and issues at lowest possible level, quickly, and fairly is an unremarkable observation but just how is this achieved? We certainly need to avoid litigation and the associated delays and extortionate costs involved in such actions. There are several strategies we can pursue to do so. These include preventative measures, to minimise the likelihood of disputes, and corrective measures to minimise the consequences of disputes. We previously explored how many disputes can be prevented through a fair risk allocation process and shared objectives. In other words, we can reduce the likelihood of disputes arising.  Despite our best attempts, disputes and issues may still arise and therefore we need to explore corrective measures to mitigate consequences.  Corrective measures include internal disputes resolution and external disputes resolution. The first part of this blog explores how we can effectively deal with internal dispute resolution.

Legal Frameworks

We need an understanding of how the law operates so that ‘the art of the possible’ is contemplated in our contract.  The ability to seek resolution of issues and disputes outside of the courts in common law countries is mostly unconstrained, provided that the commercial relationship does not attempt to ‘oust the jurisdiction of the courts’. This was not always the case. In the 19th century, there was a perverse incentive for the courts to encourage litigation and eschew arbitration as observed by Lord Campbell in Scott v Avery:

“…judges depended mainly or almost entirely upon fees and they had no fixed salary, there was great competition to get as much as possible of litigation into Westminster Hall, and a great scramble in Westminster Hall for the division of the spoil… [the courts] had great jealousy of arbitrations, whereby Westminster Hall was robbed of those cases which came neither into the Queen’s Bench, nor the Common Pleas, nor the Exchequer.”[2]

Fortunately, the decision in Scott v Avery recognises the validity of arbitration as a legitimate dispute resolution mechanism and many jurisdictions have subsequently enacted legislation that governs the arbitration process in contractual disputes.[3]

So long as a commercial agreement does not prohibit the courts for determining matters at some stage then there is great latitude in crafting effective disputes and issues resolution provisions in our contracts.   Only with the more radical ‘no disputes/no litigation’ clauses we see in some project alliance agreements can legal obstacles arise.

Prevention is Better Than Cure

In our previous blog on commercial models, we recognised that disputes and issues are far more likely to be minimised when we have:

  1. A shared vision;
  2. Early engagement;
  3. Fair and equitable risk allocation;
  4. A remuneration strategy where all parties win, or all parties lose;
  5. Openness and transparency; and
  6. Joint decision making.

These features will never eliminate disputes or issues but makes them far less likely.  We need to also recognise that when disputes or issues arise, this may not necessarily be a bad thing.  Where issues are raised in a timely and constructive manner, this could be a positive symptom of effective communication and a display of trust between the parties.  We should actively encourage prompt reporting of relevant issues and not allow them to fester.[4] How then do we incentivise such behaviours?

Encouraging Timely and Effective Dispute and Issues Resolution

Crafting a disputes and issues escalation process into a contract will encourage collaboration.  Parties should be committed to ‘fixing the problem and not fixing the blame’.[5] An example clause used to encourage such behaviour is as follows:

(a)       the parties agree that all disputes, differences of opinion and questions (Disputes) arising out of or in connection with this Agreement will be initially escalated and attempted to be resolved through the Joint Project Management Team.

(b)       The parties agree that their attempts to resolve Disputes will occur in a timely manner.  The parties will at all times, to the extent reasonably possible, seek to resolve the Dispute at the lowest appropriate level, act in a manner that will minimise any delay to the Project and that will minimise and mitigate the consequences of the parties or a party incurring any or any additional costs or liability.

(c)        If a Dispute cannot be resolved through the Joint Project Management Team within 14 days, the Dispute is to be referred to the respective parties’ Managing Directors for resolution.

Clauses such as the above drive parties to resolve issues at the lowest level and as quickly as practical.  Such mechanisms though will only be effective if all team members are aware of their obligations and leaders are committed to the above principles.

In addition to contract provisions, dispute and issues may also be addressed in a partnering charter.  The following is an extract from the Partnering Charter for the ANZAC Frigate Group Maintenance Contract.

No Blame Culture. A no blame culture exists when all personal are welcomed to raise all, and any issue with the knowledge of being treated fairly and without fear of retribution for raising the issue.

Problem Solving. In a no blame culture, problems are solved collaboratively to ensure we minimise consequences.

We must recognise that partnering charters may have no binding legal force; however, they are useful for focussing efforts of the parties in meeting mutual objectives.

More radical disputes and issues resolution strategies involve a commercial framework with an express ‘no disputes/no litigation clause’.  These provisions are used in extensively in project alliance agreements.[6]  No litigation clauses such as the above deviate from most contracts in that the parties rely on a gainshare/painshare remuneration framework to drive performance.  Whilst a noble attempt to foster collaboration, a no litigation framework is very risky from a legal perspective as such clauses do attempt to oust the jurisdiction of the courts.  Many other risks with a no litigation/no liability framework also exist including

  1. Ability to gain insurance (since no liability exists).
  2. Lack of enforceability making the consideration illusory, and
  3. Potential creation of fiduciary duties. [7]

A no disputes/no litigation commercial framework certainly maximises the likelihood of positive collaborative outcomes but also introduces new, substantial risks.

Conclusions

Whilst prevention is better than cure, we must  anticipate disputes and issues arising in our business relationships.  Our commercial framework must be crafted to deal with such issues at the lowest possible level, quickly, and fairly.  The contract terms themselves can achieve such outcomes as can a suitable partnering charter.  In the next part of our discussion on disputes and issues resolution, we will explore external mechanisms such as expert determination, mediation, and other novel techniques to resolve disputes whilst still preserving positive business relationships.

[1] N. Augustine “Augustine’s Laws” (1986)

[2] Scott v Avery (1856) 10 ER 1121

[3] See e.g: Arbitration Act 1996 (UK); Commercial Arbitration Act, RSC 1985; Arbitration Act 1996 (NZ); Commercial Arbitration Act 2010 (NSW).

[4] CASG Better Practice Guide Collaborative Contracting (2017) [31].

[5] Derek Walker,Beverley Lloyd-Walker, “Anthony Mills Innovation through Alliancing in a No-Blame Culture” (2013)

[6] Australian Government “National Alliance Contracting Guidelines Guide to Alliance Contracting” (2015) p16-17. https://www.infrastructure.gov.au/infrastructure/ngpd/files/National_Guide_to_Alliance_Contracting.pdf

[7] Trevor Thomas ‘Alliance Contracts: Utility and Enforceability’ (2007) 23 Building and Construction Law 329, 335-7

Collaboration and the Importance of Leadership

Distorted Pool, Tinderbox Tasmania (Jade Davies 2020).

Collaboration demands effective leadership to drive the right collaborative culture, reinforce collaborative behaviours, and provide effective role models to the team.  The UK NAO makes this point clear:

              “Every case study ranked leadership as the most important factor in developing collaborative relationships.”[1]

A meta-analysis of strategic alliances by Duysters, Kok, and Vaandrager found that the leading causes of strategic alliance failure stemmed from shortcomings in leadership including:

a.           Poor goal/strategic alignment,

b.           Cultural issues,

d.           Personnel issues,

e.           Lack of Commitment.[2]

We know that the right commercial model is crucial to driving collaborative behaviours but we also need to recognise the critical importance of leadership.  In this blog we will explore how leaders can foster a positive culture, drive the right behaviours, and create the best environment to achieve collaborative outcomes.

Leadership Approaches that are Incompatible with Collaborative Ventures

Not all leaders will be immediately equipped to deal with collaboration.  This is particularly true for those leaders that have spent most of their careers engaged in transactional, arms-length commercial dealings.  As we are moving to more complex, fast paced, and emergent environments, leadership models will need to change.  Consider the following comment made to the United Kingdom Parliament by the Director General of the United Kingdom’s ill-fated National Programme for Information Technology (Health):

Managing the National health Service IT suppliers is like running a team of huskies. When one of the dogs goes lame, it is shot. It is then chopped up and fed to the other dogs. The survivors work harder, not only because they have had a meal, but also because they have seen what will happen should they themselves go lame.”[3]

This IT project was highly complex, involved multiple parties, and included an exceptionally diverse range of influential stakeholders, all with divergent needs.  This key message made by the programme Director General unambiguously demonstrated that there was no scope for collaboration and self-interest reigns supreme.  If leaders wish to effectively pursue collaborative ventures, then they must eschew attitudes such as these.

Leadership and Culture

“Leadership sets the ‘tone at the top’, and is absolutely critical to achieving an organisation-wide commitment to good governance.”[4]

Leadership and culture and intricately linked. Leaders set an example to all teams (buyer and supplier) and set the standards of behaviours.  For successful collaboration, this means:

  • Driving enterprise goals and creating a shared vision,
  • Commitment to a no blame environment,
  • Fostering trust between all organisations, and
  • Pursuing a high-performance culture.

Organisation may not immediately have the ‘right’ culture to pursue collaborative ventures and we need to rely upon the leaders of the organisation to shift the organisational culture where necessary.  This can be a significant challenge where ‘business as usual’ approaches typically rely on transactional commercial dealings.  How then should leaders craft the right environment to establishing the right ‘culture and mindset’[5] in the organisation?

Leadership and Change Management

If you want to make enemies, try to change something”. Woodrow Wilson

When organisations need to shift towards a more collaborative approach, it is up to leaders to make this happen.  Leaders need to motivate their teams and sell the benefits of collaboration. This is more easily said than done.  One area leaders need to be aware of in their teams is a ‘sense of identity’. In Kwan’s paper, The Collaborative Blind Spot, she makes the observation that:

Identity provides groups with a center of gravity and meaning in the company, which help build a sense of security or Group legitimacy.[6]

Leaders need to recognise that groups may feel vulnerable when forced to collaborate and therefore leaders may need to adopt a change management approach that steers groups towards enterprise outcomes and create a new high-performing  ‘collaborate’ group.  Whilst being sensitive to group and individual needs, leaders should not allow business units to become their own caliphates and deviate from the organisational vision and desired culture. This is not a ‘one-off’ activity and demands continual attention as observed by the Australian Government’s Guide to Alliance Contracts

The desired culture should align to the behaviours required to enable the key [collaborative] features such as good faith and ‘no disputes’ to operate. Often the desired behaviours are described through establishing an Alliance Charter which documents the alliance values. However, the real culture of a team is demonstrated in how the team behaves and interacts.[7]

Leaders need to be constantly vigilant to ensure that their teams behave and interact according to the agreed values of the collaborative venture. Where the right behaviours are not demonstrated, leaders should make tough but fair decisions, including the removal of personnel whose behaviours are not compatible with the collaborative venture. Such drastic actions though would be futile if the leaders themselves are not displaying the right behaviours and taking a proactive approach to collaboration.  The cliché that, the fish rots from the head down, is therefore highly relevant to collaborative relationships. Leaders must be acutely aware that their behaviours are being closely watched by their own teams and their supplier or buyer counterparts. As recommended in ISO 44001 Collaborative Business Relationships, a Relationship Management Plan should be agreed that [emphasis added]:

identifies the project sponsors or senior responsible officers and reinforce their commitment to the collaborative contracting arrangements.”[8]

Conclusion

As we have stated in these blogs previously, there is no single factor that will ensure success in collaborative ventures. Similar to having the right commercial model, effective leadership is a must for successful collaboration. Leaders set the tone and culture of the organisation and are ultimately accountable for the success or failure of the organisation. To achieve this, leaders must be effective role models, must be committed to a shared vision, and be adept at change management.  Future blogs will explore joint government structures in collaborative ventures and how leaders operate under such arrangements.


[1] UK NAO Good Governance ‘Measuring Success Through Collaborative Working Relationships’ (2006) p 8

[2] Kok and Wildeman “Crafting Strategic Alliances: Building Effective Relationships” (1998).

[3] http://www.publications.parliament.uk/pa/cm200506/cmselect/cmpubacc/uc1360-i/uc136002.htm

[4] ANAO Better Practice Guide ‘Public Sector Governance’ Vol 1 (2003) p 16.

[5] US Government Accountability Office Defense Programs and Spending US GAO T-NSIAD-95-149 (1995)

[6] Lisa B. Kwan, “The Collaboration Blind Spot” Harvard Business Review March–April (2019).

[7] Australian Government Department of Infrastructure and Transport, “Guide to Alliance Contracting” opcit, p 35.

[8] ISO 44001 Collaborative Business Relationships.

Why We Need the Right Commercial Model to Drive Collaboration

To realise the full benefits of collaborative contracts, we need the right commercial model.  If we rely on transactional ‘boilerplate’ contract terms and conditions, then we are unlikely to achieve the full range of collaborative benefits that we have discussed in earlier blogs.  It is not just the contractual terms that we need to explore but also the market engagement strategy as well.  That is, how do buyers and suppliers interact before contract signature.  This blog subsequently explores strategies for aligning commercial models to best realise collaborative outcomes.

Do We Need a Contract At All?

Businessmen often prefer to rely on “a man’s word” in a brief letter or handshake or “common honesty and decency” – Stewart Macaulay (1963).[1]

In Stewart Macaulay’s seminal paper on non-contractual relationships, he asks the question, “why do businesses use contracts in light of its success without it”.[2] The hypothesis offered by MacCaulay is that contracts and contract law are irrelevant since there are many non-contractual sanctions available to buyers and suppliers to achieve the required business outcomes.  Why then do we need contracts to pursue collaborative contracts where the relationship should be underpinned by trust, a shared vision, and a desire for long term relationships? 

Relying on trust and good-will alone is likely to lead to failure. Contracts are tools to communicate and manage the obligations of parties in concert with the desired collaborative behaviours. We also need contracts to provide a level of certainty to establish insurance requirements, seek financial approvals, and meet statutory obligations (both within the public and private sector).  To pursue a collaborative venture without a contract is a very dangerous proposition and could result in the parties to the relationship accepting significant liabilities, especially with the imposition of the law of equity and quasi-contract obligations.

Commercial Frameworks Designed to Drive Collaboration

Max Abrahamson’s principles can be summarised by the often-used commercial tenet of ‘transfer the risk to the part best able to manage the risk’.[3] For many organisations though, this principle is often ignored.  The temptation to transfer significant risks to suppliers is very alluring, especially where buyers command significant market power.  Such strategies will often erode value for the following reasons:

  1. Suppliers will load their contract prices with substantial contingencies or management reserve to deal with risks. These costs are often passed onto the buyer whether the risk eventuates or not,
  2. Unreasonable risk allocation may result in fewer bids and lessened competition,
  3. Where inappropriate risks are transferred to suppliers, there may be a perverse incentive for suppliers to compromise on quality or behave opportunistically (e.g. bid low and make profit on variations), and
  4. In complex projects, buyers may not have ‘clean hands’ and may not be able to effectively seek remedies under the contract where risks materialise.

To illustrate the significant problems with inappropriate risk allocation, a research report by the Construction Industry Institute identified that:

Inappropriate allocation of risk resulted in a 14 percent increase in costs to projects. Of this amount, the customer was liable for 78 percent of the cost increase.[4] 

The other key problem we face with risk transfer in contracts is that the contract may only effectively deal with known risks. That is, uncertainty[5] may not be adequately addressed. If we want to pursue collaborative outcomes, then we naturally need to adopt a more collaborative approach towards risk management.

Commercial Strategies That Encourage Collaboration

We know that transactional boilerplate contracts that aim to shift the maximum amount of risk to suppliers will thwart collaboration, but what strategies can we adopt to maximise collaborative outcomes? Whilst not exhaustive, the following themes emerge in successful collaborative ventures.

Early industry engagement. Early and holistic identification of risks and opportunities will foster collaboration and ensure subsequent risk allocation and sharing strategies are fair and equitable.

Prudent and Equitable Risk allocation. To encourage collaboration, we should not place too much risk on suppliers.  Where substantial contract value is at risk then suppliers will be more likely to be risk averse and will not effectively pursue innovation and ‘best for project’ outcomes. Consistent with a shared vision, all parties should have reasonable ‘skin in the game’.

Joint Management and Ownership.  Joint management and ownership does not mean that the parties should embark upon an incorporated joint venture or alliance agreement. Joint management means that the parties work collaboratively on a ‘best for program basis’ to deliver joint outcomes. This may involve joint decision making for key areas, joint risk management, co-location of key team members, and shared systems (which ensure there is a single source of truth).

Transparency. Collaboration is far more likely when parties have full visibility of risk, issues, and opportunities throughout the contract lifecycle. Open book financial reporting, and shared risk logs all support the development and maintenance of trust.  Transparency also supports the collaborative contracting aim of no surprises.

Effective Disputes and Issues management. A commercial framework is needed that ensures disputes and issues are resolved at; the lowest level, quickly, and equitably. 

If we want to sabotage our efforts to drive collaborative outcomes and erode value then I would recommend the following commercial strategy:

  • Do not engage with industry at any stage. Ignore industry’s wealth of knowledge and their understanding of the risks in their core business.
  • Insist upon ‘unlimited liability’ for all risks and place as much of the contract value at risk as possible.
  • Insist upon unilateral, unfettered rights such as; ownership of all supplier background Intellectual Property, step-in /subrogation rights for minor breaches, and an on-demand performance guarantees.
  • In the tendering stage, apply onerous conditions of tender on suppliers (with sanctions for breach) but at the same time claim that the customer is not bound by this same ‘tender process’.
  • Make sure the tender evaluation criteria places a very high weighting on price and ensure that the contract duration is for as short a term as possible.
  • Ensure all issues and disputes are resolved through litigation.

Summary

If we wish to pursue effective collaboration and reap the known benefits of collaborative contracts, then we must select an appropriate commercial model.  Having the right culture, motivation, leadership and commitment to collaboration alone is insufficient. Trying to apply a collaborative framework with a transactional, arms-length commercial model is akin to putting ‘lipstick on a pig’.


[1] Stewart Macaulay, “Non-Contractual Relations in Business: A Preliminary Study American Sociological Review” 1 February 1963, Vol.28(1), p55.

[2] Ibid., p 62.

[3] Max Abrahamson, “Risk Management” (1984) 1 (3) International Construction Law Review 241, 244. 

[4] CCI Research Report RR210-11 “Contracting to Appropriately Allocate Risk” (2007) summarised in Altman R., Cruz J., Halls, P “One-sided Contracts: Do They Pay Off?” ACCL Vol 11 1 (2017) p 169.

[5] This includes both ontological uncertainty (the unknown unknowns) and epistemic uncertainty (risks are known but likelihood and consequence cannot be quantified).